Interim Report Q1 2014 Final

NORTHERN OFFSHORE LTD
Interim Report and Unaudited Consolidated Financial
Statements for the Three Months Ended March 31, 2014
Northern Offshore, Ltd.
Oslo Stock Exchange: NOF
Contents
1.
2.
Interim Report
a.
Introduction ......................................................................................................... 3
b.
Highlights ............................................................................................................ 3
c.
Financial Review ................................................................................................ 4
Unaudited Consolidated Financial Statements
a.
Consolidated Balance Sheets (Unaudited) ......................................................... 8
b.
Consolidated Statements of Operations (Unaudited) .......................................... 9
c.
Consolidated Statements of Comprehensive Income (Unaudited) .................. 10
d.
Consolidated Statements of Shareholders’ Equity (Unaudited) ...................... 11
e.
Consolidated Statements of Cash Flows (Unaudited)....................................... 12
f.
Notes to the Unaudited Consolidated Financial Statements ............................. 13
2
Interim Management Report for the Three Month Period Ended March
31, 2014
Introduction
Northern Offshore, Ltd. (referred to as “the Company” and collectively with its subsidiaries
as “the Group”) is a provider of contract drilling equipment and operating services for
offshore oil and gas companies. The Group owns and operates one semisubmersible drilling
rig, one drillship, two jackup drilling rigs, and has two 350’ high specification jackup
drilling rigs under construction, with delivery expected in the first and third quarters of 2016
and one floating production facility. The Company is domiciled in Bermuda and maintains
its executive office in Houston, Texas.
A complete listing of the Company’s operating and rig-owning subsidiaries is as follows;
Energy Endeavour Ltd., Energy Enhancer Ltd., Northern Offshore Energy Ltd., Northern
Offshore Enterprises Ltd., Jet Holding Ltd., Northern Offshore Leasing Limited, Qualimar
Shipping Company Limited, Jet Drilling (S) Pte. Ltd., Northern Offshore B.V.I. Ltd.,
Northern Offshore Drilling Pte. Ltd., Northern Offshore U.K. Ltd., Northern Offshore
Services Sdn Bhd, Sea Production Limited, Northern Offshore Energy International Ltd.,
Northern Offshore International Drilling Company Ltd., Northern Offshore Drilling
Services U.S. Inc., and Jet Shipping Limited.
Highlights for the first quarter of 2014 and subsequent events to date;

On May 14, 2014, the Company announced that the directors and management are
evaluating a plan to spin off a portion of the ownership of Northern Producer and its
life-of-field contract. The Northern Producer’s year to date production averaged
approximately 16,000 barrels per day for the three month period ending March 2014.

On May 14, 2014, the Company declared a $0.05 per share cash dividend to
shareholders of record on May 30, 2014. The dividend will be payable on or before
June 16, 2014.

On May 5, 2014, the Energy Searcher reached its stand-off location offshore, Lagos,
Nigeria. The unit is expected to commence its one year contract with Oceanic
Consultants Nigeria Limited, an affiliate of CAMAC Energy Inc. in early June,
2014.

On March 24, 2014, the Company received notice from Maersk Oil & Gas
(“Maersk”) exercising the second one-year option of the contract for the Energy
Enhancer which increases the day rate to $143,000 from $132,000. The anticipated
commencement date of the second option period is mid-July 2014.

On March 5, 2014, the Company made the second installment payment of $17.8
million for its two newbuild jackup rigs. On April 16, 2014, the Company and
COSCO Shipyard Group Co. Ltd held a steel cutting ceremony for its first newbuild
jackup rig.

The Group reported year to date March 2014 revenues of $49.4 million, adjusted
3
earnings before interest, income taxes, depreciation and other financial items
(“adjusted EBITDA”) of $20.3 million and net income of $10.0 million or $0.06 per
diluted share.

