KCA Deutag Alpha Limited Annual Report and … Reports/KCAD Alpha Limited 2016 Statutory...KCA Deutag Alpha Limited Annual Report and Financial Statements for the year ended 31 December

KCA Deutag Alpha Limited

Annual Report and Financial Statements

for the year ended 31 December 2016

Registered Number: 06433748


Annual Report and Financial Statements

for the year ended 31 December 2016

Contents

Chairman's Statement 1

Strategic and Operating Review 4

Financial Review 11

Corporate Information 15

Directors' report for the year ended 31 December 2016 16

Independent auditors' report to the members of KCA Deutag Alpha Limited 19

Consolidated Income Statement for the year ended 31 December 2016 21

Consolidated Statement of Comprehensive Income for the year ended 31 December 2016 21

Balance Sheets as at 31 December 2016 22

Consolidated Statement of changes in shareholders' equity for the year ended 31 December 2016 23

Company Statement of changes in shareholders' equity for the year ended 31 December 2016 24

Cash Flow Statements for the year ended 31 December 2016 25

Notes to the consolidated financial statements for the year ended 31 December 2016 26


Chairman's Statement

1

I am pleased to present my Chairman’s statement for the year ended 31 December 2016. As expected this year has been anextremely challenging year for the oil and gas industry as a result of the fall in energy prices which started in mid-2014, andreached a low in the first quarter of 2016. Since then there has been a gradual recovery in prices although confidence has

remained extremely fragile with wider economic and geopolitical factors continuing to weigh on the markets. Set within thiscontext capital expenditure in the industry has been reduced with a very limited number of new projects being sanctioned. At alllevels in the supply chain companies have been challenged to reduce costs, remove waste and become more efficient. In the

longer term this should help to drive the recovery when it becomes firmly established.

Set within this broader environment KCA Deutag has performed relatively strongly compared to many of our peers. We arefortunate that we have very limited exposure to the North American drilling market which has been particularly hard hit by the

downturn. Although there have been reductions in activity in the Eastern hemisphere several of our core markets have remainedstrong, and some of these are also markets in which we have made key strategic investment decisions over the last few years.Despite this the impact of the wider market deterioration has reduced the Group’s revenue and, to a lesser extent, profitability year

on year. In 2016 revenues fell by 25% to $1,252.2 million (2015: $1,668.8 million) reflecting reduced activity in certain markets,increasing pressures on day rates and pricing, as well as lower levels of reimbursable spend. EBITDA, however, decreased byonly 9.3% to $262.9 million (2015: $289.8 million) over the same period due to changes in the mix of earnings from our business

units and the positive impact of the efficiency improvements we have made across the Group.

A strong health and safety culture continues to be one of KCA Deutag’s core values and one which is critical to both thewellbeing of our employees and the continued success of the Group overall. I am pleased to report that we delivered an excellent

health and safety performance in 2016, ending the year with a total recordable incident rate of 0.26 per 200,000 man hours workedwhich is well below the rate of 0.45 we reported in 2015. This is the best performance the Group has ever recorded, and wellahead of the industry average. It is a result of, not only the commitment of our people to working the KCA Deutag Way, but also

our continued investment in new systems and processes, and our focus on continually refreshing and reinvigorating the ways inwhich we address the risks and potential dangers to our employees in the activities they perform. Our focus on this is unrelentingand we continue to strive for zero incidents and a culture which firmly supports this aim.

During 2014 and 2015 the Group made a significant investment in our land drilling rig fleet by way of the construction of 8 newland rigs for customers in Oman, Russia and Brunei. This strategic investment, which was complete by the end of 2015, has beencritical to KCA Deutag’s success throughout the downturn of the past 2 years, with Russia and Oman in particular performing

strongly with sustained levels of activity.

As well as benefiting from this key decision, the Group has also followed its previously announced strategy of making no newinvestment in our mobile offshore drilling fleet and seeking to divest these assets as and when suitable opportunities arose. As we

came into 2016 we owned one remaining jack-up drilling unit, the Ben Rinnes, which was on contract in Angola. Following thecompletion of this contract in the first quarter, and with no near term potential of a suitable contract, we secured a buyer for the rigwith the sale completing in June 2016. In achieving this we avoided both stacking costs and the very high capex costs associated

with keeping this rig operating. Whilst this was the last asset in our mobile offshore drilling fleet, we continue to maintain thecompetence and experience required to support mobile offshore drilling unit operations. This expertise is currently supporting thestart-up and operation of two Category J jack-up rigs for Statoil which will commence operations on the Norwegian Continental

Shelf later this year.

In a difficult and competitive market it is vital that we continue to deliver a high quality of service to our clients, not only toensure that we retain and position ourselves to win new work, but also to protect our pricing on existing contracts. We aim to

provide our clients with premium assets and best in class, well trained and competent people to carry out our operations. KCADeutag’s T-66 rig in Oman is evidence of how this successfully works. During the year it received Shell’s 2016 land rig of theyear award in the face of fierce global competition. This rig delivered strong operating performance in 2016, delivering 11 wells

of which 2 were classified by Shell as best in class, 2 were in the top quartile for performance and 9 of the 11 were drilled aheadof budget.

Liquidity and access to cash is always a priority, but all the more so as we have navigated our way through the industry downturn.

In the first quarter we successfully obtained additional loan funding of $80 million secured against certain assets and contract cashflows in Oman. This additional funding, together with very tight management of working capital, capex and costs has helped toensure that at year end we have available liquidity by way of cash or access to undrawn committed facilities of $262.1 million.

