Annual Report 2006 Årsrapport 2006
Table of Contents Innhold 4: Director s Report 11: Financial Statement 25: Auditor s Report 26: Directors and Management 30: SS Viking Producer Reactivation Project 34: Market Analysis Floating drilling rig mid-water segment 40: Styrets Beretning 47: Regnskap 61: Revisjonsberetning 62: Styret og Ledelsen 66: SS Viking Producer Reaktiveringsprosjekt 70: Markedsanalyse Flytende borerigger for mellomdypt vann Picture on the front page: SS Viking Prospector cold-stacked in Galveston, Texas, USA. Late March 2007. Viking Drilling ASA
Viking Drilling Annual Report 2006 SS Viking Century cold-stacked in Sabine Pass, Texas, USA. Late March 2007. Viking Drilling ASA
Directors Report W. Dennis Heagney CEO & President Viking Drilling ASA BUSINESS AND HISTORY The Viking Drilling Group (Viking Drilling ASA and subsidiaries) owns three out-of-service bare deck semi-submersibles; SS Viking Producer, SS Viking Century and SS Viking Prospector. The two first were originally 1st generation drilling rigs, and the last a 2nd generation. SS Viking Producer is currently being fully reactivated and significantly modified, and will upon completion principally be a new enhanced 2nd generation drilling rig for work in water depth up to 1 500 ft outside the North Sea. The completion of the reactivation program on SS Viking Producer is scheduled for mid 2008, and the construction cost is estimated at about $ 160 mill excluding the purchase price and financing costs. The SS Viking Century and SS Viking Prospector are coldstacked and no reactivation work is planned at this stage. Both rigs have a drilling ban from a previous owner. There are no technical limitations to bring the cold-stacked units back into drilling services, but it will require consent from the previous owner. Otherwise, the cold-stacked units may be used for floating production, accommodation or tender drilling services. Substantial investments are also required in these two bare decks before they can return to service. Viking Drilling ASA was incorporated in Norway on 15th December 2005 with a share capital of NOK 100 000 divided into 1 000 shares each with a par value of NOK 100 per share. AS Holding, a wholly owned company by Mr. Christen Sveaas, the Chairman of the Board and lead investor, acquired all the shares in the start-up company on 28th February 2006. On March 6th, 2006 the company was renamed Viking Drilling AS and new equity of NOK 6 900 000 was paid-up in cash. A purchase option agreement to acquire the three bare decks for $ 44.0 mill en bloc, valid for two months, was entered into on March 7, 2006 and the option premium of $ 0.5 mill was paid shortly thereafter. Pareto Securities ASA was retained as the Company s investment banker on March 30, 2006 to assist the Company in raising $ 75 80 mill new equity in order to allow the Company to exercise the purchase option. Odin Rig Services Inc, Houston, Texas (ODIN), is owned and headed by Mr. Ole Peter Blom. In March 2006, Viking engaged ODIN as technical advisor to carry out a technical inspection and feasibility study of the bare decks and prepare an estimate for time and costs to bring the hulls back into services. Mr. Blom has more than 30 years experience from the offshore drilling industry with focus on rig new builds and rig refurbishment projects. ODIN was recommended by Pareto. Immediately prior to the initial public offering, the Company was transformed to a Public Limited Company. Viking Drilling ASA
The initial public offering was carried out early May and was fully subscribed. The gross cash proceeds from the initial public offering was NOK 496 mill. The shares were listed on The Norwegian Over The Counter Market (NOTC) on May 19, 2006 under the ticker code VIKI. The purchase option to acquire the three bare decks was exercised on May 8, 2006, and the bare decks were delivered early June 2006. ODIN was engaged as Construction Manager for the reactivation of SS Viking Producer in June 2006. The ODIN team now consists of 19 highly qualified and experienced engineers and planners, based at the site offices on the yard. Allum Marine AS, a Norwegian engineering company specializing in rig reactivation and rig new builds, was engaged as the Company s technical advisor in June 2006. This engagement was terminated in March 2007. In September 2006, a senior secured 5 year bond of respectively $ 50.5 mill and NOK 194 mill ($ 31 mill) was issued. A Master Service Agreement with the yard, Gulf Copper Dry Dock & Rig Repair in Galveston, Texas, for the reactivation of SS Viking Producer was signed in September 2006. The yard will provide labor for blasting, painting, welding and installation of machinery and drilling equipment. Zentech Inc, Houston, Texas, is engaged to assist with the detailed engineering and Noble Denton / ODL Services, Houston, Texas is engaged to assist with the global analysis and stability calculation on SS Viking Producer. The current Board of Directors was elected at a shareholders meeting held in November 2006. Mr. W. Dennis Heagney was appointed CEO & President of Viking Drilling Group on January 2, 2007. Mr. Heagney has more than 30 years of experience and a proven track record in the offshore drilling industry. From 1996 2002, he served as Chief Operating Officer of Transocean Offshore Inc, the world s largest drilling contractor. From 1986 1995, he served as President of Sonat Offshore Drilling Inc where he had worked since 1969. Most recently, he served as Senior Vice President Business Development of Songa Management, Houston, Texas. In February 2007, the Company increased the construction budget on SS Viking Producer to about $ 160 mill, excluding the purchase price and financing costs, with a scheduled completion in mid 2008. A significant upgrade of the originally planned technical specifications, outlined in detail below, is the primary force driving the increased costs. In March 2007, new equity of $ 20 mill was fully underwritten by some of the largest shareholders and a new $ 60 mill 5 year bond financing was secured. Both the equity and bond can be issued at the Company s discretion, but in no event later than February 28, 2008. The Board will endeavor to secure better and less expensive financing once a drilling contract is secured for SS Viking Producer. It is expected that a contract will be secured toward the end of the reactivation program. The operational and technical management of SS Viking Producer has not been decided. The Company will actively pursue a partnership with an established national