The Company’s total outstanding debt as of March 31, 2014 was $47.0 million with
an unrestricted cash balance of $24.9 million.
Financial Review
Results of Operations
Three months ending March 31, 2014 vs. March 31, 2013
Revenues
Revenues for the three months ending March 2014 were $8.0 million higher than the same
period in 2013 driven primarily by the following:

A $3.7 million increase in dayrate revenues for the jackup Energy Endeavour due to
a higher dayrate as it commenced its new contract with Wintershall Noordzee B.V.
(“Wintershall”) on October 18, 2013;

A $3.1 million increase in dayrate revenues due to higher operating efficiencies of
the semisubmersible Energy Driller; and

A $2.4 million increase in dayrate revenues for the jackup Energy Enhancer due to
a higher dayrate as it commenced its first one-year option with Maersk on July 10,
2013.
Partially offsetting these increases was:

A $1.2 million decrease in tariff revenues from the floating production facility
Northern Producer due to lower production compared to the same period last year.
Operating Expenses
Drilling and production expenses for the three months ending March 2014 were $3.1 million
lower compared to the same period in 2013 driven primarily by the following:

A $4.2 million decrease in operating expenses for the drillship Energy Searcher as
the unit underwent certain planned maintenance, upgrades and inspections during
the prior year quarter to maintain the rig in a market ready condition;

A $0.2 million decrease in operating expenses for the semisubmersible Energy
Driller due to lower repair and maintenance costs; and

A $0.2 million decrease in operating expenses for the jackup Energy Enhancer due
to lower repair and maintenance costs, partially offset by higher labor costs.
4
Partially offsetting these decreases were:

A $1.2 million increase in operating expenses for the jackup Energy Endeavour
primarily due to higher labor costs; and

