SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

Commission File Number 1-5491

 

Rowan Companies, Inc.

 

 

2800 Post Oak Boulevard

Suite 5450

Houston, Texas 77056-6127

 

Registrant’s telephone number, including area code:

(713) 621-7800

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes. þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $4.5 billion as of June 30, 2007 based upon the closing price of the registrant’s Common Stock on the New York Stock Exchange Composite Tape of $40.77 per share.

 

The number of shares of Common Stock, $.125 par value, outstanding at February 26, 2008 was 111,312,724.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

TABLE OF CONTENTS

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-K contains “forward-looking statements” as defined by the Securities and Exchange Commission (SEC). Such statements are those concerning contemplated transactions and strategic plans, expectations and objectives for future operations. These include, without limitation:

 

 

Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this form 10-K are reasonable, we can give no assurance that such plans, intentions and expectations will be achieved. These statements are based on assumptions made by us based on our experience and perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate in the circumstances. Such statements are subject to a number of risks and uncertainties, many of which are beyond our control. You are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. Among the factors that could cause actual results to differ materially are the following:

 

 

All forward-looking statements contained in this Form 10-K only speak as of the date of this document. We undertake no obligation to update or revise publicly any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this Form 10-K, or to reflect the occurrence of unanticipated events.

 

Other relevant factors have been disclosed in our previous filings with the U.S. Securities and Exchange Commission and are included in under PART I, ITEM 1A, RISK FACTORS beginning on page 11 of this Form 10-K.

 

 

Rowan Companies, Inc. (hereinafter referred to as “Rowan” or “the Company”) is a major provider of international and domestic contract drilling services. Rowan also owns and operates a manufacturing division that produces equipment for the drilling, mining and timber industries. Organized in 1947 as a Delaware corporation under the name Rowan Drilling Company, Inc., Rowan is a successor to a contract drilling business conducted since 1923.

 

Information regarding each of Rowan’s industry segments, including revenues, income (loss) from operations, assets and foreign-source revenues for 2007, 2006 and 2005 is shown in Footnote 10 of the Notes to Consolidated Financial Statements on pages 72-75 of this Form 10-K.

 

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on our website at http://www.rowancompanies.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

 

Rowan provides contract drilling services utilizing a fleet of 21 self-elevating mobile offshore drilling platforms (“jack-up rigs”) and 29 deep-well land drilling rigs. Our primary focus is on high-specification, premium jack-up rigs, which we use for exploratory and development drilling and, in certain areas, well workover operations.

 

We conduct drilling operations primarily in the Gulf of Mexico, the Middle East, the North Sea, Trinidad, offshore eastern Canada, and, beginning in 2008, offshore West Africa, and onshore in the United States. At February 26, 2008, our jack-up rigs were located in the Middle East (9), the Gulf of Mexico (8), the North Sea (3) and Trinidad (1). Our land rigs were located in Texas (22), Oklahoma (3), Louisiana (3) and Alaska (1). Relocation of equipment from one geographic area to another is dependent upon changing market dynamics, with moves occurring only when the likelihood of higher returns makes such action economical over the longer term. In recent years, we have reduced our operations in the Gulf of Mexico and increased our presence in areas where markets are stronger. We returned to the Middle East market in 2006 with four jack-up rigs, doubled our operations there in 2007 and have a ninth rig currently en route from the Gulf of Mexico.

 

During 2007, our drilling operations generated revenues of $1,382.6 million and income from operations of $661.8 million, compared with $1,067.4 million and $447.7 million, respectively, in 2006.

 

Rowan operates larger, deep-water type jack-up rigs capable of drilling to depths of 20,000 to 35,000 feet in maximum water depths ranging from 250 to 550 feet, depending on the size of the rig and its location. Rowan has aggressively grown its jack-up fleet over the past decade to serve the needs of the industry for drilling in deeper water and harsher environments and is particularly well positioned to serve the niche market for hard-to-drill, deep offshore gas wells.

 

Our jack-ups are designed with a floating hull that is fully equipped to serve as a drilling platform and three independently elevating legs. The rigs are towed to the drilling site where the legs are lowered until they penetrate the ocean floor and the hull is jacked up to the elevation required to drill the well. Rowan’s rigs are equipped with propulsion thrusters to assist in towing between drilling sites.

 

Rowan’s jack-up fleet offers the latest technology, including cantilever jack-ups that can extend a portion of the sub-structure containing the drilling equipment over fixed production platforms to perform drilling operations with a minimum of interruption to production. Some of our conventional jack-ups feature “skid base” technology, which enables the rig floor drilling equipment to be “skidded” out over the top of a fixed platform. Conventional rigs outfitted with skid base technology can be used on some drilling assignments that previously required a cantilever jack-up or platform rig. All of our rigs feature top-drive drilling systems, which are automated pipe-handling

systems that greatly accelerate the drilling process. At February 26, 2008, Rowan’s offshore drilling fleet included the following:

 

 

Our Gorilla class rigs, designed in the early 1980s as a heavier-duty class of jack-up rig, are capable of operating in water depths up to 328 feet in extreme hostile environments (winds up to 100 miles per hour and seas up to 90 feet) such as in the North Sea and offshore eastern Canada. Gorillas II and III can drill up to 30,000 feet, and Gorilla IV is equipped to reach 35,000 feet.

 

We also have four Super Gorilla class rigs, which are enhanced versions of our Gorilla class rigs featuring simultaneous drilling and production capabilities. They can operate year-round in 400 feet of water south of the 61st parallel in the North Sea, within the worst-case combination of 100-year storm criteria for waves, wave periods, winds and currents. We also operate the Bob Palmer (formerly the Gorilla VIII), an enhanced version of the Super Gorilla class jack-up designated a Super Gorilla XL. With 713 feet of leg, 139 feet more than the Super Gorillas, and 30% larger spud cans, this rig can operate in water depths to 550 feet in relatively benign environments like the Gulf of Mexico or in water depths to 400 feet in the hostile environments offshore eastern Canada and in the North Sea.

 

In 2004, we completed construction of our first Tarzan Class rig, which was specifically designed for deep drilling in benign environments, offering capabilities similar to our Super Gorilla class jack-ups at around one-half the construction cost. The first one completed, the Scooter Yeargain, was followed by the Bob Keller in 2005 and the Hank Boswell in 2006. A fourth Tarzan Class rig which was under construction at a third-party shipyard will soon be relocated to our Sabine Pass, Texas facility and is expected to be completed in the fourth quarter of 2008.

 

In November 2005, Rowan’s Board of Directors approved the design and construction of a new class of jack-up rig, specifically targeting the market for high-pressure/high-temperature drilling in water depths to 400 feet. With more deck space, higher variable load capacity, greater hook-load capability, more cantilever reach and greater personnel capacity, we believe the 240C class will set a new standard as the replacement for the industry’s current fleet of 116C class rigs, which have been the “workhorse” of the global drilling industry for more than 25 years. Construction of the first 240C should be completed in the third quarter of 2008, with the second rig scheduled to arrive in 2009. Two additional 240C jack-ups have been approved, with delivery expected in 2010 and 2011.

 

On November 1, 2007, we signed contracts with Keppel AmFELS, Inc. to have four Super 116E class rigs constructed at their Brownsville, Texas shipyard, with delivery expected in 2010 and 2011. We estimate that each rig will cost approximately $175 million, with more than a third of that amount attributable to the cost value of the design, kit components and drilling equipment to be provided by our manufacturing businesses. The Super 116E class will employ the latest technology to enable drilling of high-pressure, high-temperature and extended-reach wells in most prominent jack-up markets throughout the world. Each rig will be equipped with the hook-load and horsepower required to efficiently drill beyond 30,000 feet.

 

Rowan’s current fleet expansion program began in 1995 following our acquisition of the manufacturing and rig-building operations formerly conducted by Marathon LeTourneau Company (now called LeTourneau Technologies, Inc.), which has designed all of the Company’s jack-up rigs. Our manufacturing division is an important part of our commitment to remain at the forefront of jack-up design and technology.

 

All of our rigs currently under construction are being built without contracts from end users.

 

See ITEM 2. PROPERTIES beginning on page 17 of this Form 10-K for additional information with respect to the capabilities and operating status of the Company’s rigs.

 

For a discussion of Rowan’s availability of funds in 2007 to sustain operations, debt service and planned capital expenditures, including those related to rig construction, see “Liquidity and Capital Resources” under

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 38-45 of this Form 10-K.

 

Rowan has drilling equipment and personnel available on a contract basis for exploration and development of onshore areas. The company added three newly constructed land rigs during 2007. At February 26, 2008, our fleet consisted of 29 deep-well land rigs. Two additional rigs are under construction for delivery during the first half of 2008.

 

Rowan’s drilling contracts generally provide for a fixed amount of compensation per day, known as the day rate, and are usually obtained either through competitive bidding or individual negotiations. A number of factors affect our ability to obtain contracts, both onshore and offshore, at a profitable rate within a given area. Such factors include the location and availability of competitive equipment, the suitability of equipment for the project, comparative operating cost of the equipment, competence of drilling personnel and competitive factors, as discussed under “Competition” below. Profitability may also depend upon receiving adequate compensation for the cost of moving equipment to drilling locations.

 

When weak market conditions characterized by declining drilling day rates prevail, Rowan generally accepts contracts at a lower day rate in an attempt to maintain its competitive position and to offset the substantial costs of maintaining and reactivating stacked rigs. When drilling markets are strong and day rates are increasing, we have historically pursued short-term contracts to maximize our ability to obtain higher rates and pass through any cost increases to customers. In recent years, with rates improving to record levels, we have increasingly pursued long-term contracts in order to enhance future revenue predictability.

