FILED BY ENSCO INTERNATIONAL INCORPORATED
PURSUANT TO RULE 425 UNDER THE SECURITIES ACT OF 1933
AND DEEMED FILED PURSUANT TO RULE 14a-12(b)
OF THE SECURITIES EXCHANGE ACT OF 1934
SUBJECT COMPANY: CHILES OFFSHORE INC.
SUBJECT COMPANY COMMISSION FILE NO.: 001-16005
ENSCO INTERNATIONAL AND CHILE'S OFFSHORE MERGER CALL
MAY 16, 2002
5:00 P.M. EST
OPERATOR: The following Webcast is a service of CCBN. Please stand by.
Good day, ladies and gentlemen. This is the Ensco International (Company: Ensco
International Inc.; Ticker: ESV; URL: http://www.enscous.com/) conference call
to discuss Ensco's proposed acquisition of Chiles Offshore.
This call is being recorded by Ensco International and is copyrighted material.
It cannot be recorded or rebroadcast without Ensco's express permission. Your
participation implies consent for our (ph) taping and agreement to these
(INAUDIBLE). At this time, I would like to introduce Mr. Chris Gaut, Ensco's
Chief Financial Officer, who will moderate the call. Mr. Gaut?
CHRISTOPHER GAUT, CHIEF FINANCIAL OFFICER, Ensco INTERNATIONAL: Thank you, Pam
(ph). Good afternoon.
Our Chairman and CEO, Mr. Carl Thorne will first have some brief prepared
remarks. And then, we'll open up this teleconference for your questions.
But first, let me note that forward-looking statements made during this call are
qualified by and subject to the risks and uncertainties that are described in
our news release this morning and discussed in our reports filed with the SEC,
including our 10-Qs and 10-K. The company's actual results may vary from our
expectation.
A summary of the deal: As explained in our press release this morning, Ensco has
signed a definitive agreement to acquire Chiles Offshore for a combination of
Ensco common stock and cash. Both boards have approved the transaction.
Under the agreement, which will be submitted for public filing today, Chiles'
stockholders will receive .6575 shares of Ensco common stock and $5.25 of cash
for each share of Chiles. There are no caps nor collars on the transaction.
Total value of the transaction is approximately $578 million based on our
closing price of yesterday.
After giving affect to the transaction, Ensco's stockholders will own 91 percent
of the combined company and Chiles' stockholders will hold nine percent.
Consummation of the transaction is subject to approval by the Chiles
stockholders and the requisite government approvals. We anticipate closing of
the merger within the next 90 to 120 days.
Let me turn it over to Carl.
CARL THORNE, CHAIRMAN AND CEO, Ensco INTERNATIONAL: Good afternoon. We believe
that the Chiles acquisition is uniquely aligned with our strategic focus. Chiles
has an excellent reputation for safety, quality of equipment and operation and
Chiles focused on major integrated oil companies is well in keeping with the
Ensco emphasis.
The two companies share a common philosophy with regard to critical issues of
safety, performance and quality of equipment and personnel. Bill Chiles and his
team have built an excellent organization. And we look forward to the
contribution that the Chiles team can and will make to the combined companies.
The two companies share common fleet designs. Chiles rigs, our super MLT 116 and
Keppel FELS MOD V designs, consistent with the Ensco standard. Chiles' fleet is
the newest in the industry, all built since 1999. The addition of the five
Chiles rigs is in keeping with Ensco's ongoing fleet renewal and enhancement
program.
Ensco is well into an enhancement program of our existing fleet to extend the
service life and upgrade the capability of its jacked-up rigs. The combined
fleet of 43 premium jack-ups will represent the second largest in the industry,
with 29 rigs or two-thirds of the fleet having been built or rebuilt since 1995.
The combined fleet will be balanced, with 21 rigs in the Gulf of Mexico and 22
rigs located internationally.
With the addition of Chiles' two rigs in the Gulf of Mexico, Ensco will have a
fleet of 21 premium jack-ups in the Gulf, over half of which will be equipped to
address deeper drilling applications on the shelf.
Internationally, three additional jack-up rigs serving (ph) inclusion of the rig
now under construction, would increase Ensco's fleet to 22 rigs and importantly
add three new heavy-duty technically-advanced rigs to the Ensco International
fleet.