A $0.3 million increase in operating expenses for the floating production facility
Northern Producer due to higher maintenance costs.
Depreciation expense for the three months ended March 31, 2014 was $0.4 million higher
due to a higher depreciable basis for the units comparable with the prior year period.
General and administrative expenses were $0.1 million higher than the same period last year
due to higher compensation costs.
Other income and expenses, net
Interest expense for the quarter was comparable to the same period in 2013. Other financial
expense was $0.5 million higher than the same period last year due to fluctuating foreign
currency exchange rates.
Income Taxes
Income tax expense was $1.2 million higher than the same period in 2013 due to higher
income before tax compared to the same period last year.
Balance Sheet
Total assets increased to $308.2 million as of March 31, 2014 from $271.1 million as of
December 31, 2013.
Total current assets increased from $53.4 million to $77.4 million during the first quarter of
2014. The increase was primarily related to higher cash and cash equivalents and accounts
receivable due to a credit facility drawdown and higher revenues, partially offset by a
dividend payment. Additionally, a portion of the increase was due to deferred mobilization
costs incurred by the Energy Searcher in preparation of its new contract in offshore Nigeria
which will be amortized over the primary twelve month contract term. Total non-current
assets increased from $217.7 million to $230.8 million during the period primarily related
to an increase in property, plant and equipment due to the second installment payment for
the newbuild jackups and an increase in the Northern Producer escrow account, partially
offset by decreases in the drydock and mobilization costs due to amortization.
Total current liabilities increased from $52.8 million to $87.7 million during the period,
primarily due to higher accounts payable and higher deferred revenue related to the Energy
Searcher’s mobilization fee and dry haul reimbursement which will be amortized over the
primary contract term of twelve months. Additionally, the Company took a new drawdown
of $25.0 million from its revolving credit facility. Total shareholders’ equity increased by
$2.2 million for the three month period of 2014, primarily attributable to net income of $10.0
million, partially offset by dividends declared during the period.
5
Cash Flows
The Group’s total cash and cash equivalents, excluding restricted cash, as of March 31, 2014
and December 31, 2013 were $24.9 million and $19.5 million, respectively.
Net cash provided by operating activities for the three month period in 2014 was $8.9
million compared to $8.0 million for the same period in 2013, representing an increase in
net cash provided by operating activities of $0.9 million. This increase was driven primarily
by an increase in net income, deferred revenue and accounts payable. These increases were
partially offset by higher deferred mobilization costs and accounts receivable.
Net cash used in investing activities during the period was $19.7 million primarily related
to capital expenditures for the newbuild jackups and deposits paid into the Northern
Producer escrow account. Net cash used by investing activities during the period of 2013
was $4.2 million primarily related to capital expenditures for the existing fleet and deposits
paid into the Northern Producer escrow account.
Net cash provided by financing activities during the period was $16.2 million primarily
related to the Company’s new drawdown of the revolver credit facility, partially offset by a
dividend distribution. The net cash used in financing activities was $8.3 million for the
same period in 2013 primarily due to a dividend distribution.
Dividends
In 2014, the Company declared dividends as follows:
Record date
February 28
May 30
Amount per share
$0.05
$0.05
During the period, the Company paid a dividend of $8.0 million. On May 14, 2014, the
Company declared a $0.05 per share cash dividend to shareholders of record on May 30,
2014. The dividend will be payable on or around June 16, 2014.
6
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2014 and December 31, 2013 and for the three-month periods ended
March 31, 2014 and 2013
7
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Expressed in thousands of United States dollars, except share data)
March 31,
2014
Current assets
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Prepaid expenses
Deferred mobilization costs
Deferred insurance premium
Other current assets
Total current assets
December 31,
2013
24,925
1,000
29,031
3,255
16,338
1,624
1,261
77,434
19,537
1,000
24,158
3,508
2,202
1,627
1,382
53,414
Noncurrent assets
Property, plant & equipment, net
Restricted cash
Noncurrent deposit/escrow account
Deferred mobilization costs, net of current portion
Drydock costs, net of current portion
Other noncurrent assets
Total noncurrent assets
211,216
5,436
10,404
61
2,300
1,360
230,777
198,158
5,436
9,222
368
2,859
1,665
217,708
Total assets
308,211
271,122
Current liabilities
Accounts payable
Accrued expenses
Income taxes payable
Affiliated debt
Deferred revenue
Total current liabilities
13,356
19,796
1,732
47,000
5,785
87,669
9,275
20,196
1,282
22,000
52,753
Total liabilities
87,669
52,753
Shareholders’ equity
Share capital: US$0.25 par value authorized: 294,000,000
shares; issued: 163,398,683 at March 31, 2014 and