 

Our drilling contracts are either “well-to-well”, “multiple-well” or for a fixed term generally ranging from one month to four years. Well-to-well contracts are cancelable by either party upon completion of drilling at any one site, and fixed-term contracts usually provide for termination by either party if drilling operations are suspended for extended periods by events of force majeure. While most fixed-term contracts are for relatively short periods, some fixed-term and well-to-well contracts continue for a longer period than the original term or for a specific series of wells. Many drilling contracts contain renewal or extension provisions exercisable at the option of the customer at prices agreeable to us. Most of our drilling contracts provide for additional payments for mobilization and demobilization costs, which we recognize as revenues and expenses over the primary contract term, and for reimbursement of certain “rebillable” costs, which we recognize as both revenues and expenses when incurred. Our contracts for work in foreign countries generally provide for payment in United States dollars except for minimal amounts required to meet local expenses.

 

Our drilling revenue backlog was estimated to be approximately $2.1 billion at February 21, 2008, down from approximately $2.2 billion one year earlier. However, we believe that the contract status of Rowan’s onshore and offshore rigs is more informative than backlog calculations due to the indeterminable duration of well-to-well and multiple well contracts and the cancellation options contained in many term contracts. See ITEM 2. PROPERTIES beginning on page 17 of this Form 10-K for the contract status of the Company’s rigs as of February 21, 2008.

 

The contract drilling industry is highly competitive and success involves many factors, including price, equipment capability, operating and safety performance and the contractor’s reputation. We believe that Rowan competes favorably with respect to all of these factors.

 

We compete with several offshore drilling contractors that together have more than 600 mobile rigs available worldwide. Our onshore operations compete with several domestic drilling contractors that have a total of about 200 deep-well land rigs available. Based on the number of rigs as tabulated by ODS-Petrodata, Rowan is the eighth largest offshore drilling contractor in the world and the sixth largest jack-up rig operator. Some of our competitors

have greater financial and other resources and may be more able to make technological improvements to existing equipment or replace equipment that becomes obsolete.

 

Rowan markets its drilling services by contacting present and potential customers, including large international energy companies, many smaller energy companies and foreign government-owned or controlled energy companies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 27-45 of this Form 10-K for a discussion of current industry conditions and their impact on operations.

 

Rowan’s drilling operations are subject to many hazards, including blowouts and well fires, which could cause personal injury, suspend drilling operations, seriously damage or destroy equipment, and cause substantial damage to producing formations and the surrounding areas. Offshore drilling operations are also subject to marine hazards, either while on site or under tow, such as vessel capsizing, collision or grounding. Raising and lowering the legs of jack-up rigs into the ocean floor requires skillful handling to avoid capsizing or other serious damage. Drilling into high-pressure formations is a complex process and problems can frequently occur.

 

We believe that Rowan is adequately insured for physical damage to its rigs and for marine liabilities, worker’s compensation, maritime employer’s liability, automobile liability and various other types of exposures customarily encountered in our operations. Certain of our liability insurance policies specifically exclude coverage for fines, penalties and punitive or exemplary damages. We anticipate that our present insurance coverage will be maintained, but can give no assurance that insurance coverage will continue to be available at rates considered reasonable, that self-insured amounts or deductibles will not increase or that certain types of coverage will be available at any cost. The extensive damage caused by hurricanes in recent years has reduced the availability of insurance for certain risks while also increasing the cost of the coverage that is available. In 2006, our cost of coverage increased to almost five times the pre-storm level even though we assumed more of the risk for certain losses. In 2007, our rates were lower than in 2006, but still significantly higher than in prior years.

 

Foreign operations are often subject to political, economic and other uncertainties not encountered in domestic operations, such as arbitrary taxation policies, onerous customs restrictions, unstable currencies and the risk of asset expropriation due to foreign sovereignty over operating areas. As our international operations have grown in recent years, these risks are more significant to us. As noted previously, we attempt to minimize the risk of currency rate fluctuations by generally contracting for payment in U.S. dollars.

 

Many aspects of our operations are subject to government regulation as in the areas of equipping and operating vessels, drilling practices and methods, and taxation. In addition, the United States and other countries in which we operate have regulations relating to environmental protection and pollution control. Rowan could become liable for damages resulting from pollution of offshore waters and, under United States regulations, we must establish financial responsibility. Generally, we are substantially indemnified under our drilling contracts for pollution damages, except in certain cases of pollution emanating above the surface of land, water from spills of pollutants, or pollutants emanating from our drilling rigs, but no assurance can be given regarding the enforceability of such indemnification provisions.

 

During 2004, we learned that the Environmental and Natural Resources Division, Environmental Crimes Section of the U.S. Department of Justice (DOJ) had begun conducting a criminal investigation of environmental matters involving several of the Company’s offshore drilling rigs, including a rig known as the Rowan-Midland, which at various times operated at locations in the Gulf of Mexico. As previously disclosed, we entered into an amended plea agreement (“Plea”) with the DOJ in November 2007, which was later approved by the appropriate court, under which Rowan pled guilty to three felony charges relating to operations on the Rowan-Midland between 2002 and 2004. As part of the Plea, we paid a fine of $7 million and completed community service payments totaling $2 million to various organizations. We are also subject to unsupervised probation for a period of three years, during which we must ensure that we commit no further criminal violations of federal, state, or local laws or regulations and must also continue to implement our comprehensive Environmental Management System Plan. Subsequent to the conduct at issue, we sold the Rowan-Midland to a third party.

We believe that Rowan currently complies in all material respects with legislation and regulations affecting the drilling of oil and gas wells and the discharge of wastes. We have made significant modifications to our Gulf of Mexico rigs to reduce waste and rain water discharge and believe that we could operate those rigs at “zero discharge” without material additional expenditures. Except as discussed above, regulatory compliance has not materially affected our capital expenditures, earnings or competitive position to date, although such measures do increase drilling costs and may reduce drilling activity. Further regulations may reasonably be anticipated, but any effects on our drilling operations cannot be accurately predicted.

 

Rowan is subject to the requirements of the Federal Occupational Safety and Health Act (“OSHA”) and comparable state statutes. OSHA’s hazard communication standard, the Environmental Protection Agency’s “community right-to-know” regulations and comparable state statutes require us to organize and report certain information about the hazardous materials used in our operations to our employees as well as to state and local government authorities and local citizens.

 

In addition to the effects of government regulation on our own operations, the demand for our services is impacted by state, federal and foreign regulations associated with the production and transportation of oil and gas that affect the operations of our by present and potential customers.

 

Our manufacturing operations are conducted by LeTourneau Technologies, Inc. (LTI), a wholly-owned subsidiary of the Company headquartered in Longview, Texas, through two operating segments: Drilling Products and Systems and Mining, Forestry and Steel Products, each of which serve markets that require large-scale, steel-intensive, high-load bearing, complex products, projects and services. In 2007, our manufacturing operations collectively generated external revenues of $712.4 million and income from operations of $72.1 million, compared with $443.3 million and $38 million, respectively, in 2006. External manufacturing backlog totaled approximately $348 million at December 31, 2007, most of which is expected to be realized in 2008, compared with $530 million at December 31, 2006.

 

Our Drilling Products and Systems segment, which has designed and built all of Rowan’s 21 jack-up rigs, is an important part of our strategy to remain at the forefront of jack-up technology. It supports our drilling operations through timely construction and repair of rigs and equipment and, in recent years, has increasingly generated sales to external customers.

 

Drilling Products and Systems built the first jack-up drilling rig in 1955, and has since designed or built more than 200 units. This segment is currently constructing the first two of four 240C class jack-ups at our Vicksburg, Mississippi shipyard for delivery in 2008 and 2009 and will provide the rig kit (design, legs, jacking system, cranes and other equipment) for the four Super 116E class jack-ups being built for Rowan by Keppel AmFELS, Inc. for delivery in 2010 and 2011. In addition, Drilling Products and Systems is expected to complete construction of our fourth Tarzan Class jack-up rig at our Sabine Pass, Texas facility in 2008.

 

The Vicksburg facility is dedicated to providing equipment, spare parts and engineering support to the offshore drilling industry. Some rig component manufacturing and rig repair services, as well as design engineering, continue to be performed at LTI’s Longview, Texas, facility.

 

Drilling Products and Systems also designs and manufactures primary drilling equipment in a wide range of sizes, including mud pumps, top drives, drawworks and rotary tables, as well as variable-speed motors, variable-frequency drive systems and other electrical components for the oil and gas, marine, mining and dredging industries. During 2006, we began providing complete land rigs and related drilling equipment packages.

 

Our Mining, Forestry and Steel Products segment features heavy equipment such as large wheeled front-end loaders, diesel-electric powered log stackers and steel plate products.

 

Our mining loaders featuring bucket capacities up to 53 cubic yards, the largest in the industry. LTI loaders are generally used in coal, gold, copper, diamond and iron ore mines, and utilize a proprietary diesel-electric drive system with digital controls. This system allows large, mobile equipment to stop, start and reverse direction without gear shifting and high-maintenance braking. LTI’s wheeled loaders can load rear-dump trucks in the 85-ton to

400-ton range. Our log stackers offer either two- or four-wheel drive configurations and load capacities ranging from 35 to 55 tons.

 

Mining products and parts are distributed through our own distribution network serving the western United Sates and Australia as well as a through a worldwide network of independent dealers. These dealers have agreements to sell our products to end-users and provide follow-up service and parts directly to those end-users. We focus on after-market parts and components for the repair and maintenance of our machines and market these items through the same dealer network. Global sites for parts stocking, rebuilding and service include approximately 60 locations on six continents.

 

From our mini mill in Longview, Texas, we recycle scrap and produces carbon, alloy and tool steel plate products for internal needs as well as external customers. We concentrates on niche markets that require higher-end steel grades, including mold steels, free-machining, aircraft-quality steels and hydrogen, crack-resistant steels, and sales consist primarily of steel plate, but also include value-added fabrication of steel products. Our products are generally sold to steel service centers, fabricators and manufacturers through a direct sales force. Plate products are sold throughout North America while sales of fabricated products are more regional, encompassing Texas, Oklahoma, Louisiana, Mississippi and Arkansas. Carbon and alloy plate products are also used internally in the production of equipment and parts.