This is intelligent growth for Ensco. We are adding to the high end of our
jack-up fleet without adding the industry supply, strengthening our core premium
jack-up operations and doing so without increasing financial leverage. Our
long-term debt to capitalization ratio is expected to remain at 24 percent after
given effect to the transaction.
Ensco will assume approximately $140 million of additional debt in the
transaction, all of which is at very attractive interest rates. We believe that
the timing of the transaction is opportune and of strategic importance.
Replication of the Chiles fleet by new building would require several years and
entail shipyard, project management and cost escalation risk.
Furthermore and possibly even more important, access to these premium assets at
this time positions Ensco to take advantage of a secular market improvement,
which we believe is accelerating. The transaction is expected to be accretive to
Ensco's earnings and cash flow from day one. Although Chiles is not large
relative to Ensco, we expect the acquisition to increase our EPS and cash flow
per share by several percentage points.
We would anticipate that operating and G&A expense for the combined companies
will be reduced by some five to $10 million per year with integration of the two
companies upon closing. The Chiles rigs have been well accepted by major oil
companies and have commanded premium day rates. The Chiles Discovery is about to
commence a contract with Phillips in the Timor Sea. It has an initial term until
early 2004 and a day rate of approximately $100,000 per day.
The Chiles Coronado has a contract in Trinidad with British Petroleum and (ph)
with a term into 2004 and a day rate in the mid-70s. The Magellan and Columbus
have been doing an excellent job for Shell in the Gulf of Mexico with day rates
in the '60s and '70s. We expect one of these rigs to continue its contract until
November and the other to be available in July.
Given the performance and reputation the Chiles has achieved with their
equipment, we believe these rigs will continue to receive premium rates. We
believe Ensco will add value to the Chiles rigs through integration of the units
in our operations, operating costs and procurement efficiencies and tax savings.
To summarize, we believe the Chiles acquisition strengthens our position and
positioning is what we have always been about. In the premium jack-up market, it
advances our efforts to renew and enhance our fleet's capability to better
enable us to meet the more rigorous drilling requirements of our customers while
preserving our financial strength and flexibility.
With those comments, Chris, I guess we'd be happy to address any questions at
this point in time.
THORNE: Right. Pam (ph), do we have any questions?
OPERATOR: Thank you. And, ladies and gentlemen, if you wish to ask a question at
this time, please remember to press the number one key on your touch-tone
telephone. If your question has been answered or you wish to remove yourself
from the queue, please press the pound key. I'm sorry. Our first question is
from Bill Herbert (ph), of Simonson Company International (ph).
BILL HERBERT (ph), SIMONSON COMPANY INTERNATIONAL (ph): Good afternoon. Chris, I
was wondering if maybe you could share with us how you guys looked at this from
a return standpoint - from a return-on-capital standpoint and maybe walk us
through some of your assumptions?
GAUT: Sure, Bill. I guess when we think about the returns here, they're - we
ought to break that down a bit. First of all, this is essentially new equipment.
HERBERT (ph): Right.
GAUT: And as you know, Bill, the returns on any new piece of equipment as
compared to a fully depreciated asset, would be apples and oranges.
HERBERT (ph): Right.
GAUT: The returns on a new rig would be low. The returns on a fully depreciated
rig would be high.
HERBERT (ph): Right.
GAUT: So that's one reason why returns in the early years here would be low. The
other point is that one of timing. The price we paid is we're paying primarily
Ensco stock. And to the extent that that's impacted by timing, that impacts the
purchase price.
HERBERT (ph): Right.
GAUT: For instance, if we had done this deal six months ago when the stock price
is - when Ensco's stock price were (ph) lower and if Chiles would have accepted
the same number of shares that we're offering now, hypothetically,...
HERBERT (ph): Right.
GAUT: ... the purchase price would have been lower and the returns would have
been higher. But, of course, it's unlikely they would have accepted that same
deal six months ago when Ensco's stock price was lower. They would have wanted
more Ensco shares. And, therefore, it would have been less accretive, probably
dilutive, if we'd done the deal six months ago.
It was our judgment that doing a transaction when the stock prices were aligned
in such a way that we would give up fewer Ensco shares and have a more creative
transaction would be a larger transaction in the long run.
