FGH Accounting questions pertaining to previously reported losses in the Ocean Rig & Petrodrill Disputes
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Oscar Wilde
Ocean Rig ( Brief History in general terms):
November 15, 1999 3Q/99 Ocean Rig Charges taken of $12.8m - "For financial reporting purposes, as of September 30, 1999, the Company has recognized revenue only to the extent of the amount of direct contract-related costs incurred which it expects to recover, as required by generally accepted accounting principles to account for claims. Accordingly, the Company has adjusted recognized revenues and gross profits to reflect the percentage of completion based on the revised delivery dates and related costs revised costs estimated and expected recoveries. The net impact of this adjustment to account for the unresolved claim and related additional costs incurred and for the timing of recognition of related revenues and expenses was a reduction in the third quarter of approximately $12.8 million. The amount of the adjustment was based on, among other things, management's evaluation of the status of the arbitration proceedings and settlement negotiations and management's estimate of the percentage of completion of the projects at the end of the quarter. Once the matter is settled, under percentage of completion accounting, the Company will be required to adjust revenues and estimated costs of the two projects in the period in which the settlement occurs. This could result in an additional adjustment to revenues and gross profit depending on the amount ultimately recovered and the timing of recognition of the related costs."
Jan 19, 1999 Ocean Rig Settlement: "In an effort to help finance the completion of the rigs, the companies have taken two important steps. First, Ocean Rig has agreed to an increase of $21.5 million in the contract price of each rig. These additional per rig amounts will be paid $5 million up front, $5 million upon delivery of the rig to Ocean Rig and the remaining $11.5 million spread over twice-monthly installments linked directly to the progress made on the rig." And "The companies have also agreed to make further improvements to the cash flow available for the projects by modifying the current milestone structure to allow for additional twice-monthly progress payments."
"Ocean Rig and Friede Goldman Offshore have also announced that, as part of the settlement, they have agreed that the Bingo 9000-1 will be delivered on October 31, 2000 and the Bingo 9000-2 on December 31, 2000."
marketwatch.newsalert.com
Jan 20, 2000 Merrill Lynch Report
Ocean Rig - Bingo 1 (Oct 31, 2000) and Bingo 2 (Dec 31, 2000) (5th gen semis) "With the increase in purchase price ($21.5m each), Friede now expects that it will break even or post a modest profit on these rigs."
Question for Mr. Holloway: Will the charges taken in 3Q/99 be recaptured as earnings in 2000 or were the charges taken in 3Q/99 merely an accounting recognition/reconciliation of earnings previously reported which were overstated?
Petrodrill (brief history/Hi-Lites):
In April 1998, TDI-Halter, L.P., now Friede Goldman Offshore Texas, L.P. ("FGOT"), a subsidiary of the Company, entered into contracts to construct two semi-submersible drilling rigs for Petrodrill IV Ltd. and Petrodrill V, Ltd. ("Petrodrill") with the combined contract value of $168.0 million. Notes: (1) In April 1998 the price of WTI (Cushing) crude was in the $16/bbl range. When adjusted for inflation, crude oil prices were at near record lows in 1998, bottoming in Dec '98. (2) Names of the rigs have subsequently been changed to Amethyst 4 & 5.
On January 27, 2000, Petrodrill filed an action against FGOT in the court in London, England, (the "UK action") seeking essentially the same relief on different theories as it had in the US litigation. In March, the court in London dismissed Petrodrill's application for interim relief that FGOT was not entitled to cease construction work; confirmed that the proper jurisdiction and forum for
the disputes was the court in London; and ordered a stay of the US litigation.
As directed by the UK court, FGOT filed a counterclaim seeking monetary damages in an amount of at least $68.5 million, and extension of the delivery dates under various legal theories. NOTE: After the six-month stay of the UK action, FGOT intends to vigorously pursue its claims for additional compensation.
Question for Mr. Holloway: If, the Company succeeds in an acceptable reconciliation with Petrodril in like manner to the Ocean Rig settlement, will the charges taken in this regard in 4Q/99 be recaptured as earnings in 2000 & 2001 as work progresses and/or; are the 4Q/99 charges merely hindsight accounting recognition/reconciliation of earnings reported in previous quarters which were perhaps optimistically over-stated?
Inquiring minds want to know!!!!!!!!!!!!!
SargeK
POINTS TO PONDER: One needs to recall that the Ocean Rig and Petrodrill rigs were contracted PRIOR to the CRASH of crude to around $10/bbl. At that level, some drilling contractors may NOT desire on time delivery of the rigs because they may not be able to meet contractual payments for equipment in a declining market. Such situations often causes a dispute. It's hard to build something for someone who is supposed to provide you engineering drawings, customer provided services and equipment but DOES NOT in an effort to delay the project because of their OWN financial difficulties. FWIW
Closing on a more positive note: FGH UP 1, 14% TODAY on above average volume!!!!!!
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