 

We conduct ongoing research and product development, primarily to increase the capacity and performance of our product lines on a continuous improvement basis, and routinely evaluate our products and after-market applications for potential enhancements.

 

The principal raw material utilized in our manufacturing operations is steel plate, much of which is supplied by our Longview mini mill. Other required materials are generally available in sufficient quantities to meet our manufacturing needs through purchases in the open market, and we do not believe that we are dependent on any single supplier.

 

Since 1955, when the first LeTourneau jack-up was delivered, LTI has been recognized as a leading designer and builder of jack-up drilling rigs, having designed or built approximately one-third of all jack-ups currently in operation worldwide. We believe that there are currently more than 80 jack-ups under construction or contracted for construction worldwide, and 16 are LeTourneau designs. At present, we have a limited number of competitors in the jack-up rig design, construction and support industries. However, numerous shipyard facilities have the capability for jack-up rig construction.

 

We encounter significant competition in the drilling equipment market. The leading competitor in the mud pump market has a share of approximately 80%. Our share of the top drive, drawworks, rotary table and land rig markets is not significant.

 

We have six major steel competitors, with four in plate products and two in fabricated products. Our share of the overall steel market is negligible, but we are very competitive in certain niche applications for high-strength, thick plate. Internal requirements for steel plate provide a base load for the steel mill.

 

We encounter competition worldwide from several sources in mining products. Our wheeled loader product line has only two direct competitors, but our larger loader models also compete with other types of loading equipment, primarily electric shovels and hydraulic excavators. Internal market studies indicate that we have achieved a market share of approximately 40% in the large-loader market (above 1,000 horsepower) over the past decade. We recently reentered the small-loader market (up to 1,000 horsepower), and currently have less than a 5% market share due to the availability of smaller and cheaper alternatives.

 

Our log stackers have four major competitors. Based on market studies, we have market shares of approximately 20% in the United States and about 15% in Canada.

Our competition in the sale of after-market parts is fragmented, with only three other companies considered to be direct competitors. Vendors supplying parts directly to end-users and others who obtain and copy the parts for cheaper and lower-quality substitutes provide more intense competition to us than do direct competitors.

 

Historically, our manufacturing customer base has been diverse, and none of our product lines are highly dependent on any one customer or small group of customers.

 

We offer warranties and parts guarantees extending for stipulated periods of ownership or hours of usage, whichever occurs first. In most cases, dealers of our products perform the warranty work. For drilling equipment, we generally perform warranty work directly and accrue for estimated future warranty costs based on historical experience.

 

Our manufacturing operations and facilities are subject to regulation by a variety of local, state and federal agencies with authority over safety and environmental compliance. These include the Environmental Protection Agency (EPA), the Texas Commission on Environmental Quality (TCEQ) and the Mississippi Department of Environmental Quality. Our manufacturing facilities must also comply with OSHA and comparable state statutes.

 

Hazardous materials are generated at our Longview, Texas, plant during the steel making process, and the facility has permits for wastewater discharges, solid waste disposal and air emissions. Industrial wastewater used for cooling purposes is re-circulated and quality tests are conducted regularly. Waste products considered hazardous by the EPA are disposed of by shipment to an EPA- or state- approved waste disposal facility.

 

Our jack-up rig designs are subject to regulatory approval by various agencies, depending on the geographic areas where the rig will be qualified for drilling. Other than the approvals that classify the jack-up as a vessel, the rules relate primarily to safety and environmental issues, vary by location and are subject to frequent change.

 

We may be liable for damages resulting from pollution of air, land and inland waters associated with our manufacturing operations. We believe that compliance with environmental protection laws and regulations will have no material effect on our capital expenditures, earnings or competitive position during 2008. Further regulations may reasonably be anticipated, but any effects on our manufacturing operations cannot be accurately predicted.

 

As a manufacturing company, we may be responsible for certain risks associated with the use of our products. These risks include product liability claims for personal injury and/or death, property damage, loss of product use, business interruption and necessary legal expenses to defend us against such claims. We carry insurance, and we believe we are adequately covered for such risks. We did not assume certain liabilities of Marathon LeTourneau Company, such as product liability and tort claims, associated with products manufactured, produced, marketed or distributed prior to the 1994 acquisition.

 

Through 2004, Rowan provided, through a wholly owned subsidiary, Era Aviation, Inc. (“Era”), contract and charter helicopter and fixed-wing aviation services principally in Alaska, the coastal areas of Louisiana and Texas, and the western United States, using a combined fleet of more than 100 helicopters and fixed-wing aircraft. Effective December 31, 2004, Rowan sold the stock of Era for cash.

 

During the 2000-2005 period, Rowan operated six anchor-handling, towing and supply boats obtained under operating lease agreements. The boats were fully-crewed by the lessor, but managed by Rowan to provide towing and supply services for its drilling operations or third parties. During 2005, Rowan assigned the remaining lease term and sold its purchase options on four anchor-handling boats and allowed the leases covering the two remaining boats to expire.

 

See Note 12 of the Notes to Consolidated Financial Statements beginning on page 75 of this Form 10-K for more information regarding the Company’s discontinued operations.

 

Rowan had 5,704, 5,160, 4,577 employees at December 31, 2007, 2006 and 2005 respectively. Included in these numbers are citizens of the United States and other countries. None of the Company’s employees are covered by collective bargaining agreements with labor unions. Rowan considers relations with its employees to be satisfactory.

 

During 2007, one drilling customer, Saudi Aramco (13%), accounted for more than 10% of the Company’s consolidated revenues. During 2006 and 2005, no customer accounted for more than 10% of consolidated revenues.

 

 

You should consider carefully the following risk factors, in addition to the other information contained and incorporated by reference in this Form 10-K, before deciding to invest in our common stock.

 

Our operations are volatile and heavily dependent upon commodity prices and other factors beyond our control.

 

The success of our drilling operations depends heavily upon the condition of the oil and gas industry and the level of drilling activity. Demand for our drilling services is vulnerable to periodic declines in drilling activity that are typically associated with depressed oil and natural gas prices. Even the perceived risk of a decline in oil or natural gas prices may cause oil and gas companies to reduce their spending, in which case demand for our drilling services could decrease and our drilling revenues may be adversely affected by lower rig utilization and/or day rates. Oil and natural gas prices have historically been very volatile, and our drilling operations have in the past suffered through long periods of weak market conditions.

 

Demand for our drilling services also depends on additional factors that are beyond our control, including:

 

 

Our drilling operations will be adversely affected by future declines in oil and natural gas prices, but we cannot predict the extent of that effect. Nor can we assure you that a reduction in offshore drilling activity will not occur for other reasons. Our manufacturing operations, though less volatile, are also dependent on commodity prices which affect demand for rigs and rig components and mining and timber equipment and parts.

 

The drilling industry has historically been cyclical, and periods of low demand could have an adverse effect on our operating results.

 

The contract drilling industry has historically been cyclical, with periods of high demand, short rig supply and high day rates, followed by periods of lower demand, excess rig supply and low day rates. Although demand for drilling services is currently strong, there can be no assurances that demand will not decline in future periods. Strong

demand has led to an increase in new rig construction and reactivation of cold-stacked rigs, which has increased price competition. We believe there are currently more than 80 competitive jack-ups under construction or contracted for construction worldwide, or almost 20% of the existing fleet, and most of these do not have drilling contracts in place. There can be no assurance that the market in general, or a geographic area in particular, will be able to fully absorb these new rigs, and the addition of these rigs could lead to decreased rig utilization, increased price competition and lower day rates. Prolonged periods of low rig utilization and day rates could require us to enter into lower rate contracts or to idle rigs, which would have an adverse effect on our operating results and cash flows. Prolonged periods of low rig utilization and day rates could also result in the recognition of impairment charges on certain of our drilling rigs if future cash flow estimates, based upon information available to management at the time, indicate that their carrying value may not be recoverable.

 

We have incurred losses recently and over prolonged periods in the past, a circumstance that could occur again in the future.

 

During 2003 and 2004, we incurred net losses of $7.8 million and $1.3 million, respectively. During 2002, we incurred a net loss of $16 million exclusive of a gain related to the settlement of the Gorilla V lawsuit. During the 1985-1995 period, we consistently incurred net losses that totaled more than $360 million. The inherent volatility of the businesses in which we operate makes it likely that we will incur additional losses in the future.

 

Our markets are highly competitive, which may make it difficult for us to maintain satisfactory price levels.

 

Our drilling and manufacturing markets are highly competitive, and no single participant is dominant. In our drilling markets, drilling contracts are often awarded on a competitive bid basis, with intense price competition frequently being the primary factor determining which qualified contractor is awarded the job, although rig availability and location, the contractor’s safety and operational record and the quality and technical capability of service and equipment are also factors. The delivery of more than 80 new jack-ups over the next three years, most of which do not currently have drilling contracts in place, will increase competition in the offshore drilling industry. Additionally, ongoing mergers among oil and natural gas exploration and production companies reduce the number of available customers and usually delay or cancel drilling projects, which may further increase competition in our drilling markets. Our manufacturing markets are also characterized by vigorous competition among several competitors. Some of our competitors possess greater financial resources than we do. We may have to reduce our prices in order to remain competitive in our markets, which could have an adverse effect on our operating results.

 

Most of our contracts are fixed-price contracts, and increases in our operating costs could have an adverse effect on the profitability of those contracts.