Cost management has been a continuous area of focus for the business over the course of 2016 as we have sought to right size ourbusinesses to the new realities of the markets in which we operate and improve our operational efficiency. Where contracts havecome to an end we have sought to minimise our ongoing costs as quickly as possible.

We have also made efficiencies in our support costs both at a business unit and corporate level including streamlining ourmanagement structure in certain areas, and optimising the processes and functions within the business. These decisive and firmactions have helped to mitigate some of the impact of reduced activity levels, and helped to deliver an improved EBITDA margin

in 2016 of 21.0% up from 17.4% in 2015.


Chairman's Statement (continued)

2

In the current conditions there has, as expected, been a relatively low level of tendering activity and limited opportunity to winsignificant new contracts. Historically we have been very successful at retaining contracts and in the first quarter of 2016 weannounced the retention of Norwegian North Sea Drilling contracts worth up to NOK 2 billion with Statoil for 7 platforms on the

Norwegian continental shelf. This extension is for 2 years from 1 October 2016. In the UK sector of the North Sea we were alsoawarded a 3 year contract extension on 4 platforms with a further 2 year extension option by a major North Sea operator.

These contract awards were welcome bright spots in a year which has been characterised by our relentless focus on improving

efficiency, and managing our cash flows whilst maintaining excellent service quality and HSE performance.

Our largest business unit is our Land drilling operation which delivered an increased level of EBITDA compared to 2015 despite asmall reduction in revenues. This was driven by the performance in our core markets of Russia, Oman and Algeria where activity

has remained relatively robust. These are all markets in which we have made substantial strategic investments over the past fewyears and in which lifting costs are lower than many other locations, supported by other economic and geopolitical considerationswhich drive activity levels. Some of our other operations including those in Europe, Kurdistan and West Africa have, however,

continued to have weak levels of utilisation.

Offshore Services continued to perform relatively steadily but saw a reduction in both revenues and EBITDA compared to 2015due to ongoing cost pressures from our clients. Many of these contracts continue to have elements that are reimbursable in nature

and in most cases we have been able to deliver cost savings which offset much of the impact on our margins. There has howeverbeen some reduction in activity in Angola and the North Sea as well as Myanmar where our contract came to an end in 2015. Onall of these contracts we have been able to reduce our cost base in line with activity levels.

Bentec has experienced a significant reduction in activity in 2016, with only a limited backlog coming into the year. In 2016 itsuccessfully completed the delivery of its first drilling rig to Nobel Oil Limited for offshore operations in Azerbaijan. This rigincluded a 750 ton top drive and the new 3000hp drawworks. Since then however, it has received no new rig orders and has

experienced lower component and after sales related activity as customers have cut back on non-essential spend. In response tothis Bentec has reduced its cost base in line with lower expected activity levels, whilst retaining certain key resources to allow thebusiness to grow again as the market recovers.

RDS, our drilling rig design and engineering specialist, also experienced a further reduction in activity in 2016. As a result of thefall in oil and gas prices, investment in new projects, particularly new greenfield projects by E&P companies, has fallenconsiderably with limited tendering opportunities. RDS has managed this by making further cost reductions and also started to

explore diversifying its activities in order to gain a foothold in sectors outwith oil and gas, but which could benefit from theengineering skills and experience which it possesses.

Although 2016, like 2015, has been a very challenging year our broad business strategy has not changed. We continue to focus on

our core operations as one of the world’s leading drilling and engineering contractors working onshore and offshore, recognisingthe importance of safety, quality and operational performance in all that we do.

The financial results of the Group for the year ending 31 December 2016 are as follows:

2016 2015$m $m

Revenue 1,252.2 1,668.8

EBITDA 262.9 289.8Operating profit 83.9 24.1Loss after tax (102.4) (144.4)

A reconciliation of EBITDA to operating profit is provided in Note 4 to the financial statements. Unless otherwise stated,EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) is presented before exceptional items.

The Group recognised a $14.7 million exceptional charge in 2016. $10.9 million of this was for non-recurring charges associatedwith the Group’s restructuring activities. There was also a $2.8 million charge arising from the loss on the sale of the Ben Rinnesjack-up rig. A credit of $0.8 million was booked relating to the sale of an asset in Libya which had been provided against in a

prior period. The balance of exceptional charges relates to various professional fees and a provision against funds in a severelydistressed bank in Iraq.

2017 Outlook

Energy prices continued their decline in the early part of 2016 reaching a low in the first quarter from which point we have seen agradual recovery. Towards the end of the year an agreement was also reached between OPEC and certain other oil producingnations to reduce supply which also gave the market further grounds to believe that the worst of the downturn might be over.

Whether this apparent shift in strategy is real and will be maintained, however, is unclear.


Chairman's Statement (continued)

3

As we go into 2017 most analysts expect to see a gradual recovery in the price of oil which if maintained will help to improve theconfidence of our customers to invest in new projects. This, combined with the reductions in costs made by the industry over the

past 2 years, should help to make more investments economically viable. There is, however, a significant over supply of personneland equipment which will take some time to unwind and will act as a cap on price inflation.

Set within this context the shape of any recovery and its impact on KCA Deutag remains uncertain. We do feel however there aremore reasons to be positive now than there were 12 months ago.

In our Land Drilling and Offshore operations, which comprise the largest part of our business, we have seen a reasonable degreeof resilience through the downturn which we expect to be maintained. We have a number of longer term contracts and operate incertain key markets where the economics of extracting oil and gas work even at lower prices. We are encouraged by higher levels

of tendering activity in late 2016 and early 2017 and expect to see fleet utilisation levels gradually improve through the first halfof 2017. As and when the market does start to fully recover we are well placed to benefit from the upside.