163,731,655 at December 31, 2013
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total shareholders’ equity
40,850
175,875
(6,691)
10,508
220,542
40,933
175,462
(6,691)
8,665
218,369
Total liabilities and shareholders’ equity
308,211
271,122
Approved by the Board of Directors of Northern Offshore, Ltd.
The accompanying notes form an integral part of the unaudited consolidated financial statements
8
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Expressed in thousands of United States dollars, except share and per share data)
Three Months Ended
March 31,
2014
2013
49,432
41,413
Operating expenses
Drilling and production
Depreciation
General and administrative
(26,949)
(8,297)
(2,142)
(30,079)
(7,937)
(2,011)
Total operating expenses
(37,388)
(40,027)
12,044
1,386
(426)
(121)
(45)
(395)
(121)
469
(592)
11,452
(1,449)
10,003
(47)
1,339
(275)
1,064
0.06
0.06
0.01
0.01
159,091
159,093
157,060
157,217
Revenues
Operating income
Other expenses, net
Interest expense, net
Amortization of deferred financing fees
Other, net
Total other expenses, net
Income before income taxes
Income taxes expense
Net income
Earnings per share
Basic
Diluted
Weighted average common shares (‘000)
Basic
Diluted
Approved by the Board of Directors of Northern Offshore, Ltd.
The accompanying notes form an integral part of the unaudited consolidated financial statements
9
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Expressed in thousands of United States dollars)
Three Months Ended
March 31,
2014
2013
Net income
Other comprehensive income/(loss), net of tax
Total comprehensive income
10,003
10,003
1,064
1,064
Approved by the Board of Directors of Northern Offshore, Ltd.
The accompanying notes form an integral part of the unaudited consolidated financial statements
10
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(Expressed in thousands of United States dollars, except share data)
Common
shares
‘000
Balance at December 31, 2012
Accumulated
Additional
other
paid-in comprehensive Retained
capital
earnings
loss
Share
capital
Total
160,488
40,122
170,985
(6,691)
30,007
234,423
-
-
-
-
1,064
1,064
3,064
766
(766)
-
-
-
Payments for taxes on vested shares
-
-
(274)
-
-
(274)
Stock-based compensation
-
-
1,470
-
-
1,470
Common shares dividends
-
-
-
-
(8,174)
(8,174)
Balance at March 31, 2013
163,552
40,888
171,415
(6,691)
22,897
228,509
Balance at December 31, 2013
163,732
40,933
175,462
(6,691)
8,665
218,369
-
-
-
-
10,003
10,003
Issuance/(cancellation) of restricted
stock
(333)
(83)
83
-
-
-
Payments for taxes on vested shares
-
-
(844)
-
-
(844)
Stock-based compensation
-
-
1,174
-
-
1,174
Common shares dividends
-
-
-
-
(8,160)
(8,160)
163,399
40,850
175,875
(6,691)
10,508
220,542
Net income
Issuance of restricted stock
Net income
Balance at March 31, 2014
Approved by the Board of Directors of Northern Offshore, Ltd.
The accompanying notes form an integral part of the unaudited consolidated financial statements
11
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Expressed in thousands of United States dollars)
Three Months Ended
March 31,
2014
2013
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Stock-based compensation
Depreciation
Amortization of deferred financing fees
Gain on disposal of rig assets
Changes in operating assets and working capital
Accounts receivable
Prepaid expenses
Deferred mobilization costs
Other current and noncurrent assets
Accounts payable
Other accrued liabilities
Deferred revenue
Income taxes payable
Other, net
Net cash provided by operating activities
1,174
8,297
121
(325)
1,470
7,937
121
(29)
(4,548)
253
(13,829)
718
1,380
(604)
5,785
450
21
8,896
3,866
647
797
932
(6,839)
(568)
(1,031)
(338)
Cash flows from investing activities
Capital expenditures – existing fleet
Capital expenditures – newbuild jackups
Changes in restricted cash
Changes in noncurrent deposit/escrow account
Net cash used in investing activities
(529)
(17,997)
(1,182)
(19,708)
(2,189)
(150)
(1,900)
(4,239)
Cash flows from financing activities
Proceeds from drawdown of new revolver facility
Payment for taxes on vested shares
Dividends paid
Net cash provided by/(used in) financing activities
25,000
(844)
(7,956)
16,200
(274)
(7,986)
(8,260)
Net changes in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
5,388
19,537
24,925
(4,470)
26,504
22,034
250
87
2,850
204
1,968
188
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes
Significant non-cash transactions during the period for:
Accrued capital expenditures
Accrued dividends
10,003
1,064
8,029
Approved by the Board of Directors of Northern Offshore, Ltd.
The accompanying notes form an integral part of the unaudited consolidated financial statements
12
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in thousands of United States dollars except share and per share data)
1.
General information and principles of accounting
Northern Offshore, Ltd. (referred to as the “Company” or collectively with its
subsidiaries as the “Group”) is a limited liability company registered in Bermuda.
The principal activities of the Group consist of providing drilling and production
services to the offshore oil and gas industry.
The Group operates offshore oil and gas production and drilling vessels deployed
around the world. The Group’s fleet consists of a drillship, a semisubmersible and
two jackup drilling rigs. Additionally, the company has two 350’ high specification