 

Most of our drilling contracts provide for the payment of a fixed day rate per rig operating day and our manufacturing contracts typically provide for a fixed price. However, many of our operating costs are unpredictable and vary based on events beyond our control. Our gross margins on these contracts will vary based on fluctuations in our operating costs during the terms of these contracts. If our costs increase or we encounter unforeseen costs, we may not be able to recover such costs from our customers, which could adversely affect our financial position, results of operations and cash flows. Our external manufacturing backlog has increased significantly over the past few years and consists mainly of fixed-price products and services to be delivered over the next 12 months. Accordingly, the magnitude of our exposure to possible losses on fixed-price contracts has increased along with the increase in the backlog. During 2007, we recognized a $15.8 million loss on a $130 million rig construction contract.

 

Our fleet expansion program may encounter liquidity problems.

 

If operating conditions deteriorate, our results of operations would suffer and working capital may not be adequate to finance our ongoing fleet expansion program. We have no existing credit facilities and outside financing may not be easily obtainable at a reasonable cost.

 

We have in progress an offshore fleet expansion program under which we plan to spend approximately $287 million in 2008 towards the completion of our fourth Tarzan Class jack-up rig, the construction of three new

240C class jack-ups and the completion of two new land rigs. Another $182 million is committed in 2008 for ongoing upgrades to existing equipment and facilities. In addition, we have outstanding commitments totaling $382 million during 2008-2011 for the construction of four new Super 116E class jack-ups at an outside shipyard. Currently, all of our planned capital expenditures are expected to be internally financed through working capital or operating cash flows. If we experience cost overruns or delays in our capital projects or if we should need additional financing and are unable to obtain it at commercially favorable rates, we could experience liquidity problems or be forced to suspend rig construction activities.

 

Our results of operations will be adversely affected if we are unable to secure drilling contracts for our rigs on economically favorable terms.

 

The drilling markets in which we compete frequently experience significant fluctuations in the demand for drilling services, as measured by the level of exploration and development expenditures, and the supply of capable drilling equipment. In response to fluctuation market conditions, we can, as we have done in the past, relocate drilling rigs from one geographic area to another, but only when such moves are economically justified over the longer term. If demand for our rigs declines, our rig utilization and day rates are generally adversely affected.

 

We have not yet obtained drilling contracts for any of our nine jack-up rigs or two land rigs that are currently under construction, or on order, though the expansion of our drilling fleet increases our operating costs. We may be unable to secure economical drilling contracts for our new rigs, in which case their delivery will negatively impact our operating results.

 

Rig upgrade, enhancement and new construction projects are subject to risks which could cause delays or cost overruns and adversely affect our financial position, results of operations and cash flows.

 

With more than 80 new jack-up rigs under construction or on order for delivery over the next three years, many shipyards and third party equipment vendors are managing significant resource constraints to meet delivery obligations. Such constraints may lead to substantial delivery and commissioning delays of rigs and equipment, as well as equipment failures and/or performance deficiencies. In addition, new drilling rigs may experience start-up complications following delivery or other unexpected operational problems that could result in significant uncompensated downtime at reduced day rates or the cancellation or termination of drilling contracts. Rig construction projects are subject to risks of delay or cost overruns inherent in any large construction project from numerous factors, including the following:

 

 

Significant cost overruns or delays could adversely affect our financial position, results of operations and cash flows. Additionally, failure to complete a project on time may result in the delay of revenue from that rig, which also could adversely affect our financial position, results of operations and cash flows. The construction of our fourth Tarzan Class jack-up rig, the J. P. Bussell, was originally subcontracted to an outside Gulf of Mexico shipyard and scheduled for delivery in the third quarter of 2007 at a total cost of approximately $145 million. As a result of

various problems encountered on the project, the expected completion of the rig is now at least one year behind schedule and its expected final cost is at least 20% over the original estimate.

 

Our four Super Gorilla class rigs and two of our Tarzan Class rigs are pledged as security under our government-guaranteed debt arrangements.

 

If operating conditions deteriorate and if market conditions were to remain depressed for a long period of time, our results of operations would suffer and working capital and other financial resources may not be available or adequate to service our outstanding debt. Our four Super Gorilla class jack-ups and two of our Tarzan Class jack-ups are pledged as security under our government-guaranteed debt arrangements. If we were unable to service our debt, it is possible that these assets could be removed from our fleet, in which case our ability to generate revenues would be significantly reduced.

 

If our customers terminate or seek to renegotiate our drilling contracts, our results of operations may be adversely affected.

 

Some of our drilling contracts are cancelable by the customer upon specific notice by the customer, or upon the occurrence of events beyond our control, such as the loss or destruction of the rig or the suspension of drilling operations for a specified period of time as a result of a breakdown of major equipment. Although our contracts may require the customer to make an early termination payment upon cancellation of the contract, such payment may not be sufficient to fully compensate us for the loss of the contract. Early termination of a contract may result in a rig being idle for an extended period of time. Our financial position, results of operations and cash flows may be adversely affected by customers’ early termination of contracts, especially if we are unable to re-contract the affected rig within a short period of time. Additionally, during adverse market conditions, a customer may be able to obtain a comparable rig at a lower daily rate, and as a result, may seek to renegotiate the terms of their existing drilling contract with us. The renegotiation of a number of our drilling contracts could adversely affect our financial position, results of operations and cash flows.

 

Failure to obtain or retain highly skilled personnel could adversely affect our operations.

 

We require highly skilled personnel to operate and provide technical services and support for our businesses. Competition for skilled and other labor required for our drilling operations has increased in recent years as the number of rigs activated or added to worldwide fleets has increased. Additionally, the competition for skilled and other labor required for our manufacturing operations has increased in recent years due to the significant expansion of businesses providing equipment and services to the energy industry. If this expansion continues and the demand for drilling services remains strong or increases, shortages of qualified personnel could develop, creating upward pressure on wages and making it more difficult to staff and service our rigs, which could adversely affect our operating results.

 

Many of our drilling rigs are subject to damage or destruction by severe weather.

 

Much of the Gulf of Mexico, the North Sea and offshore eastern Canada frequently experience hurricanes or other extreme weather conditions. Many of our offshore drilling rigs are located in these areas and are thus subject to damage or destruction by these storms. Damage caused by high winds and turbulent seas could cause us to suspend operations on such drilling rigs for significant periods of time until the damage can be repaired. Additionally, even if our drilling rigs are not directly damaged by such storms, we may still experience disruptions in our operations due to damage to our customer’s platforms and other related facilities in these areas. During Hurricanes Katrina and Rita in 2005, we lost four rigs and another was significantly damaged. Future storms could result in the loss or damage of additional rigs, which would adversely affect our financial position, results of operations and cash flows.

We are subject to operating risks such as blowouts and well fires that could result in environmental damage, property loss, personal injury and death, some of which may not be covered by insurance or recoverable indemnification.

 

Our drilling operations are subject to many hazards that could increase the likelihood of accidents. Accidents can result in:

 

 

Our offshore drilling operations are also subject to marine hazards, either at offshore sites or while drilling equipment is under tow, such as vessel capsizings, collisions or groundings. In addition, raising and lowering jack-up rigs and drilling into high-pressure formations are complex, hazardous activities and we frequently encounter problems.

 

Our manufacturing operations also present serious risks. Our manufacturing processes could pollute the air, land, and inland waters, and the products we manufacture could be implicated in lawsuits alleging environmental harm, property loss, personal injury and death.

 

We have had accidents in the past demonstrating some of the hazards described above, including high pressure drilling accidents resulting in lost or damaged drilling formations and towing accidents resulting in lost drilling equipment. Any similar events could yield future operating losses and have significant adverse impact on our business.

 

Our insurance coverage may be inadequate and has become more expensive.

 

Our insurance coverage is subject to certain significant deductibles and levels of self-insurance, does not cover all types of losses and, in some situations, may not provide full coverage for losses or liabilities resulting from our operations. In addition, due to the losses sustained by us and the offshore drilling industry as a consequence of hurricanes that occurred in the Gulf of Mexico in 2004 and 2005, we may not be able to obtain future insurance coverage comparable with that of prior years, thus putting us at a greater risk of loss due to severe weather conditions and other hazards, which could have a material adverse effect on our financial position, results of operations and cash flows. In addition, we are likely to continuing experiencing increased costs for available insurance coverage which may impose higher deductibles and limit maximum aggregated recoveries for certain perils, such as hurricane related windstorm damage or loss. We may be required to modify our risk management program in response to changes in the insurance market, including increased risk retention.

 

Our customers may be unable to indemnify us.

 

Consistent with standard industry practice, we typically obtain contractual indemnification from our customers whereby such customers generally agree to protect and indemnify us for liabilities resulting from various hazards associated with the drilling industry. However, there can be no assurance that our customers will be financially able to meet these indemnification obligations, and the failure of a customer to meet such obligations, the failure of one or more of our insurance providers to meet claim obligations, or losses or liabilities resulting from unindemnified, uninsured or underinsured events could have a material adverse effect on our financial position, results of operations and cash flows.

 

Government regulations and environmental risks, which reduce our business opportunities and increase our operating costs, might worsen in the future.

 

Government regulations dictate design and operating criteria for drilling vessels, determine taxation levels to which we (and our customers) are subject, control and often limit access to potential markets and impose extensive

requirements concerning employee safety, environmental protection and pollution control. Environmental regulations, in particular, prohibit access to some markets and make others less economical, increase equipment and personnel costs and often impose liability without regard to negligence or fault. In addition, governmental regulations may discourage our customers’ activities, reducing demand for our products and services. We may be liable for damages resulting from pollution of offshore waters and, under United States regulations, must establish financial responsibility in order to drill offshore.

 

In response to the significant damage to offshore rigs in recent years caused by Gulf of Mexico hurricanes, various industry and regulatory organizations are considering additional operating constraints during the tropical storm season. Such constraints, if required, could limit the capability of many of the Company’s rigs to operate at certain locations in the Gulf of Mexico during a significant portion of each year. Depending upon the Company’s ability to obtain work elsewhere, the impact of these additional regulations could be to reduce the Company’s ability to generate drilling revenues.