or international drilling contractor in due course. In addition to Viking Drilling ASA (parent company), the Group comprises the following subsidiaries: - Viking Offshore (USA) Inc, Texas, USA - Viking Producer Inc, Republic of Liberia - Viking Century Inc, Republic of Liberia - Viking Prospector Inc, Republic of the Marshall Islands SS VIKING PRODUCER REACTI- VATION PROJECT The reactivation of SS Viking Producer which is ongoing at Gulf Copper Dry Dock & Rig Repair in Galveston, Texas is making good progress overall. A new construction budget and master schedule were announced in February 2007 showing an estimated construction cost of about $ 160 mill, excluding the purchase price and financing costs and completion in mid 2008. The increased construction budget and new completion date is primarily caused by the following: - Significant upgrade of the originally planned technical specifications to improve the operational capabilities of the rig and strengthen and increase the number of contract opportunities. This is expected to generate a higher day rate. The technical specifications are further described later in the annual report - The need to purchase new equipment as little quality used equipment is available in the market - Equipment and labor prices have increased significantly and are expected to continue to increase going forward Installation of column buoyancy void tanks (column sponsons) and three horizontal braces will be made to increase the variable deck load to 2 300 2 400 tons. Furthermore, anchor racks will be installed on the pontoons in order to enable more efficient operation. These activities are the main reason for the delayed completion. Viking Drilling ASA
SS Viking Producer Drawworks recondition completed. Rotary table after refurbishment avaiting installation on board SS Viking Producer. The project has now achieved a greater level of audit ability and baseline data is available which will allow more accurate monitoring of the progress going forward. All long lead items are secured and the main focus going forward is to ensure timely delivery of the equipment and material. Construction work on board the rig continues to focus on blasting and painting of internal compartments, outfitting of the living quarter, electrical cable tray installation and repair of minor pitting on the columns. The fabrication of the anchor racks, column sponsons, horizontal braces and derrick substructure are ongoing with scheduled delivery dates in line with the master schedule. Installation of heavy equipment, such as main engines, substructure, derrick and mud pumps cannot start until completion of the anchor racks installation scheduled for early September 2007. The rig will become a high quality enhanced 2nd generation semi-submersible drilling rig with state-of-the-art drilling systems, capable of delivering first class wells to customers for many years. All the equipment to be installed on board the rig will be either new or reconditioned, and combined with all the steel replacement done by the previous owner in 2002, the rig will principally be new. The Board would, however, like to emphasize that major reactivation programs always involve inherent risks and the main risk going forward is the timely delivery of equipment and material. Due to the prevailing market conditions both equipment and labor prices are definitely rising, and contractors and manufacturers are under tremendous pressure which may cause both a time delay and cost overrun. In addition, shortage of qualified personnel in the industry is a challenge. Most of the vendors are based in the Houston area, which will allow better monitoring and managing of the progress and risk. FINANCIAL RESULT, BALANCE SHEET AND CASH FLOW The financial statements are prepared in accordance with the Norwegian General Accepted Accounting Principles (NGAAP). The Group The Group s net result for the year was a loss of $ 1.6 mill. No revenue has been recorded. Operating expenses are $ 1.5 mill of which $ 0.8 mill is lay-up costs related to the two cold-stacked units and $ 0.7 mill is related to general & administration costs. Net financial income was $ 1.1 mill, and non-payable tax cost was $ 1.2 mill. Since the Group does not have any operational assets generating revenue at this stage, the deferred tax asset has been charged as a non-payable tax cost. The recurring quarterly cost (burn rate) going forward is estimated at $ 800 000 of which $ 300 000 in insurance and lay-up costs for the two cold stacked bare decks, and $ 500 000 in general & administration costs. For the full year $ 63.1 mill has been capitalized on the rigs of which the purchase price represent $ 44.0 mill. Of the remaining balance, $ 18.8 mill is related to the reactivation of SS Viking Producer and includes procurement of equipment, labor and construction financing costs. Total cash at the end of the year is $ 103.3 mill, and the interest bearing debt is $ 81.5 mill. The following main accounting principles have been applied: - All costs related to the reactivation of SS Viking Producer have been capitalized except for costs related to P&I and War Risk insurances. - All lay-up and insurance costs related to SS Viking Century and SS Viking Prospector, which are currently coldstacked, have been expensed. - All general & administration costs at the Oslo and Houston offices have been expensed. - The NOK tranche (NOK 194 mill) of the bond debt has been valued at the exchange rate at the year end. - The transaction costs of $ 2.6 Viking Drilling ASA
SS Viking Producer at the yard (Gulf Copper) in Galveston, Texas. Late March 2007. mill related to the bond debt have been amortized over the loan period of 5 years and the accrued amount for the period has been capitalized on SS Viking Producer. - All interest income and interest cost which has accrued on the bond proceeds in the period has been capitalized on SS Viking Producer. The Company Viking Drilling ASA provides holding company and management services for the subsidiary companies within the Group. Net profit for the year was $ 1.0 mill. The Company had $ 0.1 mill in revenues from management services provided to the subsidiaries. Total operating expenses were $ 0.7 mill. Net financial income was $ 3.1 mill of which $ 3.6 mill is related to interest income from subsidiaries. Non-payable tax cost was $ 1.5 mill. Since the Company does not have any operational assets generating revenues at this stage, the deferred tax asset has been charged as a non-payable tax cost. In accordance with the Norwegian