jackup drilling rigs under construction, with delivery expected in the first and third
quarters of 2016 and one floating production facility. The Group’s vessels operate
in various markets including the North Sea, the Indian Ocean, Southeast Asia and
West Africa.
Northern Offshore, Ltd. is listed on the Oslo Stock Exchange where its shares began
trading in September 2007.
The unaudited interim consolidated financial statements as of March 31, 2014 and
for the three month periods ended March 31, 2014 and 2013, included herein, have
been prepared based on ASC 270 (“Interim Financial Reporting”) in accordance
with accounting principles generally accepted in the United States of America (“US
GAAP”). The year-end consolidated balance sheet data was derived from the
audited financial statements as of December 31, 2013. Although these interim
financial statements and related information have been prepared without audit, and
do not include all disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles, the Group believes that
the note disclosures are adequate to make the information not misleading. The
interim financial results may not be indicative of results that could be expected for a
full fiscal year. It is suggested that these unaudited consolidated financial statements
be read in conjunction with the consolidated financial statements and the notes
thereto included in the Annual Report to Shareholders for the year ended December
31, 2013. The unaudited interim financial statements reflect all adjustments
considered necessary for a fair presentation of financial position, results of
operations and cash flows for the periods presented.
All dollar amounts included in the financial statements and in the notes herein are
expressed in United States dollars (“$”) unless designated otherwise.
2.
Summary of significant accounting policies
Changes in Estimates
The preparation of the consolidated financial statements in accordance with US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
13
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in thousands of United States dollars except share and per share data)
liabilities at the date of the financial statements and the reported revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Mobilization and Contract Preparation Costs
Payments made in advance for contract mobilization costs associated with moving a
drilling unit from one regional location to another and contract preparation costs
associated with specific contract requirements will be deferred and recognized over
the primary contract term.
Recently issued accounting pronouncements
Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 205 and Topic 360 – Reporting Discontinued
Operations of Disposals of Components of an Entity.
In April 2014, the FASB issued revised accounting guidance and changed the
requirements for reporting discontinued operations. Under the amendments, only
disposals of components of an entity that represent a strategic shift that has or will
have a major effect on an entity’s operations and financial results will be reported as
discontinued operations in the financial statements. In general, this guidance is
likely to result in fewer disposals of assets qualifying as discontinued operations.
The guidance also requires additional disclosures. This guidance is effective on a
prospective basis for interim and annual periods beginning on or after December 15,
2014. The Group is evaluating the impact of this guidance on its results of
operations, cash flows or financial position.
3.
Restricted cash
As of March 31, 2014 and December 31, 2014, the current restricted cash was $1.0
million, which relates to the Wintershall contract performance guarantee for the
jackup Energy Endeavour. This performance guarantee expires on November 15,
2014.
The non-current restricted cash was $5.4 million for both periods, which relates to
the Oil and Natural Gas Corporation (“ONGC”) three-year contract performance
guarantee for the semisubmersible Energy Driller. This performance guarantee
expires on July 31, 2015.
14
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in thousands of United States dollars except share and per share data)
March 31,
2014
December 31,
2013
1,000
1,000
5,436
5,436
Restricted cash - current
Energy Endeavour
Restricted cash - non-current
Energy Driller
4.
Deposit / escrow account
The Group is required to fund a $12 million escrow account under the terms of the
floating production facility Northern Producer’s contract with EnQuest, beginning
with the December 2011 tariff billing. Under the terms of the agreement, for each
day the unit delivers no less than 10,000 barrels per day, 10% of the tariff income is
to be paid into the escrow account. In addition, a further 5% of the tariff income
was paid into the escrow account until a sum equal to $1,574,873 was attained. From
March 2013 onwards, only 10% of tariff income is to be paid to the escrow account
as the 5% tariff income has reached the total of $1,574,873. EnQuest will continue
to deduct the 10% of the tariff income from the monthly tariff receipts and remit the
net amount to the escrow account until the fund reaches $12 million.
As of March 31, 2014 and December 31, 2013, the balance in the escrow account
was $10.4 million and $9.2 million, respectively
5.
Accounts receivables, net
Accounts receivables are presented net of allowances for doubtful accounts
receivables as follows:
Trade receivables, net