 

Our operations are increasingly being conducted in foreign areas.

 

During 2006, we initiated a significant drilling operation in Saudi Arabia, returned to Trinidad and established manufacturing service and supply shops in Dubai and Singapore. Our Middle East operation more than doubled in size during 2007 and we will commence operations offshore West Africa in 2008. Foreign operations are often subject to political, economic and other uncertainties not typically encountered in domestic operations, such as arbitrary taxation policies, onerous customs restrictions, unstable currencies, security threats including terrorism and the risk of asset expropriation due to foreign sovereignty over operating areas. Any one of these factors could have a material adverse effect on our financial position, results of operations and cash flows. Foreign drilling contracts may expose us to greater risks than we normally assume, such as the risk that the contract may be terminated by our customer without cause on short notice, contractually or by governmental action. While we believe that the terms of our contracts mitigate this risk, we can provide no assurance that such terms will be enforced, or that this increased exposure will not have a negative impact on our future operations.

 

Anti-takeover provisions in our Certificate of Incorporation, bylaws and stockholder rights plan could make it difficult for holders of our common stock to receive a premium for their shares upon a change of control.

 

Holders of the common stock of acquisition targets may receive a premium for their shares upon a change of control. Delaware law and the following provisions, among others, of our Certificate of Incorporation, bylaws and rights plan could have the effect of delaying or preventing a change of control and could prevent holders of our common stock from receiving such a premium:

 

 

 

The Company has no unresolved Securities and Exchange Commission staff comments.

 

 

Rowan leases as its corporate headquarters approximately 79,300 square feet of space in an office tower located at 2800 Post Oak Boulevard in Houston, Texas.

 

Following are summaries of the principal drilling equipment owned or operated by Rowan and its contract status at February 21, 2008. See “Liquidity and Capital Resources” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” starting on page 38 of this Form 10-K.

 

OFFSHORE RIGS

 

 

 

 

ONSHORE RIGS(a)

 

 

 

 

Rowan’s drilling division leases and, in some cases, owns various operating and administrative facilities generally consisting of office, maintenance and storage space in the states of Alaska, Texas and Louisiana and in the countries of Canada, England, Scotland, Bahrain, Saudi Arabia and Qatar.

 

LeTourneau’s principal manufacturing facility and headquarters are located in Longview, Texas, on approximately 2,400 acres with approximately 1.2 million square feet of covered working area. The facility contains:

 

 

Drilling Products and Systems are machined, fabricated, assembled, and tested at a facility in Houston, Texas, having approximately 450,000 square feet of covered work area and 45,000 square feet of office space. This capacity is supported by the Longview, Texas, facility.

 

Our jack-up rig construction facility is located in Vicksburg, Mississippi, on 1,850 acres of land and has approximately 560,000 square feet of covered work area. Our rig service and repair operation is carried out primarily at the Company’s Sabine Pass, Texas, facility.

 

The distributor of forestry products in the northwestern United States is located on a six-acre site in Troutdale, Oregon, with approximately 22,000 square feet of building space.

 

The distributor of mining products in the western United States is located in a leased facility in Tucson, Arizona, having approximately 20,000 square feet. The distributor of mining products in Australia is located in a leased facility in Murarrie, Queensland, having approximately 29,500 square feet. There are additional branch locations in each Australian territory.

 

 

During the third quarter of 2005, Rowan lost four offshore rigs, including the Rowan-Halifax, and incurred significant damage on a fifth as a result of Hurricanes Katrina and Rita. The Company leased the Rowan-Halifax under a charter agreement that commenced in 1984 and was scheduled to expire in March 2008. The rig was insured for $43.4 million, a value that Rowan believes satisfied the requirements of the charter agreement, and by a margin sufficient to cover the $6.3 million carrying value of Rowan equipment installed on the rig. However, the owner of the rig claimed that the rig should have been insured for its fair market value and sought recovery from Rowan for compensation above the insured value. Thus, Rowan assumed no insurance proceeds related to the Rowan-Halifax and recorded a charge during 2005 for the full carrying value of its equipment. On November 3, 2005, the Company filed a declaratory judgment action styled Rowan Companies, Inc. vs. Textron Financial Corporation and Wilmington Trust Company as Owner Trustee of the Rowan-Halifax 116-C Jack-Up Rig in the 215th Judicial District Court of Harris County, Texas. The owner filed a similar declaratory judgment action, claiming a value of approximately $83 million for the rig. The owner’s motion for summary judgment was granted on January 25, 2007 which, unless overturned on appeal, would make Rowan liable for the approximately $40 million difference between the owner’s claim and the insurance coverage, plus interest and costs. The Company continues to believe its interpretation of the charter agreement is correct and is vigorously pursuing an appeal to overturn the summary judgment ruling in the Texas Court of Appeals. The Company does not believe, therefore, that it is probable that it has incurred a loss, nor one that is estimable, and has made no accrual for such at December 31, 2007.

 

During 2004, Rowan learned that the Environmental and Natural Resources Division, Environmental Crimes Section of the U.S. Department of Justice (DOJ) had begun conducting a criminal investigation of environmental matters involving several of the Company’s offshore drilling rigs, including a rig known as the Rowan-Midland, which at various times operated at locations in the Gulf of Mexico.

 

On October 9, 2007, the Company entered into a plea agreement (“Plea”) with the DOJ, under which the Company pled guilty to three felony charges relating to operations on the Rowan-Midland between 2002 and 2004: (i) causing the discharge of a pollutant, abrasive sandblast media, into U.S. navigable waters, thereby violating the

Clean Water Act, (ii) failing to immediately report the discharge of waste hydraulic oil from the Rowan-Midland into U.S. navigable waters, thereby violating the Clean Water Act, and (iii) discharging garbage from the Rowan-Midland in violation of the Act to Prevent Pollution from Ships. As part of the Plea, the Company paid a fine of $7 million and completed community service payments totaling $2 million to various organizations. In anticipation of such payments, the Company recognized a $9 million charge to its fourth quarter 2006 operations. Under the Plea, the Company would have been subject to unsupervised probation for a period of two years. The Plea was submitted for approval to the United States District Court for the Eastern District of Texas. On November 8, 2007, the Company entered into an amended plea agreement with the DOJ extending the unsupervised probationary period from two to three years, which was then approved by the court on November 9, 2007. During the period of unsupervised probation, the Company must ensure that it commits no further criminal violations of federal, state, or local laws or regulations and must also continue to implement its comprehensive Environmental Management System Plan. Subsequent to the conduct at issue, the Company sold the Rowan-Midland to a third party.

 

The Environmental Protection Agency has approved a compliance agreement with Rowan which, among other things, contains a certification that the conditions giving rise to the violations to which the Company entered guilty pleas have been corrected. The Company believes that if it fully complies with the terms of the compliance agreement, it will not be suspended or debarred from entering into or participating in contracts with the U.S. Government or any of its agencies.

 

On January 3, 2008, a civil lawsuit styled State of Louisiana, ex. rel. Charles C. Foti, Jr., Attorney General vs. Rowan Companies, Inc. was filed in the Eastern District Court of Texas, Marshall Division, seeking damages, civil penalties and costs and expenses for alleged commission of maritime torts and violations of environmental and other laws and regulations involving the Rowan-Midland and other facilities in areas in or near Louisiana. The Company intends to vigorously defend its position in this case but cannot estimate any potential liability at this time.

 

During 2005, the Company learned that the DOJ was conducting an investigation of potential antitrust violations among helicopter transportation providers in the Gulf of Mexico. Rowan’s former aviation subsidiary, which was sold effective December 31, 2004, received a subpoena in connection with the investigation. The Company has not been contacted by the DOJ, but the purchaser claimed that Rowan is responsible for any exposure it may have. The Company has disputed that claim.

 

In June 2007, the Company received a subpoena for documents from the U.S. District Court in the Eastern District of Louisiana relating to a grand jury hearing. The agency requesting the information is the U.S. Department of the Interior, Office of Inspector General Investigations. The documents requested include all records relating to use of the Company entertainment facilities and entertainment expenses for a former employee of the Minerals Management Service, U.S. Department of Interior and other records relating to items of value provided to any official or employee of the U.S. Government. The Company has fully cooperating with the subpoena and has received no further requests.

 

The construction of Rowan’s fourth Tarzan Class jack-up rig, the J. P. Bussell, was originally subcontracted to an outside Gulf of Mexico shipyard, Signal International LLC (Signal), and scheduled for delivery in the third quarter of 2007 at a total cost of approximately $145 million. As a result of various problems encountered on the project, the expected completion of the rig is now at least one year behind schedule and its expected final cost is at least 20% over the original estimate. Accordingly, Rowan has recently declared Signal in breach of contract and initiated court proceedings styled Rowan Companies, Inc. and LeTourneau Technologies, Inc. vs. Signal International LLC in the 269^th Judicial District Court of Harris County, Texas to relocate the rig to the Company’s Sabine Pass, Texas facility for completion by its Drilling Products and Systems segment and to recover the cost to complete the rig over and above the agreed contract price, plus interest. It is anticipated that Signal will file a counterclaim against Rowan, alleging breach of contract and claiming damages for amounts owed and additional costs incurred totaling in excess of $20 million. The Company intends to vigorously defend its rights under the contract. The Company does not believe that it is probable that Rowan has incurred a loss, nor one that is estimable, and has made no accrual for such at December 31, 2007.

 

Rowan is involved in various legal proceedings incidental to its businesses and is vigorously defending its position in all such matters. The Company believes that there are no other known contingencies, claims or lawsuits that could have a material adverse effect on its financial position, results of operations or cash flows.