Accounting Act 3-3a the financial statements for the Company and the Group have been prepared under the assumption of continued operation. The basis for this assumption is that the present plans of the Group is fully financed and the strong market outlook for the Group s assets. The Group s current financial situation is regarded sound. INVESTMENTS, FINANCING AND CAPITAL ISSUES The Company has carried out two share issues in 2006. The first issue in March 2006 was a private issue of 69 000 shares, each with a par value of NOK 100.00, at a subscription price of NOK 100.00 per share. The second issue, which was an initial public offering, was carried out in May 2006 by issuing 49 600 000 shares, each with a par value of NOK 1.00, at a subscription price of NOK 10.00 per share. The net proceeds from the equity issues are $ 79.1 mill after transaction costs. Immediately prior to the initial public offering, the shares were split 1:100 increasing the total number of shares to 7.0 mill each with a par value of NOK 1.00. The total number of shares outstanding as of today is 56.6 mill each with a par value of NOK 1.00. In addition, the Company has issued 6.2 mill warrants for one share each, which may be called on or before November 9, 2007 at a subscription price of NOK 1.00 each, provided that the average volume weighted market share price is minimum NOK 15.00 over 10 consecutive working days with an accumulated traded volume of minimum 1.0 mill shares. The Company issued a floating rate senior secured 5 year bond financing in September 2006 of $ 50.5 mill and NOK 194 mill ($ 31 mill). The book value of the bond at the end of the year is $ 81.5 mill. The bond is secured by first priority mortgage in all three bare decks. The bond carries a coupon of respectively 3 months LIBOR + 6.50% p.a. for the USD loan and 3 months NIBOR + 6.50% p.a. for the NOK loan. The bond will amortize with 20% each at the end of year 3 and year 4 and the 60% balance in October 2011. The Company may redeem the bond any time at 107% of par value prior to October 5, 2008, and at 104% thereafter. The proceeds can only be used for the reactivation of SS Viking Producer. The net proceeds from the bond are $ 78.9 mill after transaction costs. In March 2007, a new equity issue of $ 20 mill was fully underwritten by some of the largest shareholders and a new $ 60 mill 5 year bond financing was secured. Mr. Christen Sveaas, the Chairman of the Board and lead investor, has underwritten $ 7.3 mill of the new equity. The new equity and bond will be issued when the cash is required, which is estimated at the end of 2007. Total transaction costs of $ 5.0 mill were paid in March 2007. The new $ 20 mill equity issue will be a rights issue for the Company s shareholders and the issue price will be determined by the Board in accordance with normal market practice for a rights issue at the time the Board decides to carry out the issue. If SS Viking Century or SS Viking Viking Drilling ASA
Prospector (the two cold-stacked bare decks) are sold for more than $ 22 mill each before the new equity is paid-up in cash, the equity underwriting commitment shall be reduced by the excess amount and the equity issue may be reduced accordingly. The equity underwriting may be called upon by the Company at its discretion, but in no event later than February 28, 2008. The new $ 60 mill bond financing carries a fixed interest rate of 15% p.a. The bond will be secured by second mortgage in all three bare decks. The bond will amortize with $ 10 mill on each of March 15, 2010 and March 15, 2011 and the balance of $ 40 mill on March 15, 2012. The Company may redeem the bond any time at 108% of par value prior to March 15, 2009, and at 104% thereafter. The proceeds can only be used for the reactivation of SS Viking Producer. The proceeds will not be made available before the new equity is paid-up in cash. The bond may be issued by the Company at its discretion, but in no event later than February 28, 2008. The total investment in SS Viking Producer is estimated at about $ 200 mill incl. the purchase price and financing cost to completion in mid 2008. At year-end $ 34.3 mill has been capitalized on the rig including the purchase price of $ 15.5 mill which was paid in cash in June 2006. The balance of $ 18.8 mill is related to the reactivation of the rig and includes procurement of equipment, labor and construction financing costs. The purchase price for SS Viking Century and SS Viking Prospector was $ 14.25 mill each, which was paid in cash in June 2006. Operating cost from inception of the Company until completion of SS Viking Producer in mid 2008 is estimated at about $ 12 mill which includes training of rig crew, lay-up and insurance costs on the two other bare decks and general & administration costs. FINANCIAL RISK The Group is exposed to certain financial risks related to its activities. These are mainly foreign currency risk, interest rate risk, liquidity risk and market risk. Foreign currency risk The Group s financial statements are denominated in USD which is the functional currency. The Group does not have any revenue as of today. The revenue in the industry is mostly denominated in USD, which is the expected currency of the Group in the future. The Group s expenses are primarily in USD, with a small portion in NOK which is related to general & administration cost at the head offices in Oslo, Norway and interest costs on the NOK 194 mill bond debt. Most of the labor, equipment and material costs related to the SS Viking Producer reactivation project are denominated in USD. The market value of the assets is denominated in USD. The Group s total interest bearing debt is USD 81.5 mill at the year-end, of which USD 31 mill is denominated in NOK equivalent to NOK 194 mill. Changes in the USD / NOK exchange rate will have a positive or negative impact on the net asset value of the Group. As of today, this exposure is covered by keeping an approximate equivalent amount in cash denominated in NOK. The cash deposit will be used for the reactivation project on SS Viking Producer, and the plan then is to hedge this foreign currency risk by using forward contracts. Interest rate risk The Group is exposed to fluctuations in interest rates for USD and NOK. The total interest bearing bond debt at year-end is equivalent to USD 81.5 mill divided into USD 50.5 mill and NOK 194 mill. The bond debt carries a floating interest rate based on three months LIBOR and NIBOR. The exposure is partially hedged with the current cash position, which carries a floating