HERBERT (ph): Fine. So, I mean, several different ways to look at this
transaction and return is one of them. But I think you articulated what the main
drivers were. So that's fine.
Carl, what - from our standpoint, I guess, this transaction, aside from the fit,
is sort of, an expression of optimism on your part with respect to the cycle.
What are you seeing right now with respect to industry activity unfolding and
how these rigs fit into perhaps deep formation drilling on the - on the
continental shelf going forward?
THORNE: As we have said for some time, as I stated in our last conference call,
we believe that this market is accelerating. The market improvement is
accelerating, particularly with the deep gas drilling applications in the Gulf
of Mexico.
We still see that to be the case. And as I have stated in the prepared remarks,
we feel that one of the issues relative to this acquisition is one of timing and
having - and our ability to utilize these rigs. And what we see is a
dramatically improving market going forward. As I said, we think this
improvement is accelerating.
We also have the issue that we're still involved in our upgrade program,
particularly with respect to the Gulf of Mexico rigs and that that program will
probably be spread, you know, not only over this year but also next year before
we complete the improvements, the enhancements of our existing fleet that we
think that we're going to do at this particular point in time.
All those things taken together, we thought and still think and believe that the
timing of this transaction is one of a very strategic nature.
HERBERT (ph): OK. And then, last question for me. You allude in your press
release to the participation in Ensco going forward on the part of Bill Chiles
as an executive officer. What role is he going to play?
THORNE: We see Bill playing a very key role, not only Bill but the other members
of his team, playing a very key role in this thing going forward.
We think that they have done an exceptional job relative to the building of
these rigs, the positioning of Chiles in the marketplace, as I said, completely
consistent with our philosophy, one of quality equipment, quality people and
certainly with an emphasis on safe operations and protection of the environment.
So all of this alignment, you know - I mean, the companies are so closely
aligned in philosophy, that as I have said on several occasions, I compliment
Bill and his team for the job that they have done.
And I think that this combination with us going forward, with Bill continuing to
function as an integral part of this whole process, particularly in view of the
fact that our philosophies are so aligned is extremely important to the success
of the overall venture.
HERBERT (ph): Thank you very much.
OPERATOR: Thank you. Our next question is from Arvind Sanger, of Deutsche Bank.
ARVIND SANGER, DEUTSCHE BANK: Thank you. Good afternoon. Carl, one question -
or, Chris, maybe this might be more directed at you. If the - if the earnings
are accretive right away, which I understand, as the Ensco business improves and
its rigs move up, it seems to me that the potential for appreciation and day
rates is less on the Chiles side since those rigs are already getting pretty
good rates.
Does it mean that maybe three or four quarters out, if you assume a pretty good
recovery in the worldwide jack-up market, it starts to get dilutive at some
point? Have you, you know, worked through that in terms of - you know, in terms
of those kind of numbers?
GAUT: Given some of the other savings that - or efficiencies that Carl
mentioned, including, you know, some tax savings that we think we can get out of
the combination and bringing our worldwide and a market thing and then
operational base here, as well as strictly operation savings, we think that
those will help enhance the transaction.
However, we don't think this will be a dilutive transaction as we look at it
(ph). We think that their - although they - many of the Chiles units are getting
quite attractive day rates now, in the 60s and 70s, as Carl mentioned, we do
think they've got further upside there, as well. And there's another rig about
to come out of the shipyard that's pretty much paid for.
So no, we don't think this will be dilutive. We think it will be accretive. But
also, I think a benefit that we see is that the Chiles rigs and their good
ability to be placed in term contracts will add stability and visibility to
Ensco's results.
THORNE: Arvind, I my just add an additional note to that. One of the real
advantages that we feel that we get from the Chiles fleet and I will reiterate -
I think that Bill and his team have done an exceptional job of putting these
assets together - is that all five of these rigs have three 2,200 horsepower
pumps, 7,500 psi mud systems, things that give us some of the hydraulic
horsepower, some of the advantages that we were really looking for.
All of the rigs have 70-foot high-strength high-loading capability cantilevers,
four of them 70-foot cantilevers. One of them is 65-foot cantilever.
Even with our enhancement program, another thing is the size and in capacity of
mud systems on some of this deeper application work. Even with our enhancements,
you know, of our existing rigs, we are still not adding 2,200 horsepower pumps
primarily because of the size of the rigs, configuration, age of the rigs.