Bentec and RDS have been particularly hard hit by the downturn. In RDS it will take some time for large, new greenfield projectsto work their way through the pipeline to be sanctioned and engineering studies to be performed. There should be increasedbrownfield activity if confidence returns and clients undertake delayed or deferred work on existing assets. In Bentec we have

right sized our business to assume a relatively low level of activity in 2017 focused on components and after sales work which weexpect to be the first part of the business to show signs of recovery.

During 2017 the Group will be reviewing its financing arrangements and in particular the refinancing of its $500 million SeniorSecured Notes due in May 2018. Should these notes not be refinanced by late January 2018, the maturity of certain other of theGroup’s financing arrangements spring forward to that date.

In advance of this, the Board of Directors are currently considering a number of alternatives in the debt markets and are workingtowards putting in place a suitable refinancing package which meets the Group’s requirements. Taking the likelihood of a

refinancing into account, the Directors have reviewed the capital structure of the Group, the revenue, EBITDA and cash flowprojections, together with sensitivity scenarios, and are confident that the Group has adequate resources to meet all of its liabilitiesas they fall due for the foreseeable future. For these reasons the Directors consider it appropriate to prepare the Group’s financial

statements on a going concern basis. Further details are provided in the Financial Review on page 13.

Overall, we believe that 2017 offers greater cause for optimism about the future. Oil prices have recovered from their lows and are

expected to gradually recover, which will help to improve confidence levels and hence new investments by our customers. It isnot expected to be a rapid recovery but most commentators believe that the bottom of the market is now behind us.

By continuing to focus on our core values and overall business strategy whilst making ourselves more efficient and responsive tochange, KCA Deutag has improved its operations during the downturn and we believe that we are now well positioned to takeadvantage of the recovery when it comes.

R EllisChairman, KCA Deutag Alpha Limited

3 March 2017


Strategic and Operating Review

4

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Market Dynamics and Positioning

In 2016 KCA Deutag Alpha Limited continued to deliver high quality operational performance with a focus on service deliverywhilst maintaining safe, effective, trouble-free operations. Market conditions were very difficult with oil prices declining further

at the beginning of the year, reaching a low in the first quarter. As a result of the downturn in the industry generally we have seenlower activity in certain parts of our business. In response to this we have continued to tightly manage our cost base particularlywhere activity levels have reduced. We have also made changes to the structural way in which we manage the business to take out

duplication of resources and to ensure that all of our systems and processes are adding value.

Despite the impact of the downturn we have maintained a healthy contract backlog of $5.4 billion at 31 December 2016. We havecarefully managed our cash flows and access to liquidity to ensure that we have adequate cash resources to navigate through the

uncertainties of the current business environment. At the year end we had available liquidity in cash and undrawn facilities of$262.1 million.

Looking forward the business outlook is still uncertain but there are early signs of optimism and the belief that the bottom of the

downturn is now behind us. Whilst the shape of any recovery is unclear it is unlikely that we will see a rapid rebound given thesignificant excess supply of equipment and personnel in the market. Risks remain in the wider geopolitical environment and itmay take some time for broader market confidence to return.

Within this difficult and uncertain environment we believe that the fundamentals of our business remain strong in the long term.Over the past 2 years we have had to make many difficult decisions, but we believe that these were necessary to ensure the longterm success of the business and that as a result, we will emerge stronger once the recovery comes. We continue to remain focused

on what we can control as a business. We must strive for best in class service delivery with exceptional safety performance and wemust work with our employees and other stakeholders to be as efficient and cost effective as we can.

2016 Performance

Overall the Group performed relatively well during 2016 in what was again another extremely challenging year. The main themesof the business performance were:

Land Drilling utilisation held up well in our core markets of Russia, Oman and Algeria which are all countries in which wehave made significant strategic investment over recent years. Activity in some of our other markets, such as Europe, WestAfrica and Kurdistan, has remained very weak with only limited opportunities to win new work.

Offshore Services activity has also performed relatively strongly benefiting from long term contracts in most of the marketsin which we operate. During the year we were successfully re-awarded the drilling contract for 7 of Statoil’s platforms on the

Norwegian continental shelf as well as a contract for 4 platforms in the UK North Sea. We did however experience reducedactivity offshore Angola and in the UK sector of the North Sea, whilst our contract in Myanmar ceased at the end of 2015.During the year we took advantage of an opportunity to sell our last remaining jack-up drilling unit, the Ben Rinnes. This

sale completed in June 2016, avoiding potentially high stacking and capex costs.

RDS had another challenging year with limited opportunity to win new work, particularly new greenfield projects. As aresult we have right sized the business to our current activity levels.

Bentec had very limited backlog coming into 2016 and has found it difficult to replenish the order book in the currentclimate. In response to this we reduced our staffing requirements based on an expectation of continued low activity in 2017.Bentec did however complete the delivery of its first drilling rig for offshore operations in Azerbaijan and a number of topdrive orders were picked up towards the end of the year.

Strategic Review

KCA Deutag aims to deliver safe, reliable and efficient drilling operations even in the world’s most harsh and challengingenvironments. Where possible we aim to offer our customers total end-to-end solutions from innovative design and manufacture

through to trouble free operations.

In 2016 KCA Deutag had 4 Business Units. Following the gradual reduction in significance of our mobile offshore drilling unitsto our overall business, and the transition of day to day management of the residual activities to Offshore Services, the results ofthe mobile offshore drilling units are now included within the Offshore Services business segment.