interest rate. Changes in the LIBOR and NIBOR interest rate will have a positive or negative impact on the financial result and cash flow. In March 2007, a new USD 60 mill bond financing was secured. The bond carries a fixed interest rate until maturity. Liquidity risk Based on the present plans, the Group is fully financed. In the event of a significant cost increase and / or time delay on the reactivation of SS Viking Producer, or the Group is not able to secure a charter contract for SS Viking Producer within reasonable time after the completion of the reactivation project, the Group s financial situation may be adversely affected. This could in turn cause the Group to be unable to meet its financial obligations, in which case the rigs could be subject to a forced sale at prices that may result in a loss. In March 2007, a new equity issue of $ 20 mill was fully underwritten by the largest shareholders and a new $ 60 mill 5 year bond financing was secured. The cash proceeds from the new equity and the bond issue will be made available upon 30 days notice from the Company and in no event later than February 28, 2008. The Company does not plan to give such notice before the cash is required, which is estimated at the end of 2007. No security for the payment commitment has been pledged by the underwriters. The Group has a payment risk on the underwriters, which has been reviewed and found acceptable. If the underwriters fail to make their timely payments, it may cause delay on completion of SS Viking Producer. Viking Drilling ASA
Market risk The Group s investments in outof-service semi-submersible bare decks, cold-stacked for a significant period of time and require substantial investment in order to generate revenues, involves substantial risks. There is risk connected to cost overruns related to the refurbishment project, rig operational risks and charterers ability to meet payment obligations if and when an employment contract is entered into. CORPORATE GOVERNANCE The Company has not adopted a Corporate Governance Policy as of today, but the Norwegian Code of Practice for Corporate Governance will be implemented by the end of 2007. Until that the Company will comply with all relevant laws and regulations, as well as the Norwegian Code of Practice for Corporate Governance. There will also be implemented systems for communication, monitoring, responsibility and incentives in place that create the greatest value over time, long term health and success for the Company, as well as the shareholders return on their investments. ORGANIZATION AND EQUAL OPPORTUNITIES In 2006, the Group did not have any employees. Both the commercial and construction management was undertaken by subcontracted parties under management contracts. Mr. Ole Geir Hagen was acting as the Company s CEO & President until December 31, 2006 under a management contract. Effective January 2, 2007, Mr. W. Dennis Heagney was appointed CEO & President of the Company and of Viking Offshore (USA) Inc, Texas, a wholly owned management company. Mr. Ole Geir Hagen is presently acting as the Company s CFO under a management contract. As of today, Viking Offshore (USA) Inc has five employees at its offices in Houston, Texas. Viking Offshore (USA) Inc operates under a managed services agreement with the rig owning companies. The Construction Manager for the reactivation of SS Viking Producer is subcontracted to Odin Rig Services Inc, Texas. The Group does not have any employees on board the rigs today. The Group complies with its expressed attitude that there shall be no discrimination based on race, religion and gender. 60% of the directors and 67% of the administrative staff are women. HEALTH, SAFETY AND THE ENVI- RONMENT Health, Safety and Environment (HSE) are key to Viking Drilling s operations. The Group s basic vision and policy are that all accidents can be prevented. Viking Drilling focuses systematically on training and certification of personnel, as well as integrating instructions, routines and rules so as to prevent situations that could cause injury to personnel or damage to equipment. With respect to the reactivation of SS Viking Producer, the policies and procedures of the yard s (Gulf Copper Dry Dock & Rig Repair) health and safety plan have been reviewed and found acceptable for adoption into a mutually operable project document. Strict practices in monitorig access to SS Viking Producer are fully implemented as well as a system of intervention should incidents of any unsafe nature occure. A full hurricane evacuation plan, which is referenced to the FEMA standard hurricane evacuation recommendations following the Katrina hurricane, is implemented. There have been no incidents of injury to personnel or damage to equipment since start-up. Neither have there been any accidents. There has been no sick leave. The Group s rigs were not operational in 2006. Viking Drilling will place great emphasis on the rigs meeting all statutory requirements for emissions, pollution and environmental impact. The reactivation of SS Viking Producer, which is currently ongoing at Gulf Copper Dry Dock & Rig Repair in Galveston, Texas, is done in compliance with the US environmental regulations. Operational procedures will be implemented before the rigs go on contract to avoid incidents with negative environmental impact. ALLOCATION OF THE RESULT The Board does not propose a dividend for 2006. The net profit of the Company of $ 988 000 is transferred to other equity. The Company s unrestricted equity was $ 988 000 at year-end. ANNUAL SHAREHOLDERS MEETING The annual shareholders meeting is scheduled for May 14, 2007 at 17:00 hours in Oslo, Norway. EVENTS AFTER YEAR-END Significant events after the year-end are included above. For further information see the notes. OUTLOOK - THE FLOATER DRIL- LING MARKET The demand for oil & gas continues to increase and is driven by an increased global population and consumption. At the same time, production and reserves are declining, and OPEC s production is presumably at effective capacity. The current producing fields are expected to represent 30 40% of demand in 2015, and Viking Drilling ASA