 

There were no matters submitted to a vote of Rowan common stockholders during the fourth quarter of the fiscal year ended December 31, 2007.

 

 

The names, positions, years of credited service and ages of the officers of the Company as of February 26, 2008 are listed below. Officers are appointed by the Board of Directors and serve at the discretion of the Board of Directors. There are no family relationships among these officers, nor any arrangements or understandings between any officer and any other person pursuant to which the officer was selected.

 

 

 

 

Each of the officers listed above continuously served in the position shown above for more than the past five years except as noted in the following paragraphs.

 

Since May 2004, Mr. McNease’s principal occupation has been in the position set forth. From May 2003 to May 2004, Mr. McNease served as President and Chief Executive Officer of the Company. From August 2002 to May 2003, Mr. McNease served as President and Chief Operating Officer of the Company. From April 1999 to August 2002, Mr. McNease served as Executive Vice President of the Company and President of its drilling subsidiaries. Mr. McNease was first elected to the Board of Directors in April 1998.

 

Since January 2007, Mr. Buvens’ principal occupation has been in the position set forth. From April 2003 until January 2007, Mr. Buvens served the Company as Senior Vice President, Legal. Prior to that time, Mr. Buvens served the Company as Vice President, Legal.

 

Since January 2007, Mr. Keller’s principal occupation has been in the position set forth. Prior to that time, Mr. Keller served the Company as Senior Vice President, Marketing.

Since January 2007, Mr. Russell’s principal occupation has been in the position set forth. From January 2005 to January 2007, Mr. Russell served the Company as Vice President, Drilling. Prior to that time, Mr. Russell served the Company as Vice President, Rowan Drilling Company, Inc., a Rowan subsidiary.

 

Since June 2007, Mr. Bartol’s principal occupation has been in the position set forth. From January 2007 to June 2007, Mr. Bartol served as a consultant to the company on strategic initiatives. Prior to that time, Mr. Bartol’s previous positions included: CFO of Jindal United Steel Corp., COO of Network International, co-founder of the Saint Arnold Brewing Company and Vice President at Simmons and Company International.

 

Since October 2007, Ms. Carroll’s principal occupation has been in the position set forth. Prior to that time, Ms. Carroll was VP of Environmental, Health and Safety for TEPPCO Partners, LLP.

 

Since April 2006, Mr. Dowdy’s principal occupation has been in the position set forth. Prior to that time, Mr. Dowdy was Chief Engineer, Marine Group for LeTourneau, Inc., a Rowan subsidiary.

 

Since January 2007, Mr. Wells’ principal occupation has been in the position set forth. From May 2005 to January 2007, Mr. Wells served the Company as Vice President, Finance and Treasurer. Prior to that time, Mr. Wells served the Company as Controller.

 

Since July 2005, Mr. Woodall’s principal occupation has been in the position set forth. Prior to that time, Mr. Woodall was Manager, U.S. Employee Services for Schlumberger.

 

Since July 2007, Mr. Jones’ principal occupation has been in the position set forth. From July 2006 to July 2007, Mr. Jones served the Company as Senior Corporate Counsel. Prior to that time, Mr. Jones practiced corporate law at Andrews Kurth LLP.

 

Since May 2005, Mr. Hatfield’s principal occupation has been in the position set forth. Prior to that time, Mr. Hatfield served the Company as Corporate Accountant.

 

Since January 2007, Ms. Trent’s principal occupation has been in the position set forth. From October 2005 to January 2007, Ms. Trent served the Company as Corporate Secretary and Compliance Officer. From 2004 — September 2005, Ms. Trent performed contract legal services, primarily for Jindal United Steel Corp., a Baytown, Texas steel mill company. From 1998 to September 2002, Ms. Trent worked at Reliant Energy, Incorporated, as the Senior Aide to the CEO (1999-2001) and then as Vice President — Investor Relations.

 

 

Rowan’s Common Stock is listed on the New York Stock Exchange. The price range below is as reported by the New York Stock Exchange on the Composite Tape. On January 31, 2008, there were approximately 1,500 holders of record.

 

The graph below reflects the relative investment performance of Rowan Companies, Inc. common stock, the Dow Jones U.S. Oil Equipment and Services Index and the S&P 500 Index for the five-year period ending December 31, 2007, assuming reinvestment of dividends on the date of payment into the common stock.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Rowan Companies, Inc., The S&P 500 Index
And The Dow Jones US Oil Equipment & Services Index

 

 

 

On February 24, 2006, Rowan paid a special cash dividend of $.25 per common share to shareholders of record on February 8, 2006. On May 2, 2006, Rowan’s Board of Directors approved a regular quarterly cash dividend $.10 per share, which the Company has since paid on each of May 26, August 18 and November 29, 2006 and February 20, June 6, August 29, and November 30, 2007. Future dividends, if any, will only be paid at the discretion of the Board of Directors. At December 31, 2007, Rowan had approximately $253 million of retained earnings available for distribution to stockholders under the most restrictive provisions of its debt agreements.

 

During 2007, Rowan repurchased 25,139 shares of common stock from employees in connection with income tax and related withholding obligations due to vesting of restricted stock grants.

 

For information concerning Common Stock of the Company to be issued in connection with the Company’s equity compensation plans, see PART III, ITEM 12, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS on page 82 of this Form 10-K.

 

The following information summarizes Rowan’s results of operations and financial position for each of the last five years.

 

 

 

 

 

RESULTS OF OPERATIONS

 

The following table highlights Rowan’s operating results for the years indicated (in millions):

 

 

As indicated in the preceding table, Rowan’s results of operations are heavily dependent upon the performance of our drilling division, which comprises about 94% of our fixed assets and, over the past three years, has generated 69% of our aggregate revenues and 92% of our aggregate operating income. Our manufacturing operations, featuring our Drilling Products and Systems segment, have led the strategic expansion and upgrade of our drilling fleet over the past decade and, in recent years, has expanded product lines and improved contributions to our operating results, as is demonstrated above with revenue increases exceeding 50% in each of the past two years and meaningful increases in profitability. The performance of each of our continuing operations over the 2005-2007 period is discussed more fully below.

 

The amounts shown in the table above for Income from discontinued operations reflect the aggregate after-tax results of our aviation and boat operations for each of the past three years, including a $13.1 million after-tax gain recognized on the sale of our boat purchase options in 2005. See Note 12 of the Notes to Consolidated Financial Statements beginning on page 75 of this Form 10-K for further information regarding the Company’s discontinued operations.

 

Drilling Operations

 

Rowan’s drilling operating results are a function of rig activity and day rates in our principal operating areas, which are offshore in the Middle East, Gulf of Mexico, the North Sea, eastern Canada and, beginning in 2008, West Africa, and onshore in several Gulf Coast states and Alaska. In 2006 and 2007, we significantly expanded our presence in the Middle East and will have nine jack-up rigs or 43% of our offshore fleet in that market by the second quarter of 2008. We are selective in pursuing work in other overseas markets where our premium and harsh environment jack-up rigs are well-suited, and seek opportunities to maximize long-term returns.

Rig activity and day rates are primarily determined by energy company exploration and development expenditures, which are heavily influenced by oil and natural gas prices, and the availability of competitive equipment. Day rates generally follow the trend in rig activity and, due to intense competition pervasive in the contract drilling industry, both measures have historically declined much faster than they have risen.

 

In recent years, global demand for oil and natural gas has increased in order to fuel growing economies, especially in developing nations like China and India. At the same time, many key producers have increasingly struggled with depleting reserves, requiring more drilling simply to maintain current production levels. These market forces have caused a dramatic increase in oil and natural gas prices. Marginal drilling projects that were deemed uneconomical a few years ago with oil at $25 per barrel or gas at $3 per mcf, are considered worth the additional risk at prices well above $50 and $5, respectively. At the same time, the global jack-up fleet has continued to age, with the average rig now more than 20 years old. These trends caused a surge in worldwide drilling activity beginning in 2005, with all available rigs benefitting. More recently, however, we have begun to see a bifurcation of the jack-up market emerging, with newer and more capable rigs being marketed throughout the world, maintaining more consistent utilization and commanding higher day rates, while opportunities for older and less capable “commodity” rigs have become more limited.

 

Our rig fleets consist currently of 21 offshore jack-up rigs and 29 land rigs. Our offshore fleet features three Gorilla class jack-ups built during the early 1980s, four Super Gorilla class jack-ups constructed during the 1998-2003 period, and three Tarzan Class jack-ups delivered in the 2004-2006 period. Nine additional jack-ups are under construction or on order with deliveries expected over the 2008-2011 period. Our land fleet includes 12 newly-constructed rigs, four rigs built during 2001-2002 and 11 rigs that have been refurbished in recent years. Two additional land rigs are expected to be completed during 2008.

 

For much of our history, our offshore drilling operations have been focused in the Gulf of Mexico, where eight of our offshore rigs are currently deployed. This market is extremely fragmented among many oil and gas companies, many of whom are independent operators whose drilling activities are often highly dependent upon near-term operating cash flows. A typical drilling assignment may call for 30-60 days of exploration or development work, performed under a single-well contract with negotiable renewal options. Long-term contracts have been rare, and generally are available only from the major integrated oil companies and a few of the larger independent operators. Thus, drilling activity and day rates in this market have tended to fluctuate rather quickly, and generally follow trends in natural gas prices. Under these market conditions, Rowan generally avoided long-term commitments in the past unless they provided opportunities for rate adjustments in the future.