Unbilled receivables
Other
Accounts receivables, net
March 31,
2014
December 31,
2013
19,979
5,852
3,200
29,031
15,580
5,761
2,817
24,158
15
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in thousands of United States dollars except share and per share data)
6.
Property, plant and equipment
The details in fixed assets are as follows:
March 31,
2014
Production and drilling vessels
Cost
Accumulated depreciation
Net book value
Furniture and fixtures
Cost
Accumulated depreciation
Net book value
Computer system and hardware
Cost
Accumulated depreciation
Net book value
Total property, plant and equipment
December 31,
2013
594,891
(383,909)
210,982
573,771
(375,879)
197,892
1,275
(1,225)
50
1,275
(1,220)
55
1,000
(816)
184
1,000
(789)
211
211,216
198,158
Construction of two jackup drilling rigs
On October 4, 2013, the Company announced that two of its subsidiaries have
executed contracts for the construction of two LeTourneau Super 116E Class jackup
drilling rigs, with a priced option for the construction of two additional rigs of the
same design. The yard contract price is less than $180 million, with favorable tailend-heavy payment terms.
On November 5, 2013, the Group made the first installment payment of $17.8
million for its two newbuild jackup rigs. The second installment payment of $17.8
million was made on March 5, 2014.
The Group’s current capital commitment for the two newbuild jackups relates to the
final payments, which will be paid upon delivery totaling $320.4 million. Delivery
of the rigs is currently anticipated for the first and third quarter of 2016 with $160.2
million due per rig when delivered. The actual timing of the final payment could be
impacted due to an extension of the delivery date pursuant to the terms of the
contract.
16
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in thousands of United States dollars except share and per share data)
7.
Deferred revenue
The deferred revenue was related to a payment received from Oceanic Consultants
Nigeria Limited, an affiliate of CAMAC Energy Inc., for the mobilization fees and
reimbursement of dry haul carrier costs incurred by the drillship Energy Searcher in
preparation for its new contract in offshore Nigeria, which will be amortized over
the primary one year term of the contract.
March 31,
2014
Deferred revenue - current
8.
5,785
December 31,
2013
-
Income taxes
Under current Bermuda law, the Company is not required to pay income taxes in
Bermuda. However, certain of the Company’s subsidiaries are taxpayers in foreign
jurisdictions. All income taxes of the Group are attributable to income earned
from operations in foreign jurisdictions.
The change in the effective tax rate from period to period is primarily attributable to
changes in the profitability mix of the Group’s operations in various foreign
jurisdictions. Because the Group’s operations continually change among numerous
foreign jurisdictions, and methods of taxation in these jurisdictions vary greatly,
there is little direct correlation between the income tax provision and income before
taxes.
A reconciliation of the differences between the Group's income tax provision
computed at the domestic rate and the reported provision for income taxes follows:
Three months ended
March 31,
2014
2013
Income before income taxes (non-domestic)
Income tax provision at domestic rate
Taxes on foreign earnings at greater than the
domestic rate
Adjustments to taxes attributable to prior years
Income tax provision
11,452
-
1,339
-
1,449
1,449
279
(4)
275
Effective tax rate
12.65%
20.5%
17
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in thousands of United States dollars except share and per share data)
9.
Earnings per share
A reconciliation of the numerators and denominators of the basic and diluted per
share computations for income from continuing operations follows:
(in thousands)
Three months ended
March 31,
2014
2013
Weighted-average shares outstanding
— basic
159,091
157,060
2
157
159,093
157,217
10,003
1,064
0.06
0.06
$ 0.01
$ 0.01
Effect of potentially dilutive shares:
Stock options and awards
Weighted-average shares outstanding
— diluted
Net income — basic and diluted
Net income per share:
Basic
Diluted
10.
$
$
Debt
Total debt outstanding as of March 31, 2014 and December 31, 2013 were $47.0
million and $22.0 million, respectively, which were classified as current in the
Consolidated Balance Sheet.
Revolving Credit and Credit Support Facility:
On May 18, 2011 the Company entered into a $50 million revolving credit facility
and $10 million credit support facility (collectively, the “Facility”) with Metrogas
Holdings Inc. (“Metrogas”), an affiliate of the Company’s largest shareholder,
Geveran Trading Co. Ltd. (“Geveran”). On April 26, 2012, the Facility was
amended (“Amended Facility”), increasing the revolving credit limit by $25 million
to a total of $75 million. On January 20, 2014, the maturity date of the Amended
Facility was extended to May 18, 2015. The Group relies on the revolving credit
facility to fund its working capital requirements and investments in the current fleet.
Based on the current business plan, the Group expects to have sufficient liquidity to
meet its business obligations over the next twelve month period.
The utilized portion of the Amended Facility bears interest at a rate of 3.00% over
the London Interbank Offered Rate (“LIBOR”) with a non-utilization fee of 1.0%
paid quarterly in arrears on the unutilized portion of the Facility.