the reserve replacement ratio is currently at 75%, the lowest ever. This macro economic picture represents a huge challenge for the oil companies who are now in the process of changing their focus from cash flow to exploration. This is expected to generate increased demand for drilling rigs both for development and exploration drilling going forward. According to ODS-Petrodata, an independent consultancy firm, the supply of floaters (both semis and drill ships) is principally sold out until early 2009 based on known and planned drilling programs. The oil companies are currently building a back log of drilling programs due to present shortage of offshore drilling rigs. ODS-Petrodata is furthermore forecasting a shortage of 15 20 floaters from Q1 2008 and until end 2014 in their mid-case scenario which is based on an oil price of $ 60 65 / bbl. The total number of mid-water semis (< 3 000 ft) on a global basis is 94 units, 22 of which are scheduled to become available before June 30, 2008. The target market for SS Viking Producer is the mid-water segment in the Gulf of Mexico, Brazil, West Africa and Mediterranean. The total number of mid-water semis in these geographical areas is 33 units, 12 of which are scheduled to become available before June 30, 2008 including SS Viking Producer. The expected additional requirement in these geographical areas over the next 3 4 years is 20 30 units giving a total demand of 50 60 units. Most of the semis which are becoming available are expected to be fixed on long term contracts prior to June 2008, leaving a good window of opportunity for SS Viking Producer upon completion in mid 2008. Day rates for comparable semisubmersibles have increased during the year and are currently around $ 300 000 per day for long term contracts. Two 2nd generation semis were reported fixed beginning of March 2007 on long term contracts. The SS Sedneth 701 (1 500 ft, built 1972) was fixed to Chevron, Angola at $ 360 000 per day for 30 months starting August 2007. SS Petrolia (1 200 ft, built 1976), a sister rig of SS Viking Producer, was fixed to Pemex, Mexico at $ 280 000 per day plus a mobilization / demobilization fee of $ 11.0 mill for 2.5 years starting October 2007. The Board believes that the present strong mid-water drilling rig floater market to be generally maintained. OUTLOOK FOR 2007 The reactivation of SS Viking Producer is making good progress and will continue at full speed going forward. Time to market is a key issue and several alternatives are currently being considered to reduce the construction period and make the rig available earlier than mid 2008. Securing a professional operation for the rig is another key area the Company will focus on during the year. Inquiries from interested charterers have been received and are currently being pursued. For the time being, the Company has an opportunistic view of the market, and will therefore keep SS Viking Producer options open for as long as possible in order to achieve a good long term day rate. No reactivation work is planned for on the SS Viking Century and SS Viking Prospector at this stage. These cold-stacked units are safely secure respectively in Sabine Pass and Galveston, outside Houston, Texas, USA. There are ongoing discussions with the previous owner with respect to the deletion of the drilling ban, but no agreement has been reached to date. Inquiries have been received from contractors, considering using these units for floating production and accommodation. These business opportunities are being pursued and possible sales will be evaluated and compared with alternatives. Oslo, 19th April 2007 Viking Drilling ASA Christen Sveaas Kristin Gjertsen Anne Gro Gulla Chairman Bente Thiis Thornton Erik Wahlstrøm W. Dennis Heagney CEO & President (Since January 2, 2007) 10 Viking Drilling ASA
Income statement Parent Company Group 2005 2006 (All figures in USD 1 000) 2006 REVENUE 0 128 Management fees 0 0 128 Total revenue 0 OPERATING EXPENCES 0 0 Layup cost rigs 1 773 0 91 Wages and salaries 2 91 0 0 Depreciation of fixed assets 3 2 0 614 Administration expences 2,10 690 0 705 Total operating costs 1 557 0 (577) OPERATING RESULT (1 557) FINANCIAL INCOME AND EXPENCES 0 3 642 Interest received from group company 0 0 1 739 Interest income 1 771 0 1 626 Other financial income 1 626 0 (2 192) Interest expences (577) 0 (1 734) Other financial expences (1 734) 0 3 080 Net financial income/(-expences) 1 086 0 2 504 NET PROFIT BEFORE TAXES (471) 0 (1 516) Taxes 8 (1 166) 0 988 NET PROFIT (1 637) Proposed allocation of net profit: 0 988 Other equity Viking Drilling ASA 11
Balance Sheet Parent Company Group 2005 2006 (All figures in USD 1 000) 2006 ASSETS FIXED ASSETS Tangible fixed assets 3,7 0 0 Rigs 63 059 0 0 Machinery, equipment and vehicles 17 Financial fixed assets 0 4 Investment in subsidiaries 4,7 0 0 65 973 Loans to group companies 0 0 65 977 Total fixed assets 63 075 CURRENT ASSETS Receivables 0 Accounts receivable 0 0 68 Prepayments 5 3 573 15 99 764 Bank deposits and cash 7 103 266 15 99 832 Total current assets 106 839 15 165 809 TOTAL ASSETS 169 914 EQUITY AND LIABILITIES EQUITY 15 9 290 Share capital (56.000.000 shares of NOK 1 each) 9 290 0 71 028 Share premium reserve 71 028 Retained earings 0 988 Other equity/(accumulated loss) (1 637) 15 81 306 Total equity 9 78 682 LIABILITY Contigent liabilities 0 350 Deferred taxes 8 0 Long-term liabilities 0 81 515 Bonds 7 81 515 Current liabilities 0 354 Trade creditors 7 412 0 0 Taxes payable 8 0 0 11 Public duties payable 11 0 2 273 Other short-term liabilities 2 295 0 84 503 Total liabilities 91 233 15 165 809 TOTAL EQUITY AND LIABILITIES 169 914 Oslo, 19th April 2007 Viking Drilling ASA Christen Sveaas Kristin Gjertsen Anne Gro Gulla Chairman Bente Thiis Thornton Erik Wahlstrøm W. Dennis Heagney CEO & President 12 Viking Drilling ASA (Since January 2, 2007)
Cash Flow Statement Parent Company Group 2005 2006 (All figures in USD 1 000) 2006 CASH FLOW FROM OPERATIONAL ACTIVITIES 0 2 504 Profit before tax (471) 0 0 Depreciations 2 0 (68) Change in prepayments (3 573) 0 354 Change in trade creditors 7 412 0 2 283 Change in other short-term items 2 305 0 5 073 A = Net cash flow from operational activities 5 675 CASH FLOW FROM INVESTMENT ACTIVITIES 0 0 Reduction / (increase) operation equipment, machinery, etc. (19) 0 0 Reduction / (increase) rigs (63 059) 0 (4) Investments in subsidiaries 0 0 (4) B = Net cash flow from investment activities (63 078) CASH FLOW FROM FINANCING ACTIVITIES 0 81 515 Increase / (reduction) in bonds 81 515 0 (65 973) Reduction / (increase) in liabilities and loan to group companies 0 15 79 138 Share issue 79 138 15 94 680 C = Net cash flow from financing activities 160 653 15 99 749 A+B+C = Net changes in bank deposits and cash 103 251 0 15 Bank deposits and cash at beginning of period 15 15 99 764 Bank deposits and cash at end of period 103 266 Viking Drilling ASA 13