We cannot increase mud systems to the extent that are already existing on the
Chiles fleet. So we are looking at rigs that are further enhanced from anything
that we could physically and economically accomplish with some of the upgrades
that we're doing on existing rigs. And these rigs are brought fully in keeping
with the same things that we have done with the Ensco 101 and the Ensco 102 in
terms of ultimate capability.
SANGER: A couple of other quick questions. The 102 is coming out soon. I guess
that'll be another premium rig you're adding to your fleet. What's the - or I
don't know if this already came up. What's the contract status for that one?
THORNE: The rig is - we have taken delivery of the rig but the rig is not yet
complete. It was a conditional delivery. The rig will probably still be in the
shipyard for another probably three to four weeks and commissioning and final
deficiencies being cured relative to the delivery status, we would anticipate
that that rig is bid on several jobs at this particular point in time. And we
would envision having an announcement sometime within the next couple of months
relative to that status.
SANGER: OK. And the last Chiles rig coming out, will that add to the debt or
will the cash flow over the next few months pay for that so that by the time the
deal closes and that rig delivery, which happened, I guess, more or less at the
same time, there wouldn't be in any change in, you know, kind of work you're
getting in terms of the balance sheet?
GAUT: No material change in debt by - between the third quarter.
One-hundred-and-forty (ph) million in closing would be our view.
SANGER: OK. Great. Thank you.
OPERATOR: Thank you. Again, ladies and gentlemen, if you have a question, please
press the number one key. Our next question is from Jim Wicklund, of Bank of
America Securities.
JIM WICKLUND, BANK OF AMERICA SECURITIES: Good afternoon, guys. If your entire
fleet goes to 70 to $100,000 day rate anytime soon, I promise, I won't consider
that a problem. What are you
currently - just Ensco's Gulf of Mexico fleet, what are you guys running right
now for utilization and average day rates?
GAUT: Yeah. Jim, we've got to be a bit careful there. We're at essentially full
utilization - full utilization on the rigs. I will be updating the day rates
here, I guess, tomorrow or the next day, the rest of this week. But day rates
have move up, as we indicated in the earnings conference call. But we'll give
you a rig-by-rig breakdown in an 8-K here within two days, if that'd be OK.
WICKLUND: OK. How much would it cost to build these rigs, not just the first
one, but all five? And how long would it take if you guys kept your balance
sheet at the current debt level?
GAUT: So, if keeping the debt at the current debt levels, it would take a number
of years.
THORNE: It would take a number of years. And, you know, I mean, that's one of
the keys to the old transaction, Jim, as we mentioned.
I mean, there's all sorts of risk in terms of, you know, of shipyard capacity
and, you know, whether or not these rigs, you know - you know, have fully
contracted or expect to be fully contracted like these because adding additional
supplies to the business, the escalations and costs that we'll see between now
and then and the other requisite, you know, risk - resulting risks that we
talked about, you know, in some of our prepared remarks.
So there's really no way to answer your question, but (ph) certainly, you know,
what that ultimate amount would be. But I can assure you it would be much more
than two years by the time we could get delivery on all of this high-spec
equipment that is involved in the rigs, construct the rigs and, you know and get
them on stream.
WICKLUND: OK. Didn't Chiles win the NOIA Safety Award this year? Is that - is
that an important thing to win?
THORNE: It's not only important but, in fact, as you're probably aware, I'm the
Chairman of NOIA and it was my pleasure to be involved in that presentation to
Bill and his team. And they are to be commended.
And again, the philosophies of these two companies are so closely aligned
relative to our complete and total dedication to quality of people, quality of
assets and safety of operations, I can assure you that in (INAUDIBLE), that's a
major plus.
WICKLUND: I know that everybody in the rig business knows each other. But has
this deal been a long time in coming or has it been a fairly recent negotiation?
THORNE: Of course, not anything, Jim, that we can talk about at this particular
point in time.
WICKLUND: OK. Who were the bankers on the deal?
GAUT: The Chiles company was represented by CSFB. And Ensco was not represented
in the negotiation.
WICKLUND: OK. Congratulations, guys. Nice buy. Nice company.
GAUT: Thank you.
THORNE: Thanks, Jim.
OPERATOR: Thank you. Our next question is from Pierre Conner, of Hibernia
Southcoast.