18
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in thousands of United States dollars except share and per share data)
The Facility contains certain security, reimbursement and break cost provisions,
representations and warranties, and affirmative and negative covenants. In addition,
the Amended Facility established a minimum value requirement for the floating
production facility Northern Producer (the “Rig”) of 125% of the outstanding facility
balance. As of March 31, 2014 and December 31, 2013, the Company was in
compliance with the minimum value requirement.
On March 4, 2014, the Company made an additional drawdown of $25 million of its
revolving facility with a term of twelve months maturing March 3, 2015 and bears
an interest rate of 3.00% over LIBOR.
On May 16, 2014, the Company refinanced its maturing drawdowns of $22 million
with Metrogas. The new term of the drawdown is twelve months maturing May 15,
2015 and bears an interest rate of 3.00% over LIBOR.
The Company has the option to pay back the drawdowns before it matures or to
refinance the maturing drawdowns either in full or in part.
11.
Segment information
The Group bases its segment reporting on asset class and has identified four
reportable segments including “Other” which includes management service
contracts and corporate expenses. Reporting segment information by asset class
reflects the primary basis on which the current key decision makers manage the
business. Total assets are shown as of the applicable period end.
The following tables present the Group’s segment data.
Revenue
Depreciation
Interest expense
Pretax profit or (loss)
Income taxes
Total Assets
Jackups
25,098
2,883
8,150
338
140,713
Three months ended March 31,
2014
Floaters
*FPF
Other
Total
15,547
8,787
49,432
3,627
1,754
33
8,297
426
426
18
5,450
(2,166) 11,452
685
(2)
428
1,449
98,615
54,451
14,432 308,211
19
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in thousands of United States dollars except share and per share data)
Revenue
Depreciation
Interest expense
Pretax profit or (loss)
Income taxes
Total Assets
Jackups
18,998
2,693
3,334
343
102,573
Three months ended March 31,
2013
Floaters
*FPF
Other
Total
12,421
9,994
41,413
3,690
1,478
76
7,937
395
395
(7,966)
7,239
(1,268)
1,339
535
22
(625)
275
92,572
55,406
22,556 273,107
*Floating Production Facility
12.
Financial risk management
(i)
Currency risk
The Group’s functional currency is the U.S. dollar. However, a portion of the
Group’s operating expenses and capital expenditures are exposed to currency risk
arising from various currency exposures primarily with respect to the Singapore
dollar, Norwegian kroner, Danish kroner, British pound, and Indian Rupee. When
the U.S. dollar weakens or strengthens in relation to the above-mentioned currencies,
the expenses reported in U.S. dollars will increase or decrease. Currently, the Group
does not use any financial instruments to reduce its exposure to foreign currency
fluctuations.
(ii)
Interest rate risk
The Company is exposed to market risks inherent in the operations, primarily related
to interest rate risk which arose from the Company’s borrowing and financing
requirements. The utilized portion of the Amended Facility bears interest at a rate
of 3.00% over LIBOR and a non-utilization fee of 1.0% paid quarterly in arrears on
the unutilized portion of the Facility. As of March 31, 2014, the Company had $47.0
million outstanding under the Facility.
The Company did not use derivatives to alter the interest characteristics of the debt
instruments and has no holdings of derivative or commodity instruments as of March
31, 2014 and December 31, 2013.
(iii)
Liquidity risk
On May 18, 2011 the Company entered into a $50 million revolving credit facility
and $10 million credit support facility (collectively, the “Facility”) with Metrogas
Holdings Inc. (“Metrogas”), an affiliate of the Company’s largest shareholder,
Geveran Trading Co. Ltd. (“Geveran”). On April 26, 2012, the Facility was
20
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in thousands of United States dollars except share and per share data)
amended (“Amended Facility”), increasing the revolving credit limit by $25 million
to a total of $75 million.
The Amended Facility established a minimum value requirement for the floating
production facility Northern Producer (“Rig”) of 125% of the outstanding facility
balance. As of March 31, 2014 and December 31, 2013, the Company was in
compliance with the minimum value requirement.
Based on the current business plan, the Group expects to have sufficient cash flow
to meet its business obligations over the next twelve month period. However, the
Company's ability to meet its obligations over the next twelve month period is
dependent on the Company achieving its business plan and on the ability of
Metrogas to provide the committed funding under the Facility.
On March 4, 2014, the Company made an additional drawdown of $25 million of its
revolving facility with a term of twelve months maturing March 3, 2015 and bears
an interest rate of 3.00% over LIBOR.
On May 16, 2014, the Company refinanced its maturing drawdowns of $22 million
with Metrogas. The new term of the drawdown is twelve months maturing May 15,
2015 and bears an interest rate of 3.00% over LIBOR.
The Company has the option to pay back the drawdowns before it matures or to
refinance the maturing drawdowns either in full or in part.