Accounting Principles The annual financial report is prepared according to the Norwegian Accounting Act and generally accepted accounting principles. The Group s functional currency is USD, and the Group, including the Company and all subsidiaries, presents its financial statements in USD. Consolidation principles The consolidated accounts include the parent company Viking Drilling ASA and other operations in which the company has a controlling interest, directly or indirectly, irrespective of form of organisation. The consolidated accounts are prepared according to the same accounting principles for the entire Group. Inter-company transactions, earnings, receivables and liabilities are eliminated. The cost price for shares and units in subsidiaries are eliminated in the group accounts against the equity in the subsidiary at the time of establishment or purchase (purchase method). Excess value related to fixed assets are allocated in the 14 Viking Drilling ASA Group accounts to the relevant fixed assets and depreciated over the anticipated lifetime of the assets. Excess value that cannot be identified with a tangible asset is classified as goodwill and depreciated. When consolidating foreign subsidiaries, balance sheet items are translated at the balance day exchange rate for the year. Translation differences are entered directly against Group equity. Subsidiaries and investment in associates Subsidiaries and investments in associates are valued at cost in the company accounts. The investment is valued as cost of acquiring shares in the subsidiary, providing they are not impaired. Write down to fair value will be carried out if the impairment is not considered temporary, and a write down is deemed necessary according to generally accepted accounting principles. Impairments are reversed when the indication no longer exists. Dividends and other distributions are recognised in the same year as they are recognised in the subsidiary accounts. If dividends exceed withheld profits after acquisition, the exceeding amount represents reimbursement of invested capital, and the distribution will be subtracted from the recorded value of the acquisition in the balance sheet. Valuing and classifying assets and liabilities Assets intended for ownership or use on a long-term basis are classified as fixed assets. Other assets are classified as current assets. Receivables due within one year are classified as current assets. The same criteria are applied when classifying short and long-term debt. Current assets are valued at the lower of acquisition cost and fair value. The first year s instalment of the long-term liabilities is included in long-term liabilities.
Financial instruments The processing of financial instruments in the accounts follows the intention behind the conclusion of the agreements. At the time of conclusion, the agreement is defined either as a hedge or as a trade agreement. Assets and liabilities in foreign currency Balance sheet items in foreign currency that are not hedged against fluctuations in exchange rates are valued at the exchanged rate on the balance sheet day. Balance sheet items in foreign currency that are hedged against exchange rate fluctations by financial instruments are valued at the hedged rate. Balance sheet items in foreign currency that are hedged against each other are valued at the exchange rate on the balance sheet date. Tangible fixed assets Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of self-constructed assets and modifications includes the cost of material, direct labor and other direct attributable costs including construction financing cost to bring the asset to a working condition for its intended use. Where components of an item of property, plant and equipment have different useful lives, they are accounted for separately. Subsequent expenditures are capitalised when it is probable that they will give rise to future economic benefits. Other costs are recognised in the income statement as incurred. Depreciation is charged to the income statement on a straight line basis over the estimated useful life of each component of property, plant and equipment. The estimated useful lives, residual values and decommissioning costs are reviewed at each financial year end. No depreciation of the rigs have been made to date. Depreciation of SS Viking Producer will start when the reactivation is completed, and the rig is readyto-drill. The depreciation plan will be determined at that time. The depreciation of SS Viking Century and SS Viking Prospector has not started to date. The technical condition of these rigs is in such a state that it is not expected to deteriorate further while the rigs are cold-stacked. Costs for special surveys / class renewal surveys on offshore units required by classification societies are capitalised and depreciated over the anticipated period between surveys, generally five years. No costs have been recorded to date. Other maintenance and repair costs are expensed as incurred. Writing down fixed assets In cases where the remaining value (highest of utility value and sales value) of fixed assets is lower than book value, the assets should be written down to the remaining value. Write-downs are reversed if the basis for the writedown no longer exists. Revenue Revenue derived from charterhire contracts or other service contracts is recognized in the period that services are rendered at rates established in the relevant contracts. Certain contracts may include mobilization fees payable at the start of the contract. In cases where the fee covers a general upgrade of a rig or equipment which increases the value of the rig or equipment beyond the contract period, the fee is recognized as revenue over the contract period whereas the investment is depreciated over the remaining lifetime of the asset. In cases where the fee covers specific upgrades or equipment specific to the contract, the mobilization fees are recognized as revenue over the estimated contract period. The related investment is depreciated over the estimated contract period. In cases where the fee covers specific operating expenses at the start up of the contract the fees are recognized in the same period as the expenses. No revenue is recorded to date in the Group. Receivables Accounts receivables are entered at nominal value less provision for bad debt. Taxes Tax expenses in the profit and loss account comprise both tax payable for the accounting period and changes in deferred tax. Deferred tax in the balance sheet is calculated on the basis of existing temporary differences between accounting and taxable profit. Net deferred tax assets are recorded in the balance sheet to the extent it is more likely than not that the assets will be utilized. Assumption of continued operations The annual accounts are prepared under the assumption of continued operations. Cash flow statement The company used the indirect cash flow model. Viking Drilling ASA 15