Our Land Drilling business unit owns and operates a high quality fleet of over 50 land drilling rigs ranging from highly mobile

units to large rigs capable of drilling extended reach wells.


Strategic and Operating Review (continued)

5

Bentec is one of the world’s leading manufacturers of drilling rigs and oilfield equipment delivering high quality, cost effectiveand durable drilling and oilfield systems for rigs able to operate in extreme environments.

Our Offshore Services business unit is the world’s largest international platform services operator with approximately 40 clientowned platforms under management. As previously announced we completed the divestiture of our last remaining jack-up drilling

unit, the Ben Rinnes, following the completion of its contract in Angola.

Our drilling rig and engineering specialist, RDS, provides a comprehensive drilling facilities engineering service at every stage ofrig design, construction and modification.

In carrying out our day to day business we believe in operating the KCA Deutag Way which defines the type of company that weare and will continue to be for our people, our clients, the environment and the communities in which we operate. The KCA

Deutag Way is the combination of tried and tested policies and procedures combined with key behaviours that support our 6 corevalues. These govern the way we do business and ensure that we operate safely, succeed globally and our customers enjoy worldclass service wherever we operate.

Our 6 core values are:

Health & Safety. We believe that all of our employees have the right to work in an accident free work place and have the

responsibility to create and maintain a safe environment. During 2016 we achieved a total recordable incident rate of 0.26incidents per 200,000 man hours worked. This was an improvement from a rate of 0.45 recorded in 2015 and a new record for theGroup.

Valuing all people. We provide more than 6,000 talented people in approximately 20 countries with training and development in

their respective roles. We continue to invest in improved systems and processes to track and monitor competence and develop ourpeople.

Performance improvement. The KCA Deutag Way drives continuous improvement as we strive to make each well we drillbetter than the last. We proactively measure our performance well by well and seek ways to make and recommend improvements.

Environmental stewardship. Our processes and policies aim to minimise the impact of our operations on the social and physical

environments in which we work.

Business integrity. The KCA Deutag Way preserves business integrity under all circumstances with robust policies andprocedures and a “zero tolerance” approach.

Sustainable growth. We aim to achieve profitable and long term sustainable growth with a culture of financial discipline acrossthe Group. We aim to invest wisely in new projects which need to achieve certain financial return hurdles and to operate

efficiently with a robust cost management culture.

We believe that if we focus on these 6 core values and operate the KCA Deutag Way, we have a business model that will continueto deliver successful financial performance and strong customer relationships.

We continue to maintain a balance and focus on “asset lite” opportunities in our platform, engineering and manufacturingbusinesses whilst also capitalising on the opportunities for our Land Drilling business to invest in new assets which meet the

Group’s investment thresholds, when the market conditions are right.

Business Review

Land Drilling

KCA Deutag’s Land Drilling business unit experienced a utilisation level of 65% in 2016 (72% in the first half of 2016 and 58%in the second half). The reduction in utilisation in the second half of the year was a result of the challenging environment whichled to the early termination of five rig contracts. However, we also enjoyed several successes during this period and saw contracts

renewed with long term durations.



6

Europe

Utilisation levels were highly depressed in this region in 2016, and as a result the European business was restructured in line with

market conditions. We continued to target, and were successful with, a small number of geothermal opportunities. Thisrepresents an increasingly attractive sector for KCA Deutag.

Russia

We maintained high utilisation once again in Russia, despite two contract terminations. We successfully increased our presence in

the developing East Siberian market to four rigs.

We continued to expand our Combined Drilling Services (CDS) operations, where we manage and procure all the specialist

drilling and completion services required to execute projects, increasing from three to four concurrent CDS projects.

Middle East/Far East

Mobilised to Brunei in late 2015, our new build T-203 land rig operated well throughout 2016. The environment in Pakistanhowever has been somewhat challenging and saw the expiry of one of our two contracts there in the middle of the year.

Oman once again enjoyed full utilisation in 2016 and the five Bentec new build fast moving desert rigs which commencedoperations in 2015 have performed well in their first full year of their long term contracts.

We continued to have 4 rigs in Iraq. The 2 rigs in South Iraq enjoyed full utilisation whereas the 2 rigs in Kurdistan, a market thatis significantly impacted by the current economic climate, were idle throughout the year.

Our 3000hp rig (T-202) completed a contract in the UAE in August 2016 and is now idle.

Africa

The Algerian rigs continued to perform strongly with 80% utilisation, despite one rig being idle between contracts and the earlytermination of the contract for another rig in the third quarter.

Nigerian utilisation was disappointing with only one new contract in 2016. The 'marginal field' operators who now form themajority of Nigeria’s client base continue to be heavily impacted by reduced revenues from lower oil prices. Collection of

payments was a major focus in 2016 and appropriate actions were taken against doubtful receivables.

Offshore Services

North Sea

Throughout 2016 we continued to operate our customers’ platforms in the UK North Sea delivering excellent operational

performance despite the reduction in activity levels. During the year we successfully reactivated one drilling rig and four of oursix drilling contracts were extended.

In Norway we signed a two year extension for the management of drilling operations on 7 platforms for Statoil and the pipe poolcontract. The construction of the 2 Category J jack-up rigs for Statoil also continued as planned in South Korea with local support

from the Norwegian team. These rigs will be operated and managed by KCA Deutag and are scheduled to commence drillingoperations later this year. In 2016 we also continued to operate one platform for ExxonMobil.