MIKE DRICKRUM (ph), HIBERNIA SOUTHCOAST (?): Thanks, Carl and Chris. Actually,
this is Mike Drickrum (ph). I just had a quick question for you, Carl. Where do
you see as the ideal market to work these Chiles rigs? I'm especially interested
in the two that are in the Gulf right now and then, the one that's currently
under construction.
THORNE: I'm sorry. I didn't understand the question.
DRICKRUM (ph): Where would you like to work the Chiles rigs, particularly the
two that are in the Gulf and the one that's under construction?
THORNE: Anywhere that we can get the $150,000 a day.
DRICKRUM (ph): OK.
THORNE: ... very seriously, I - we certainly would see, you know, at least two
of the Chiles rigs, you know, staying in the Gulf of Mexico to address, you
know, this improving market for the high-spec rigs that we see there.
We think (ph) and see, you know, several opportunities internationally and/or in
the states, you know, for the third rig, you know, that comes out - or the next
rig that comes out of the yard.
But right now, with two rigs in the Gulf and two in the international service
already relative, you know, to the existing Chiles fleet, we think that that
last rig is, kind of, a swing rig that, you know, can be utilized anywhere.
But, you know, until such time as this thing is closed, that is certainly, you
know, Bill's decision and Bill's business, you know, until such time as the
transaction is consummated.
DRICKRUM (ph): Sure. Thanks a lot.
OPERATOR: Thank you. And our next question is from Kurt Hallead, of RBC Capital
Markets. Mr. Hallead, your line is open.
KURT HALLEAD, RBC CAPITAL MARKETS: Hi. Hi. Sorry about that. Just a quick
question for you is - it looks like most of the cost savings and the accretion
is going to come from the G&A side.
Just wondering if there were some offset to that from maybe a depreciation
adjustment you're going to have to take from the Chiles side. And if I'm not
mistaken, they're on accelerated depreciation. I was just wondering if you can
clarify that for me.
GAUT: Yes. Our depreciation policy is a bit longer than Chiles'. And so, there
will be some offset there. Kurt, in addition to (ph), you know, some savings
would be at the G&A level.
We think that there'll be some savings through procurement, how we operate, you
know, our operating programs and the tax rate, as well. We think we'll be able
to bring down the tax rate on the - on the Chiles rigs by several percentage
points, closer to, you know, the Ensco rates.
We've given guidance to you, I think, of 28 percent on Ensco. With Chiles having
a significant presence in the Gulf of Mexico, it won't get that low. But they've
been accruing at 35-percent tax rate in their financials to date. We think we
can then do several percentage points better than that in the combined entity.
HALLEAD: OK. So that five to $10 million that you mentioned would include the
procurement and the G&A ...
GAUT: Right.
HALLEAD: ... but not the tax (ph) or ...
GAUT: It would not - would not include the tax elements of that.
HALLEAD: And that five to $10 million of cost savings would include any
adjustments that would have to be made, offsetting on the G&A side. Is that a
correct assumption?
THORNE (?): Yes. It's not a - that five to 10 is just operating expense and G&A.
Right.
HALLEAD: OK. And then, the accretion in terms of several percentage points,
would be based off of First Call numbers for both '02 and '03. Is that correct?
So this situation is going to be accretive for you in '02 and then also in '03?
THORNE (?): That is our believe, Kurt, yes.
HALLEAD: OK. Great. That's all I have. Thank you very much.
OPERATOR: Thank you. Our next question is from Jordan Horoschak, of CIBC World
Markets.
JORDAN HOROSCHAK, CIBC WORLD MARKETS: Good afternoon. I was - and
congratulations, actually, with the transaction. I was wondering if you've given
any thought to exercising the second and third options for the rig construction
that Chiles had before?
I know that those options expired sometime in October and they had already been
extended - if you'd considered exercising them. And what is the cost of building
rigs under these options?
THORNE: That is not anything that we have given consideration to and cannot give
consideration to and will be a decision, you know, of Bill and group again until
such time as this transaction is consummated.
HOROSCHAK: And, Chris, do you know what the cost of building the rigs under the
options would be?
GAUT: Yes, we do. I don't think that's public information at this time, no.