Notes to the accounts NOTE 1 - LAYUP COSTS RIGS Parent company Group 2005 2006 2006 Wharfage 0 0 547 Insurance rigs 0 0 226 Total Layout costs rigs 0 0 773 NOTE 2 - REMUNERATION TO DIRECTORS, MANAGEMENT AND AUDITOR Parent company/group 2006 Directors 91 Management 205 Auditor (see further specification below) 9 Neither the Company nor the Group has any employees at year-end. Remuneration to the Directors The remuneration to the Board of directors is determined by the shareholders meeting on an annual basis. A provision of NOK 500 000 (USD 79 935) plus 14.1% social security of NOK 70 500 (US$ 11 270), has been made in the financial statements for 2006. The directors will be reimbursed for, inter alia, traveling and other expenses incurred by them in attending Board meeting. A director, who has been given special assignment beside normal duties, may be paid such extra remuneration as the Board may determine. No remuneration has been paid to the directors in 2006. Remuneration to the Management Mr. Ole Geir Hagen was acting as the CEO & President of all companies in the Group from the start-up in March 2006 until year-end, under a management contract with Fami Holding AS, which is wholly owned by him. Fami Holding AS has received a total remuneration of $ 205 492 in 2006. Effective January 2, 2007, Mr. W. Dennis Heagney was employed as CEO & President of all companies in the Group. Mr. Heagney s main employment terms are: - Annual salary $ 500 000 - Bonus compensation with a total value of $ 1.7 mill which is related to the following: $ 200 000 each rig for securing a charter contract $ 200 000 each rig when the rig has commenced operation on the charter contact $ 250 000 each rig for removal of the drilling ban on SS Viking Century and SS Viking Prospector - The employment contract may be terminated by both parties with 90 days notice. - In the event the employment is terminated by the Company because of Change of Control, Mr. Heagney shall receive an amount equal to the annual salary and the unpaid part of the above bonus compensation. - In the event the employment is terminated by the Company other than for a Change of Control, Mr. Heagney shall receive an amount equal to 75% of the annual salary, and if within 6 months following such termination either one of the above bonus milestones are achieved, Mr. Heagney shall receive the applicable bonus compensation. - In the event the employment is terminated by Mr. Heagney, no compensation shall be paid. Effective January 2, 2007, Mr. Ole Geir Hagen is engaged as the Company s CFO under a management contract with Fami Holding AS at a fixed fee of NOK 150 000 (USD 23 980) per month. Mr. Hagen is not entitled to any bonus or termination compensation. The agreement may be terminated by both parties with 1 month notice. No loans or guarantees are granted to the directors, management, employees, shareholders or related parties to any of these groups. 16 Viking Drilling ASA
Parent company Group Auditor s fees 2005 2006 2006 Legally mandated audit 0 2 2 Assistance preparing annual report and tax papers 0 3 3 Tax advicory sevices 0 1 1 Other accounting services 0 3 3 Total 0 9 9 NOTE 3 TANGIBLE FIXED ASSETS Parent company Viking offshore SS Viking Producer SS Viking Prospector SS Viking Century Cost at 1 Jan. 06 0 0 0 0 0 - Additions 0 19 34 289 14 372 14 397 63 078 Total Cost at 31 Dec. 06 0 19 34 289 14 372 14 397 63 078 Accumulated depreciations at 31 Dec. 06 0 (2) 0 0 0 (2) Accumulated write-downs at 31 Dec. 06 0 0 0 0 0 - Book value fixed assets 31 Dec. 2006 0 17 34 289 14 372 14 397 63 076 The Group owns three bare deck semi-submersibles which were acquired in June 2006 at the following purchase prices: - SS Viking Producer (Pentagon class, built 1969) $ 15.5 mill - SS Viking Century (Korkut class, built 1973) $ 14.25 mill - SS Viking Prospector (Victory class, built 1971) $ 14.25 mill The rigs have been cold-stacked for a significant period of time and are out-of-class. Substantial investments are required in all three bare decks before they can return to service. SS Viking Producer is currently being reactivated at Gulf Copper Dry Dock & Rig Repair in Galveston, Texas, USA as an enhanched 2nd generation drilling rig for work in water depth up to 1 500 ft outside the North Sea. The completion of the reactivation program is scheduled for June 2008, and the construction cost is estimated at $ 160 mill excluding the purchase price and financing costs. SS Viking Century and SS Viking Prospector are cold-stacked, and no reactivation work is planned for to date. These rigs have a drilling ban controlled by a previous owner. Depreciation of SS Viking Producer will start when the reactivation is completed, and the rig is ready-to-drill. The depreciation plan will be determined at that time. The depreciation of the two other rigs has not started to date. The technical condition of these rigs is in such a state that it is not expected to deteriorate further while the rigs are cold-stacked. Viking Drilling ASA 17
NOTE 4 INVESTMENTS IN SUBSIDIARIES AND INTERCOMPANY BALANCES Subsidiary companies are handled in the accounts according to the cost method. Company Location Share ownership/ voting rights Book value Viking Offshore (USA) Inc. Texas, USA 100% 1 Viking Producer Inc. Liberia 100% 1 Viking Prospector Inc. Marshall Islands 100% 1 Viking Century Inc. Liberia 100% 1 Intercompany Balances Parent company Viking offshore Viking Producer Viking Prospector Viking Century Loans to Group entities 65 973 3 591 (37 922) (15 803) (15839) Calculated interest are based on Libor 3 months plus 6.5% p.a.. NOTE 5 OTHER RECEIVABLES Parent company Group 2005 2006 2006 Value Added Tax 0 68 68 Prepaid arrangement fee bond loan 0 0 2 456 Prepaid insurance rigs 0 0 1 049 Total Other receivables 0 68 3 573 NOTE 6 BANK DEPOSITS Parent company Group 2005 2006 2006 Bank deposits, unrestricted 15 94 862 98 364 Bank deposits, restricted as security 0 4 902 4 902 Total Bank Deposits and cash 15 99 764 103 266 Bank deposits, restricted as security for bond loans Parent company/ Group Bank deposits for bond loan of NOK 194 mill 1 610 Bank deposits for bond loan of US $ 50.5 mill 3 292 Total Bank deposits, restricted as security for bond loans 4 902 18 Viking Drilling ASA