 

As discussed more fully below, high natural gas prices and the continued migration of rigs to foreign markets in recent years, coupled with the significant loss of equipment during the 2005 hurricanes, created a jack-up supply deficit in the Gulf of Mexico in 2006. As a result, rig day rates, which increased dramatically in late 2005, continued to set new records during 2006 and early 2007, and the occasional term drilling contract, ranging from six months to two years, became available for certain high specification rigs. These opportunities have been more prevalent in other markets, however, and Gulf of Mexico market conditions have since weakened, especially for less capable rigs. In anticipation of these factors, we had begun to focus our marketing efforts in the Middle East, the North Sea and other foreign areas beginning in 2005, and currently have two-thirds of our jack-up rigs committed to markets outside the Gulf of Mexico.

 

The Middle East market has been a primary focus for our drilling operations since late 2005, when we obtained a three-year contract from Saudi Aramco for four of our jack-up rigs offshore Saudi Arabia. The 116C class jack-ups Rowan-Middletown, Charles Rowan, Arch Rowan and Rowan-California departed the Gulf of Mexico in January 2006 and commenced operations in the Persian Gulf in April. In 2007, we added four rigs to this market: a two-year contract for Maersk offshore Qatar with 116C class jack-ups Rowan-Paris and Gilbert Rowe which began in late January and a four-year contract for Saudi Aramco with Tarzan Class jack-ups Scooter Yeargain and Hank Boswell which began in late March. The Tarzan Class jack-up Bob Keller recently departed the Gulf of Mexico for a three-year assignment for Saudi Aramco which should begin in the second quarter of 2008.

 

The North Sea is a mature, harsh environment offshore drilling market that has long been dominated by major oil and gas companies operating within a relatively tight regulatory environment. Project lead times are often lengthy and drilling assignments, which typically require ultra premium equipment capable of handling extreme

weather conditions and high down-hole pressures and temperatures, can range from several months to several years. Thus, drilling activity and day rates in the North Sea move slowly in response to market conditions, and generally follow trends in oil prices.

 

Our North Sea operations currently include our Super Gorilla class jack-ups Gorilla V, Gorilla VI and Gorilla VII. The Gorilla V commitment should extend into the third quarter of 2010 while Gorilla VI is currently committed through the first quarter of 2010. The Gorilla VII recently obtained a two-year commitment offshore Angola that should begin in the second quarter of 2008.

 

We have operated offshore eastern Canada at varying levels since the early 1980s, and our presence there peaked at three fully utilized rigs in mid-2000. More recently, demand for harsh environment jack-ups in the area has been sporadic. The departure of the Gorilla VI in late 2006 left us with no ongoing drilling operations there, though one of our Gorilla class rigs will return to eastern Canada for a minimum six-month assignment beginning in mid to late 2009.

 

Rowan has never cold-stacked its drilling rigs during slack periods as we believe the long-term costs of retraining personnel and restarting equipment negates any short-term savings. Thus, our drilling expenses have not typically fluctuated with rig activity, though they have increased as our rig fleets have been expanded and relocated. Rig fleet additions over the past three years have included the Tarzan Class jack-ups Hank Boswell (September 2006) and Bob Keller (August 2005), twelve new land rigs delivered in 2006 (8 rigs) and 2007 (4 rigs) and two existing land rigs that were refurbished during 2005.

 

2007 Compared to 2006

 

The following table highlights the performance of our drilling division during 2007 compared to 2006 (dollars in millions):

 

 

Drilling revenues increased by $315.2 million or 30% in 2007, due primarily to the effects of increased average day rates and drilling activity, as follows (in millions):

 

 

Our overall offshore fleet utilization was 94% in 2007, up from 86% in 2006, when several rigs were being prepared for long-term assignments overseas. We compute rig utilization as revenue-producing days divided by total available rig-days. Our average offshore day rate was $156,200 in 2007, an increase of approximately 11% over 2006. Average day rates are determined as recorded revenues, excluding rebilled expenses, divided by revenue-producing days. Total revenue-producing days offshore increased by 1,154 or 19% between years, with over one-half of that increase associated with the relocated rigs.

Oil prices continued their upward ascent to record levels in 2007, increasing consistently throughout the year from the upper $50s per barrel in January to the mid $90s in December. Thus, many foreign markets like the Middle East continued to pursue high-specification jack-ups with long-term contracts at historic rates. During early 2007, four of our rigs commenced operations in the Middle East under multi-year contracts following their relocation from the Gulf of Mexico. Our eight jack-ups working offshore Saudi Arabia and Qatar collectively generated approximately $400 million of drilling revenues in 2007, averaging almost $149,000 per day.

 

Demand for harsh environment equipment in the North Sea remained strong during the year enabling us to keep our rigs fully utilized and increase our contracted backlog in that market. Gorilla V was 99% utilized there in 2007 and generated almost $173,000 per day in drilling revenues during the year. Gorilla VII was 95% utilized in the North Sea market in 2007 and averaged more than $257,000 per day there in drilling revenues during the year. After relocating from Canada in early 2007, Gorilla VI was 100% utilized in the North Sea and averaged more than $302,000 per day there in drilling revenues during the remainder of the year. Our collective North Sea drilling operations generated approximately $246 million of drilling revenues in 2007, averaging more than $241,000 per day.

 

Gorilla III was 100% utilized offshore Trinidad in 2007 and generated more than $76 million of drilling revenues, or almost $209,000 per day.

 

The following table summarizes average natural gas prices and our Gulf of Mexico fleet utilization and average day rates during the year:

 

 

 

 

Natural gas prices remained at historically high levels throughout 2007, though fluctuating weather conditions and high storage levels contributed to price weakness during the third quarter and reduced drilling demand in the Gulf of Mexico and throughout the United States. Thus, the migration of many competitive jack-ups from the Gulf of Mexico continued throughout 2007. Most of the available rigs that remained in the area encountered tougher competition for fewer drilling assignments and, as a result, declining day rates. Our six-month to two-year term commitments for four of our nine Gulf of Mexico rigs — Bob Palmer, Gorilla II, Gorilla IV and Bob Keller — helped to insulate Rowan from the impact of weakening demand. As shown in the preceding table, our average Gulf of Mexico day rate decreased by $9,500 or 7% during 2007.

 

The four rigs mentioned above were collectively 95% utilized in 2007 and averaged more than $180,000 per day in drilling revenues during the year, with only the Bob Palmer experiencing downtime as a result of contractually-required modifications. The Rowan-Louisiana, which was severely damaged in 2005 during Hurricane Katrina, returned to service in the Gulf of Mexico in December 2006, and was 100% utilized in 2007. Our total revenue-producing days in the Gulf of Mexico decreased by 777 or 20% in 2007 due to the rig relocations that occurred over the past two years.

 

Our 29 deep-well land rigs in Texas, Louisiana, Oklahoma and Alaska generally withstood the weakening domestic market conditions during 2007, and attained 95% utilization and an average day rate of $22,800 during the year, compared to 97% and $22,600 in 2006. The fleet included twelve new 2000 horsepower rigs that were constructed during the past two years which contributed to a 2,497 or 36% increase in revenue-producing days in 2007. Two additional new land rigs are currently under construction and expected to be delivered during the first half of 2008.

Drilling operating costs increased by $86.5 million or 17% in 2007 compared to 2006, due primarily to effects of the following (in millions):

 

 

Depreciation expense incurred by our drilling operations increased by $24.3 million or 31% in 2007, due primarily to the addition of the rigs noted above. Selling, general and administrative costs increased by $11.8 million or 21% in 2007, due primarily to incremental incentive compensation costs associated with our improved financial results.

 

Our drilling operations realized $40.7 million of gains on asset disposals during 2007, including a $14.1 million gain in connection with the sale of our Alaska-based drilling camps and a $23.4 million gain related to the installment sale of the Rowan-Midland and related equipment. The net gain for 2006 was $28.2 million, most of which related to the installment sale of the Rowan-Midland and related equipment. Our 2006 operating results also included a $9.0 million charge in the fourth quarter for fines and community service payments made in 2007 in settlement of criminal charges stemming from a Department of Justice criminal investigation of environmental matters involving several of our offshore drilling rigs. This matter is discussed more fully under LIQUIDITY AND CAPITAL RESOURCES: Contingent Liabilities beginning on page 42.

 

2006 Compared to 2005

 

The following table highlights the performance of our drilling division during 2006 compared to 2005 (dollars in millions):

 

 

Drilling revenues increased by $292.0 million or 38% in 2006, due primarily to the effects of increased average day rates between periods, which more than offset the net impact of changes in our rigs fleets and reduced drilling activity for relocating rigs, as follows (in millions):

 

Our overall offshore fleet utilization was 86% in 2006, down from 96% in 2005, as several rigs were being prepared for long-term assignments overseas. We compute rig utilization as revenue-producing days divided by total available rig-days. Our average offshore day rate was $141,500 in 2006, an increase of approximately 81% over 2005. Average day rates are determined as recorded revenues, excluding rebilled expenses, divided by revenue-producing days. Total revenue-producing days declined by just over 1,000 or 7% between years, with much of that decrease associated with the rigs that were being prepared for long-term assignments overseas.

 

Natural gas prices remained at historically high levels throughout 2006, though mild weather contributed to a decline from the record average prices experienced during 2005. The migration of competitive jack-ups from the Gulf of Mexico continued during 2006, which enabled higher rates for those rigs that remained in the area, and our day rates easily surpassed our all time high levels. The following table summarizes average natural gas prices and our Gulf of Mexico fleet utilization and average day rates during the year:

 

 

 

 

As shown in the preceding table, our average Gulf of Mexico day rate increased by 95% in 2006, though rates began to weaken somewhat during the fourth quarter. The onset of the hurricane season in June dampened overall drilling activity during the third quarter, forcing available rigs to compete for fewer, shallow-water opportunities, and many operators had exhausted much of their drilling budgets before the end of the year.