Caspian

Throughout 2016 our operation of 7 platforms in the Caspian Sea in Azerbaijan was highly active and continued to deliver strongoperational performance for our client.

Sakhalin

Similarly our operations in Sakhalin had a very busy year despite the pricing pressure we experienced due to the low oil price.



7

Angola

In 2016 Cabinda Gulf Oil Company (CABGOC) continued to operate with a minimum maintenance crew but this contract wasnot extended beyond 31 December 2016 as no drilling activity was planned for 2017.

Myanmar

Operations for Daewoo ceased at the end of 2015 and all of our personnel have now exited the country.

MODUs

Coming into 2016 we owned only one jack-up drilling unit, the Ben Rinnes, which was on contract offshore Angola for Sonangol.

During the first quarter Sonangol notified us of their intention to terminate the contract early and to demobilise the rig. Under theterms of the contract we were able to charge an early termination fee. We are currently working with the customer to recoveramounts due which, as a result of the broader economic situation in Angola, have been delayed. The amounts are not in dispute

and we expect to recover outstanding payment, albeit that this may take longer than normal.

As a result of the very weak market, particularly for offshore rigs, we were unable to secure a suitable follow-on contract for theBen Rinnes, and in June of last year we sold this asset.

As a result of this we no longer have a mobile offshore drilling fleet. The disposal of these assets was a key part of our strategy tostreamline the business and focus on our core operations. We do however retain all the necessary skills and experience to operate

these types of assets and will look at future opportunities to operate these on behalf of clients. As we announced in 2013 wesecured the contract to operate two Category J jack-up rigs owned by Statoil. These rigs are expected to start up operations in2017 in the Norwegian North Sea.

RDS

The weakening oil price has continued to have a negative impact on the financial performance of RDS as clients review projectsin the light of capital investment constraints. To counter this RDS continues to explore opportunities outside the oil and gas

markets, as well as developing modular rig products and specialised rig designs for future plug and abandonment work. Over theyear our staffing levels reduced in line with the lower workload and the efficiency improvements which were implemented in2015 and 2016 to mitigate the impact of reduced activity levels.

Greenfield

The Statoil Mariner project, including a small team in Korea, and the BP Clair follow-on engineering project continued

throughout 2016 but at much reduced manning levels compared to 2015. The only other projects performed in London weresmall concept studies.

The Hebron project continued to be the main source of revenue for our operation in Canada but an additional contract was alsoawarded by another client for brownfield work.

Brownfield

During the year our office in Aberdeen performed a small amount of close out work on Total Dunbar along with ongoing ad hocprojects for various other North Sea clients, but the main workload was providing support for projects in Sakhalin. A small in

country team was also present in Sakhalin but it is due to demobilise at the end of January 2017.

The Baku office continued work on BP platforms albeit at reduced rates. The current contact runs through to September 2017 withtwo extension options of one year each for engineering support services.

Norway continues to have an excellent relationship with its principal customer but the work scopes have reduced following ourclient’s decision to perform a larger percentage of the engineering work in-house.



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Bentec

Bentec came into 2016 with a limited order backlog and a requirement to secure new orders to maintain utilisation of itsmanufacturing capacity at reasonable levels. Because of the weak market and deferral of any non-essential spend by most of its

customers, securing orders has proven extremely challenging. In response to this Bentec took decisive action to significantlyreduce its cost base during the year to right size the organisation to expected activity levels in the medium term, whilst retainingkey resources which will allow Bentec to capture new opportunities when the recovery comes.

During the year Bentec delivered its first rig for offshore operations to Nobel Oil Limited in Azerbaijan. This rig was installed onan existing platform offshore Azerbaijan in the Caspian Sea. The offshore drilling package included the recently launched 750 tontop drive and the new 3000hp draw works.

Principal Risks and Uncertainties

As with any business, KCA Deutag Alpha Limited faces a number of risks and uncertainties in the course of its day to day

operations. The principal risks and uncertainties, and mitigating actions that are employed by the Group to manage those risks, arenoted below.

Market risk

The Group operates in the oil and gas sector which is a market driven, cyclical industry where activity is closely correlated withthe market prices for oil and gas. Changes in these prices may lead to an increase or decrease in our activity levels. From

mid-2014 and continuing through 2015 and 2016 we saw a rapid and sustained reduction in market prices for oil and gas whichhas reduced activity throughout the industry as new projects are cancelled or delayed. Often in these circumstances we also see anincrease in litigation and customer claims as clients attempt to minimise their costs and manage budgets.

We mitigate the impact of this risk through endeavouring to secure longer term contracts with our clients where possible together

with contractual protection for early termination. Many of our clients own oil and gas assets where the lifting costs are at thelower end of the spectrum and hence are still able to make positive returns even at lower energy prices. Most of our activity is inthe eastern hemisphere where the economic cycles have historically been less volatile than in the western hemisphere. Where

possible we employ a flexible resourcing model so that we are able to change manning levels as activity changes. Each of ourbusiness units has different exposure and sensitivity to changes in energy prices with RDS and Bentec being the most susceptibleto reduced activity as their work is generally linked to new capex spend by our clients.

We operate a governance structure which aims to ensure that potential risks on contracts and projects are identified through review

and challenge prior to execution. Our internal commercial and legal processes ensure that deviations to standard contractingprinciples must have the appropriate review and approval prior to commitment. This, together with robust record retentionprocesses, provides us with the ability to rigorously defend commercial claims as and when they arise.

Financial risk

Our operations and growth plans require access to capital to allow the Group to grow and manage the changes in business activity

levels over time. The Group is financed through a combination of equity and debt. At the year end the Group has total net debt of$1,117 million which requires to be refinanced periodically.