HOROSCHAK: OK. And one other question. Carl, I think you said in your opening
remarks that either the Magellan or the Columbus would continue on contract in
the Gulf of Mexico until later in the year.
I mean, correct me if I'm wrong. But I thought maybe both contracts expired at
the end of the second quarter. If that's true, can you tell us a little bit
about the specifics of the option on that contract and what sort of day rate
that rig would experience?
THORNE: Well, again, what we said was we thought that one, you know, would go
through, I think November and one would be available sometime in the - at - you
know, sometime during the summer. And again, these are issues of marketing that
we have no right nor no intention of involving ourselves in until such time as
the transaction is consummated.
HOROSCHAK: Right. OK. Great. Thank you very much.
OPERATOR: Thank you. Our next question is from Amy Donnell (ph), of Simmons and
Company (ph).
AMY DONNELL (ph), SIMMONS AND COMPANY (ph): Thank you. You have just answered my
question.
OPERATOR: Thank you. And again, ladies and gentlemen, if you have a question,
please press the number one key. Our next question is from Robert Ford, of
Sanders and Morris (ph).
ROBERT FORD, SANDERS AND MORRIS (ph): Thanks. Carl, what's the breakup fee?
THORNE (?): It's a standard and usual breakup fee, Robert. And as we said, the
documents will be published here - I mean, not published but made publicly
available. We'll be filing them today. They'll be publicly available probably
tomorrow.
FORD: OK. How much is left to pay the shipyard on the Galileo?
GAUT (?): We'll stick with what's been publicly stated there. We believe it's
accurate as of the 10-Q that Chiles filed yesterday. There was $31 million
remaining to be spent on the Galileo in their 10-Q and we'd refer you to that.
And that rig would be, as was stated or commented earlier, I think, by one of
our listeners, the rig would be completed around about the time of the
completion of this transaction.
FORD: OK. Depreciation policies, could you tell me the exact difference? You
depreciate jack-ups, what, over 30 and they go over 20 or what's the difference
there?
GAUT (?): They're over 25 years, Robert, and we're over 30 years.
FORD: OK. OK. That's all I have.
GAUT (?): They're (ph) both from the original construction date.
FORD: OK. OK.
GAUT (?): Original (ph) construction date.
FORD: Thank you.
GAUT (?): Yeah.
OPERATOR: Thank you. Our next question is from Mark Urness (ph), of Salomon
Smith Barney.
MARK URNESS (ph), SALOMON SMITH BARNEY: Yes. Good afternoon and congratulations.
Carl, I wanted to ask if you - the 102 has been competing with Chiles rigs for
international contract opportunities? And I wondered also if you could comment
on how important establishing a presence in Trinidad will be?
THORNE: Well, the - of course, they hadn't been competing, you know, because
Chiles has no rigs except for the rigs that they just put to work for Phillips.
So there are no other rigs really to compete, you know, in southeast Asia with
the present location, you know, of the rigs.
URNESS (ph): They've had their rigs committed, is what you're saying.
THORNE: They've had their rigs committed. As far as the importance of Trinidad,
you know, of course, Trinidad. Any international jurisdiction and any job with
British Petroleum, you know, because of our focus on the major companies, you
know, is critically important.
And again, one of the things that we see so strategically important about this
deal is the alignment, you know, and the focus that we have had and the job that
the Chiles group has done, you know, in positioning their equipment and having
it accepted by these major integrated oil companies.
URNESS (ph): Also, could you comments as to whether or not there's a lockup on
the shares that will be issued to Chiles shareholders?
GAUT: There is an agreement with the major shareholders of Chiles. And again,
that would refer you to the publicly available documents, which are going to be
filed here.
URNESS (ph): OK. And then, I also take it from your opening remarks that this
does not require Ensco shareholder approval, only Chiles shareholder approval?
THORNE: That is correct.
GAUT: That's right, Mark (ph).
URNESS (ph): Thank you.
OPERATOR: Thank you. And, Mr. Gaut, I am showing no further questions at this
time.
GAUT: Pam (ph), thank you. Thank you all for your attention. And we say, the
documents will be available and we'll talk to you all again, if not sooner, by
the second quarter conference call on July 18th. Goodbye.
OPERATOR: Ladies and gentlemen, this concludes today's conference call. Thank
you for your participation. And you may disconnect at this time. And have a good
day.
END