 

Our third Tarzan Class jack-up, the Hank Boswell, was delivered and commenced operations in the Gulf of Mexico in September 2006. The Rowan-Louisiana, which was severely damaged in 2005 during Hurricane Katrina, was returned to service in December 2006. Eight rigs either began or ended the year mobilizing from the Gulf of Mexico: four rigs commenced operations in Saudi Arabia in April 2006, two rigs began drilling in Qatar in January 2007 and two additional rigs, including the Hank Boswell, were in the shipyard preparing to relocate to Saudi Arabia at year end. In addition, the Gorilla III left the Gulf of Mexico in August and began work in Trinidad in September. As a result, our total revenue-producing days in the Gulf of Mexico decreased by 3,479 or 47% during 2006.

 

Spot oil prices continued to set records in 2006. Prices on the NYMEX traded between $55 and $70 per barrel for almost the entire year, reaching an all time high of $77 per barrel in July, and ended the year at around $60. Thus, many foreign markets like the Middle East continued to lure jack-ups from the Gulf of Mexico with long-term contracts at attractive rates. Our four jack-ups working offshore Saudi Arabia generated approximately $115 million of drilling revenues in 2006, averaging more than $113,000 per day.

 

Demand for harsh environment equipment in the North Sea improved during the year enabling us to keep our rigs fully utilized and, as noted previously, increase our contracted backlog in the area. Gorilla V was 95% utilized in the UK sector of the North Sea in 2006 and generated more than $138,000 per day in drilling revenues during the year. Gorilla VII was 98% utilized offshore Denmark in 2006 and averaged more than $198,000 per day there in drilling revenues during the year.

 

Gorilla VI was 85% utilized and generated almost $184,000 per day in drilling revenues offshore eastern Canada during 2006. Gorilla III was relocated from the Gulf of Mexico to Trinidad during the third quarter of 2006, where the rig was fully utilized and averaged more than $186,000 per day in drilling revenues during the remainder of the year.

 

Our 25 land rigs were 97% utilized in Texas, Louisiana and Oklahoma in 2006, and achieved an average day rate of $22,600 during the year, compared to 98% and $18,400 in 2005. The fleet included eight of twelve new 2000

horsepower rigs that were constructed during the year. One additional new land rig was completed in early 2007 and the remaining three rigs are expected to be delivered during the first and third quarters of 2007. Ten of the twelve new rigs have been contracted for terms ranging from two to three years.

 

Drilling operating costs increased by $115.9 million or 30% in 2006 compared to 2005, due to effects of the following (in millions):

 

 

Depreciation expense incurred by our drilling operations increased by $8.1 million or 12% in 2006, due primarily to the addition of the rigs noted above. Selling, general and administrative costs increased by $4.9 million or 9% in 2006, due primarily to additional incentive compensation costs following the adoption of Statement of Financial Accounting Standards No. 123R.

 

Drilling operating income in 2006 included $28.2 million of gains on asset disposals during the year, $24.5 million of which related to the installment sale of the Rowan-Midland and related equipment, compared to $66.8 million in 2005, which resulted from both asset disposals and the net excess insurance recoveries related to our losses during Hurricanes Katrina and Rita. Our 2006 operating results also included a $9 million charge for fines and community service payments made in 2007 in settlement of criminal charges stemming from a Department of Justice criminal investigation of environmental matters involving several of our offshore drilling rigs. This matter is discussed more fully under LIQUIDITY AND CAPITAL RESOURCES: Contingent Liabilities beginning on page 42.

 

Outlook

 

Worldwide rig demand is inherently volatile and has historically varied from one market to the next, as has the supply of competitive equipment. Exploration and development expenditures are affected by many local factors, such as political and regulatory policies, seasonal weather patterns, lease expirations, new oil and gas discoveries and reservoir depletion. In the end, however, the level and expected direction of oil and natural gas prices are what most impact drilling activity, and oil and gas prices are ultimately a function of the supply of and demand for those commodities. With consistently high prices in recent years, most energy companies have realized substantial cash flows while also struggling to sustain production and replace reserves. We believe, therefore, that investments will continue to be made in additional drilling projects throughout the world.

 

Currently, the worldwide jack-up market appears to be as strong as it’s ever been, with over 90% of the competitive fleet under contract. In addition, the expected demand for jack-ups exceeds the current supply of rigs in the Middle East, Southeast Asia, West Africa and the Mediterranean. We believe that these markets will absorb many of the more than 80 newbuild jack-up rigs scheduled for delivery during 2008-2011, though the migration of high specification drilling equipment from mature jack-up markets like the Gulf of Mexico and the North Sea may also continue in the near term. Our long-term contracts obtained over the past two years in the Middle East, North Sea and West Africa have brought significantly more global diversification and revenue visibility to our drilling operations and we will continue to pursue overseas assignments that we believe will maximize the contribution of our offshore rigs and enhance our operating results.

 

The 2005 hurricanes caused tremendous damage to drilling and production equipment and facilities throughout the Gulf Coast, and we suffered a significant loss of prospective revenues from the total destruction of four rigs. During 2006, there was a noticeable decline in demand for drilling equipment that coincided with the onset of hurricane season in June and grew more pronounced as growing natural gas inventories caused prices to weaken

during the third and early fourth quarters. This ultimately forced jack-up contractors, including Rowan, to accept reduced rates in certain cases in order to keep less capable rigs fully utilized. These conditions — reduced drilling opportunities during hurricane season and natural gas price volatility — were repeated in 2007, and utilization and day rates for available rigs weakened further over the last half of the year. Currently, Gulf of Mexico rig demand remains well below peak 2006 levels, but appears to be recovering. We are especially encouraged by early 2008 developments in the ultra deep gas market; specifically, our contract to re-enter the Blackbeard Prospect with the Gorilla IV and the commencement of drilling on the Eldorado Prospect by the Bob Palmer.

 

This increased global demand for drilling equipment in recent years has led to greater requirements for parts, supplies and people, which have in turn increased the cost of each. In addition, drilling equipment running near capacity for extended periods ultimately requires more extensive maintenance and repairs. We expect these inflationary pressures to continue in 2008 which, unless we are able to recover the increased costs through higher day rates, will impair our future operating results. In addition, the cost of insurance in the Gulf of Mexico is significantly higher than it was in 2005. Though we were recently able to obtain rate reductions for our offshore operations and fleet, the cost of our coverage is still much higher than the pre-storm level even after we assumed more of the risk of certain losses. Our relocation of rigs from the Gulf of Mexico has helped to offset the increase in insurance rates.

 

Thus, our drilling operations are currently benefiting from predominantly favorable market conditions worldwide and are profitable. There is no assurance, however, that such conditions will be sustained beyond the near-term or that our drilling operations will remain profitable. The market may not be able to fully absorb the more than 80 jack-ups currently under construction or on order, and our drilling operations will be adversely affected if market conditions otherwise deteriorate. Additionally, as previously reported, we have recently committed to build six additional jack-up rigs over the next three years, giving us nine total rigs either under construction or on order at present. We currently anticipate funding construction of all these rigs through operating cash flows, but will consider attractive financing alternatives. If market conditions deteriorate, our cash flows may be insufficient, and we could be forced to accept unfavorable financing terms in order to complete construction.

 

Manufacturing Operations

 

We have manufacturing facilities in Longview and Houston, Texas and Vicksburg, Mississippi that collectively produce mining, timber and transportation equipment, alloy steel and steel plate, and drilling rigs and various rig components under two operating segments: Drilling Products and Systems and Mining, Forestry and Steel Products. In prior years, Rowan reported one manufacturing segment and that information has been adjusted to conform to the current year presentation.

 

The Drilling Products and Systems segment provides equipment, parts and services for the drilling industry. Featured products include complete jack-up rigs, rig kits and component packages, primary drilling equipment such as mud pumps, drawworks, top drives, rotary tables, electrical components such as variable-speed motors and drives. The segment built the first offshore jack-up drilling rig in 1955 and has designed or built more than 200 rigs since, including all 21 in our fleet. During 2007, Drilling Products and Systems completed construction of a jack-up rig for Perforadora Central, a Mexican drilling contractor, provided the jack-up kit and much of the drilling equipment for our fourth Tarzan Class rig, the J. P. Bussell, made significant construction progress on the first of our latest jack-up design, the 240C class, and began construction of the second 240C rig.

 

The Mining, Forestry and Steel Products segment produces large-wheeled mining and timber equipment and related parts and carbon and alloy steel and steel plate.

2007 Compared to 2006

 

The following table highlights the performance of our Drilling Products and Systems segment during 2007 compared to 2006 (dollars in millions):

 

 

Our Drilling Products and Systems segment achieved an aggregate $257.6 million or 107% increase in revenues in 2007, which featured the following:

 

 

Our 2007 Drilling Products and Systems operating results included a $15.8 million loss on the external rig construction project which required many more labor hours than we originally anticipated. Efforts made in late 2006 and early 2007 to deliver the Hank Boswell three months ahead of schedule, rebuild the Rowan-Louisiana and assist with contractually-required modifications to our Middle East rigs had the effect of delaying progress on the external rig construction project. Thus, as is shown in the preceding table, our average margin on operating costs decreased to 14% of revenues in 2007 from 17% in 2006.

 

Depreciation expense incurred by Drilling Products and Systems in 2007 increased by $3.6 million or 44% over 2006, due to machinery, equipment and building additions to expand capacity at our manufacturing facilities. Selling, general and administrative costs increased by $8.7 million or 102% in 2007, due to higher selling-related expenses and incremental staffing required to facilitate the growth in operations discussed immediately above and increased amounts of professional fees and other shared administrative costs that are allocated between our manufacturing segments based upon revenues.

 

Our 2007 Drilling Products and Systems operating results shown in the preceding table exclude the effects of the approximately $263 million of products and services provided at cost to our drilling division during the year, most of which was attributable to construction progress on the J. P. Bussell, the two 240C class jack-ups and the six new land rigs.

The following table highlights the performance of our Mining, Forestry and Steel Products segment during 2007 compared to 2006 (dollars in millions):