Where possible the Group seeks to secure long term debt financing which provides access to funds for a number of years into thefuture. Current secured debt facilities for example have no significant capital repayments required until 2018. The Group has

sought to diversify its access to debt markets away from wholly traditional bank debt towards institutional debt by way of thecorporate bond markets. The Group will seek to refinance these debt facilities as repayment dates get closer and opportunitiesarise to take advantage of market conditions. The Group also seeks to secure debt facilities with a light covenant structure and

monitors these closely. Periodic reviews of fixed rate and variable rate interest rate exposures are also made with the aim ofmaintaining a balance between the two.

The Group also works closely with its principal shareholders to discuss potential future financing requirements. All significantgrowth capital expenditure is approved by the Board. In the past our shareholders have supported the Group through the injection

of additional equity to support growth plans.



9

During the year we obtained additional loan funding of $80 million secured against certain assets and contract cash flows inOman. This provides KCA Deutag with significant additional flexibility and liquidity headroom to help navigate through thecurrent market downturn and period of uncertainty. At the year end available liquidity in cash and undrawn facilities was $262.1

million.

The Board are currently considering options and reviewing the market in light of the debt that requires to be refinanced beforematurity in 2018.

Currency related risks

We carry out our operations in a number of countries and are exposed to currency risk as those currencies become stronger orweaker against the US Dollar. Some of the countries in which we operate are heavily reliant on oil and gas and have historically

seen significant exchange rate volatility as a result of commodity price variations. Our financial results are presented in USDollars and these results are sensitive to either a relative strengthening or weakening against the US Dollar of the major currencieswe are exposed to.

The Group employs a number of mechanisms to manage elements of exchange risk at a transaction, translation and economic

level. Where possible we will seek to naturally hedge our exposures through matching currency revenue and expenditure whichwe are able to do by contracting our revenues in either US Dollar or local currency. In some situations, we have been able tohedge our Balance Sheet exposure by matching local currency assets with local currency liabilities. Where this is not possible we

may seek to hedge our currency exposures through the purchase of forward contracts. In terms of the overall economic risk wemonitor our exposure to all of the key markets in which we operate. We aim to maintain a diversified geographical exposurewithout being overly reliant on any single country of operation.

Summaries of our geographical exposure and sensitivity of our results to foreign exchange movements are included in Notes 4

and 18 to the financial statements.

Business continuity risk

Many of the key markets in which we operate are potentially at a higher risk of political upheaval. Over the past few years wehave witnessed the impact of war and civil unrest in Libya, a terrorist incident in Algeria and the threat of terrorism in Kurdistan.In addition there is the potential threat of political and economic sanctions against certain sovereign states which by their very

nature can be both unpredictable and potentially highly disruptive. Over the past 2 years, for example, we have seen certainsanctions imposed against specific types of business activities in Russia.

Certain markets in which we operate are also susceptible to governmental and political influence around contract award, localcontent requirements and bidding processes which may not always be transparent. We maintain robust processes to ensure that we

always follow our own approved guidelines and ethical practices.

Before we enter a new country we carry out risk assessments and third party security reviews. To mitigate risks once operating ineach country we have a robust emergency response system to ensure that we are able to move our personnel rapidly and safely inthe event of an unplanned incident. We work with specialist third parties to maintain a good understanding of the security risks

and how to react in each set of circumstances. Where possible we seek to limit our exposure to higher risk regions such that anemergency in one location does not have a material impact on the ability of the Group to continue operating. In the past we havebeen able to rapidly redeploy personnel when required and reduce costs in impacted countries to a minimum.

We have access as required to specific legal and compliance expertise associated with export compliance and adherence to

sanctions. We work with the various governmental authorities to assist with ensuring compliance and the appropriate awareness ofrules and regulations.

Ethics and violation of applicable anti-corruption laws

We are an international business with operations in developing countries and in countries which are high on the CorruptionPerceptions Index published by Transparency International. Violation of anti-corruption laws may result in criminal and civil

sanctions and could subject us to other liabilities in the UK, the US and elsewhere.

We have policies and procedures designed to assist our compliance with applicable laws and regulations and have trained ouremployees to comply with such laws and regulations. We have enshrined business integrity as one of our six core values andfoster a compliance culture within our operations. We have put in place appropriate governance processes to monitor compliance

and seek to continuously improve our systems of internal controls to remedy any weaknesses.



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Asset integrity & Compliance regime

We are subject to increasingly stringent laws and regulations relating to environmental protection as well as being exposed to

potentially substantial liability claims due to the hazardous nature of our business. An accident or a service failure can causepersonal injury, loss of life, damage to property, equipment or the environment, consequential losses or the suspension ofoperations or possibly the termination of a contract. Furthermore we may be liable for damages resulting from pollution both on

land and in offshore waters.

We have put in place robust processes and procedures to support each of the principal activities which we undertake. We seek toemploy personnel with the relevant experience, qualifications and competencies and have the appropriate tracking mechanisms to

ensure that our staff have demonstrable competencies for each of the tasks that they perform. We have a governance structurewhich ensures that our compliance with processes is validated periodically and that a culture of continuous improvement isreinforced. We have robust reporting mechanisms to report safety and environmental data at each operating unit and escalation

processes to investigate incidents. We have a pre-defined contracting strategy with our clients setting out what exposures areacceptable and escalation mechanisms where we are asked to agree to contractual positions which fall out with these setparameters. We have a comprehensive package of insurance coverage to further protect us from potential claims or incidents.