NOTE 7 LONG TERM LIABILITIES/MORTGAGED DEBT Parent company/ Group Interest bearing bond loan 81 515 The net book value of assets pledged as security Rigs 63 059 Bank deposits 4 902 Shares in subsidiaries 4 Total net book value of assets pledged as security 67 965 Bond loan $ 50.5 mill and NOK 194 mill In September 2006, the Company issued a floating rate senior secured 5 year bond loan of $ 50.5 mill and NOK 194 mill. The book value of the debt at year-end is $ 81.5 mill. The net proceeds from the loan shall only be used for the reactivation of SS Viking Producer. The bond carries an interest rate of respectively 3 months LIBOR + 6.50% p.a. for the USD loan and 3 months NIBOR + 6.50% p.a. for the NOK loan, payable quarterly in arrears. The interest rate will be increased to respectively LIBOR + 7.50% p.a. and NIBOR + 7.50% p.a., if the reactivation of SS Viking Producer is not completed within December 31, 2007. The loan will amortize with 20% ($ 10.1 mill and NOK 38.8 mill) each on October 5, 2009 and October 5, 2010 and the 60% ($ 30.3 mill and NOK 116.4 mill) balance on October 5, 2011. The Company may redeem parts of the loan or the entire loan any time at 107% of par value prior to October 5, 2008 and at 104% thereafter. The loan is secured by a 1st priority mortgage in SS Viking Producer, SS Viking Century and SS Viking Prospector and all insurances and equipment related thereto, as well as 1st priority pledge in all the outstanding shares in the wholly owned subsidiaries, Viking Offshore (USA) Inc, Texas, Viking Producer Inc, Liberia, Viking Century Inc, Liberia and Viking Prospector Inc, Marshall Islands. In addition, an amount equivalent to 6 months interests has been pledged in an escrow account. If SS Viking Producer is sold or the Company decides to discharge the mortgage over the rig any time prior to final maturity date, the Company shall redeem 100% of the outstanding loan at 107% of par value if occurring prior to October 5, 2008 and at 104% thereafter. If SS Viking Century or SS Viking Prospector is sold or the Company decides to discharge the mortgage over the rigs any time prior to final maturity date, the Company shall redeem $ 7 575 000 and NOK 29 100 000 of the loan on each rig at 107% of par value if occurring prior to October 5, 2008 and at 104% thereafter. Upon change of control, each bondholder shall have a right of pre-payment of the loan at a price of 101% of par value during a period of 60 days following the notice given by the Company. Change of control means any person or group (as such term is defined in the Norwegian Public Limited Liability Companies Act section 1-3) becomes the owner, directly or indirectly, of more than 50% of the outstanding shares in the Company. The Company shall not make any dividend payment, repurchase of own shares or make other distributions to its shareholders during the term of the loan. During the term of the loan, the Company shall at all times maintain a debt ratio of less than 75% based on consolidated book value. The initial transaction costs of $ 2.6 mill related to the loan were paid in October 2006 and are capitalized and amortized over the life of the loan. The net proceeds were received on October 5, 2006. Viking Drilling ASA 19
Bond loan $ 60 mill In March 2007, a $ 60 mill bond loan was secured. The bond has not been issued to date. The bond may be issued at the Company s discretion, but in no event later than February 28, 2008. The bond will be issued when the cash is required, which is estimated at the end of 2007. The loan will not be made available before $ 20 mill new equity has been paid-up in cash. If SS Viking Century or SS Viking Prospector is sold for more than $ 22 mill each before the new equity is paid-up in cash, the equity issue may be reduced by the excess amount. If SS Viking Century or SS Viking Prospector is sold prior to the settlement of the bond issue, the loan shall be reduced by $ 10 mill each rig, and the Company shall pay a fee to the underwriters of $ 800 000 each rig. The net proceeds from the loan shall only be used for the reactivation of SS Viking Producer. The main terms of the loan are as follows: The loan carries a fixed interest rate of 15% p.a. for the term of the loan, payable quarterly in arrears. The loan will amortize with $ 10 mill each on March 15, 2010 and March 15, 2011 and the $ 40 mill balance on March 15, 2012. The Company may redeem parts of the loan or the entire loan any time at 108% of par value prior to March 15, 2009 and at 104% thereafter. The loan will be secured by a 2nd priority mortgage in SS Viking Producer, SS Viking Century and SS Viking Prospector and all insurances and equipment related thereto, as well as 2nd priority pledge in all the outstanding shares in Viking Offshore (USA) Inc, Texas, Viking Producer Inc, Liberia, Viking Century Inc, Liberia and Viking Prospector Inc, Marshall Islands. In addition, an amount equivalent to 6 months interests will be pledged in an escrow account as security for debt service. If SS Viking Producer is sold or the Company decides to discharge the mortgage over the rig any time prior to final maturity date, the Company shall redeem 100% of the outstanding loan at 108% of par value if occurring prior to March 15, 2009 and at 104% thereafter. If SS Viking Century or SS Viking Prospector is sold or the Company decides to discharge the mortgage over the rigs any time prior to final maturity date, the Company shall redeem $ 10.0 mill of the loan on each rig at 108% of par value if occurring prior to March 15, 2009 and at 104% thereafter. Upon change of control, each bondholder shall have a right of pre-payment of the loan at a price of 101% of par value during a period of 60 days following the notice given by the Company. Change of control means any person or group (as such term is defined in the Norwegian Public Limited Liability Companies Act section 1-3) becomes the owner, directly or indirectly, of more than 50% of the outstanding shares in the Company. The Company shall not make any dividend payment, repurchase of own shares or make other distributions to its shareholders during the term of the loan. During the term of the loan, the Company shall at all times maintain a debt ratio of less than 75% based on consolidated book value. The initial transaction costs of $ 4.1 mill related to the loan were paid in March 2007 and are expensed. Ballat water pump installed in pump room B on SS Viking Producer. Construction crane on SS Viking Producer in operation. 20 Viking Drilling ASA