(iv)
Oil and gas price risk
The Group’s business is exposed to commodity price risk, mainly the oil and gas
price. Increases or decreases in commodity prices have positive or negative impact
on the Group’s business. The demand for the Group drilling units is sensitive to oil
price developments, fluctuations in production levels, exploration results and general
activity within the oil industry. Additionally, the Northern Producer's revenues are
indexed to the daily Brent Crude Oil price which directly impacts tariff revenues
earned.
(v)
Concentration of credit risk
The Group markets its services to the offshore oil and gas industry, and its customer
base consists primarily of major integrated and government-owned international oil
companies, as well as smaller independent oil and gas producers. Management
believes the credit quality of the Group's customers is generally acceptable. The
Group provides allowances for potential credit losses when necessary.
A single customer accounted for 34% of trade receivables at March 31, 2014 while
another customer accounted for 31% of trade receivables at December 31, 2013.
21
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in thousands of United States dollars except share and per share data)
Additionally, a single customer accounted for 32% of revenue for the three months
ended March 31, 2014 and another customer accounted for 46% of revenue for the
three months ended March 31, 2013.
The Group places its cash and cash equivalents with high credit quality and wellcapitalized financial institutions to limit the Group's risk of counterparty default.
The Group does not expect any significant loss to result from non-performance by
such financial institutions.
13.
Fair values of financial instruments
The Company's financial instruments consist of cash and cash equivalents, trade
accounts receivable, accounts payable and current debt. The carrying amounts of
cash and cash equivalents, trade accounts receivable and accounts payable
approximate fair value due to the highly liquid nature of these short-term
instruments.
The Company classify its fair value measurements based on the following fair value
hierarchy as prescribed by the accounting guidance for fair value.
Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities
the Company has the ability to access.
Level 2 – a fair value measurement utilizing inputs other than a quoted market price
that are observable, either directly or indirectly, for the asset or liability. Level 2
inputs include, but are not limited to, quoted prices for similar assets or liabilities in
an active market, quoted prices for identical or similar assets or liabilities in markets
that are not active and inputs other than quoted market prices that are observable for
the asset or liability.
Level 3 – any fair value measurements which include unobservable inputs for the
asset or liability for more than an insignificant portion of the valuation. These inputs
may be used with internally developed methodologies that result in management’s
best estimate of fair value.
The current debt as of March 31, 2014 was $47.0 million and is valued using Level
2 measurement. Based on borrowing rates currently available to the Company for
loans with similar terms, the carrying value of the Company’s current debt
approximates its fair value. Fair value represents the amount at which an instrument
could be exchanged in a current transaction between willing parties.
The utilized portion of the Amended Facility bears interest at a rate of 3.00% over
the LIBOR with a non-utilization fee of 1.0% paid quarterly in arrears on the
unutilized portion of the Facility.
22
NORTHERN OFFSHORE, LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Expressed in thousands of United States dollars except share and per share data)
14.
Material Related Party Transactions
On May 18, 2011, the Company entered into a $50 million revolving credit facility
and $10 million credit support facility with Metrogas, an affiliate of the Company’s
largest shareholder, Geveran. On April 26, 2012, the revolving credit facility was
amended and increased by $25 million to a total of $75 million. On January 20,
2014, the maturity date of the Amended Facility was extended to May 18, 2015.
On March 10, 2014, Geveran utilized its guarantee facility with Nordea to provide a
counter guarantee on behalf of the Company to a local Nigeria bank in the amount
of approximately Nigerian Naira $1.9 billion (equivalent to approximately US$11.8
million). The counter guarantee is a requirement of the local Nigeria bank to enable
them to issue a temporary import bond in favor of the Nigeria Customs Service (“the
Beneficiary”) for the temporary importation of the drillship Energy Searcher relating
to its one year drilling contract offshore Nigeria. The guarantee is effective from the
above-mentioned date and shall remain valid until the Beneficiary confirms that the
Company’s obligations under the terms of the customs bond have been fulfilled.
15.
Subsequent Events
For the period ended March 31, 2014, the Company evaluated subsequent events
from March 31, 2014, through May 29, 2014, the date these financial statements
were available to be issued. There were no material subsequent events to be
disclosed that have not been disclosed herein in the notes to the unaudited
consolidated financial statements.
23

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