Credit related risk

Although many of our customers have historically been blue chip international oil companies we also work for national oilcompanies, as well as independent operators. Because of the significant capital expenditure requirements for our clients to

develop oil and gas assets, and the cyclical nature of commodity prices, some of our clients can become financially distressed,particularly in a sustained downturn which we have experienced over the past 2 years. We have also seen some sovereign statesheavily dependent upon oil and gas struggling to balance their budgets and consequently being unable to access sufficient foreign

currencies such as US Dollars to settle liabilities. In some cases local currencies have become illiquid and very difficult to convertto other currencies. During the course of 2015 and 2016 we have experienced difficulty in Angola in particular from the build-upof local currency cash balances which we have been unable to convert to US Dollars and delays in collection of amounts

receivable in US Dollars. This has resulted in an increased level of trapped cash and aged receivables.

We seek to mitigate these risks through continuous monitoring of exposures to individual clients as well as overall exposure toparticular geographies. Where possible we will seek payments in advance of services and protection via bank guarantee and

similar mechanisms. We have robust escalation processes to chase overdue accounts with regular reviews with our seniormanagement team. In some cases we are able to leverage our position to push for the release of payments but where this is notpossible early and robust legal processes are used to accelerate a conclusion to the process. We also structure contracts to be paid

in US Dollars where possible.

On behalf of the Board of Directors

N McKay

Chief Executive Officer, KCA Deutag Alpha Limited3 March 2017


Financial Review

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Overview

The financial statements of the Group for the year ended 31 December 2016 have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS) and are presented in US Dollars, which is the principal functional and presentational

currency of the Group's income streams and cash flows.

Trading Performance

Note 4 to the financial statements sets out the segmental analysis of the business analysed between Offshore Services, RDS, Land

Drilling and Bentec, highlighting EBITDA performance before exceptional items which is the key financial performance indicatorthat the Group uses for its operations.

The following table sets out the 2016 figures:

Revenue EBITDA*Operating

profit (loss)EBITDA

Margin2016 2016 2016 2016

$m $m $m %Offshore Services 553.6 91.6 77.4 16.5RDS 75.2 5.1 4.4 6.8

Land Drilling 568.4 186.5 42.8 32.8

Bentec 55.0 (1.1) (13.0) (2.0)

Central overheads / exchange - (19.2) (27.7) -1,252.2 262.9 83.9 21.0

* before exceptional items

The above table has been extracted from Note 4 to the financial statements, which also includes the comparative information for2015.

Group revenue has fallen overall by 25.0% with each of our 4 business units experiencing a reduction as a result of the downturn

in the global oil and gas industry. The EBITDA margin increased in 2016 to 21.0% from 17.4% in 2015. This improvement inmargin is a combination of the relative mix and contribution from each of our business units year on year, together with businessrestructuring and cost reduction measures implemented.

Offshore Services’ EBITDA was lower in 2016 due to pressures from our customers to reduce costs, lower activity in West Africaand the cessation of a contract in the Far East at the end of 2015. In 2016 we also completed the sale of the Ben Rinnes jack-up rigfollowing the termination of its contract in Angola. In 2015 we had 2 jack-up rigs operating for much of the year, with the Ben

Loyal being sold in December 2015.

RDS delivered lower EBITDA due to the ongoing impact of low oil and gas prices significantly reducing customer projects,particularly new greenfield projects.

In Land Drilling, the Group experienced an increase in EBITDA due to a full year of operation of new build rigs delivered intoOman, Brunei and Russia during 2015. Activity in our core markets of Russia, Oman and Algeria has remained strong offsettingweakness in certain other markets. Significant cost reduction and other business efficiency measures also contributed to the

improved EBITDA.

Bentec delivered lower EBITDA as historic backlog reduced and with limited opportunities for new orders as our customers cutback on capex and other discretionary spend. In response to the lower activity significant headcount reductions and other cost

saving measures were implemented during the year.

Depreciation and Amortisation

Depreciation of the Group's tangible assets totalled $146.9 million (2015: $176.8 million) of which $140.0 million (2015: $167.2million) related to depreciation of drilling rigs and related equipment. Amortisation of intangible assets, which consist of thevalue of customer relationships, trade names and Group technology, amounted to $17.4 million (2015: $19.5 million).


Financial Review (continued)

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Exceptional Items

During 2016 the Group incurred the following exceptional, non-recurring net expenditure which is separately disclosed withinNote 8 to the financial statements:

Reorganisation costs of $10.9 million primarily relate to the Group’s cost reduction, restructuring and redundancyexpenditure.

A credit to the Income Statement of $0.8 million was booked in 2016 for monies received from Libyan assets providedagainst in earlier periods.

The Offshore Services business unit completed the sale of the Ben Rinnes jack-up rig in June 2016, resulting in a loss ondisposal of $2.8 million.

Other exceptional items of $1.6 million include a provision of $0.9 million against cash in a severely distressed bank in Iraqwhere we have been unable to access funds and various other non-recurring project items.

Finance Costs

Net finance costs for KCA Deutag Alpha Limited in the year amounted to $145.7 million (2015: $132.8 million) and the analysisis shown in Note 5 to the financial statements.

During the year the Group amortised $8.6 million (2015: $8.2 million) of debt arrangement fees, $4.2 million (2015: $3.8 million)

of the original issue discount relating to the Group's senior secured notes, and $0.6 million (2015: $0.6 million) of the discountasset relating to the Group's term loan debt.

The net exchange loss of $9.4 million (2015: nil) includes accounting gains or losses arising on non-functional currency debt,

with the net exchange loss arising mainly on revaluation of US Dollar debt held in the Balance Sheet of Group companies whosefunctional currency is denominated in Sterling. In addition, it includes accounting gains or losses arising on non-functionalcurrency pension liabilities and on Angolan Kwanza cash balances which can neither be repatriated nor converted to another

currency.

The Group had not hedged the interest rate on any of its senior bank facility debt as at 31 December 2016. The $500 millionsenior secured notes are at a fixed interest rate of 9.625%. The $375 million senior secured notes are at a fixed interest rate of

7.25%. The Term Loan B debt of $365.6 million as at 31 December 2016 carries interest at LIBOR + 5.25% margin but withLIBOR having a floor rate of 1.0% applied. Debt relating to project financing in Oman of $64 million as at 31 December 2016carries interest at LIBOR + 4.00% margin.

The weighted average interest rate applicable to the Group's finance leases at 31 December 2016 was 11.8%.

Taxation

Notes 7 and 20 to the financial statements set out the analysis of the Group's tax charge and breakdown of deferred tax

respectively along with the Group's effective tax rate.

The 2016 total tax charge of $40.6 million (2015: charge of $35.7 million) has increased from 2015 mainly as a result of adecrease in the deferred tax credit to $1.0 million in 2016 (2015: credit of $9.1 million). This decrease is driven in part by the

de-recognition of certain tax losses in the group based on anticipated future performance in the Netherlands ($3.1 million), therecognition of a deferred tax liability in respect of revenue recognition temporary differences in Oman ($1.0 million) and variousother smaller movements relating to revenue recognition and fixed asset temporary differences. The current tax charge of $41.6

million (2015: $44.8 million) has decreased mainly due to lower turnover in deemed profit tax regions and reductions in taxableprofits in other corporate tax paying regions.

Net income tax liabilities in the Group Balance Sheet include $18.6 million relating to uncertain tax positions where management

has had to exercise judgement in determining the most likely outcome in respect of the relevant issue. Where the final outcome onthese issues differs to the amounts provided, the Group’s tax charge will be impacted.

Capital Investment

During the year a total of $105.0 million (2015: $124.9 million) was invested in fixed assets, of which $94.0 million related to

drilling rigs and equipment (2015: $119.5 million). During 2016, the Group purchased two land rigs from an affiliate for $50million. This outflow is included within capital expenditure. The Group also sold two land rigs to an affiliate for $50 million inthe year. This inflow is shown in disposals.



13

Group Cash flow and Debt

The Group's cash flow and debt movements in the year were as follows:2016 2015

$m $mNet debt at start of year (1,216) (1,196)Cash generated from operating activities 282 294

Capital expenditure and investments, net of disposal proceeds (44) (114)Tax paid (39) (50)Interest paid - net (106) (106)

Exchange rate and other non-cash effects 19 (6)Capitalised arrangement fees amortised (13) (13)Acquisition of non-controlling interest in subsidiary - (25)

Net debt at 31 December (1,117) (1,216)

Net debt is defined as the excess of the Group's long and short term borrowings (including overdrafts) over cash, cash equivalentsand other deposits, capitalised debt arrangement fees and original issue discount assets.

At the end of 2016 the Group held cash balances, net of overdrafts, of $161.9 million and had available liquidity of $262.1 million

(2015: $115.4 million).

KCA Deutag Alpha Limited, their affiliates, or other related parties may or may not opportunistically purchase debt in one ormore series of open market transactions from time to time.

Borrowings

At 31 December 2016 the Group's total bank borrowings were $1,279.1 million (2015: $1,213.6 million), 98.3% (2015: 99.5%) ofwhich is due to mature in more than one year and approximately 67.0% (2015: 71.0%) of the borrowings were at fixed rates. The

balance of the finance leases outstanding at 31 December 2016 was $6.0 million (2015: $7.8 million).

Pensions

At 31 December 2016, the Group had a total of $127.1 million (2015: $128.2 million) of liabilities relating to various defined

benefit pension schemes. The largest element thereof was $112.3 million (2015: $121.5 million) relating to unfunded liabilities inGermany where it is standard practice that annual employee contributions are charged to the Income Statement and recorded inthe Balance Sheet as a liability. Thereafter the Group pays out pensions to scheme members after retirement.

In the UK the Group's two defined benefit pension schemes had a net deficit totalling $14.8 million (2015: $6.7 million) which isbeing funded by the Group over the medium term.

Going concern

The Group closely monitors and manages liquidity risk throughout the year with regular reforecasts of both projected liquidity andcovenant compliance. These forecasts consider the key risks we identify in each of our business units including but not limited to,forward utilisation, pricing, payment delays by our customers, contract awards and cancellations and the oil and gas market

generally. Management are able to use these forecasts to identify any liquidity or covenant compliance risks in a timely mannerand take mitigating actions.

At the year end the Group has a strong liquidity position and has headroom under its borrowing facilities and the financialcovenants which form part of these facilities. The Group’s forecasts and projections indicate that over the next 12 months theGroup is expected to maintain a strong liquidity position but that the headroom under the financial covenants will reduce.

However based on these projections, and reasonable sensitivity scenarios applied to them including the use of equity cureprovisions if necessary, the Directors expect to meet the covenant requirements as set out in our loan documents over the next 12month period.



14

Going concern (continued)

The Group has started negotiations with its banks and bondholders around refinancing certain of its borrowing facilities, inparticular the $500 million senior secured notes due May 2018 and extending the revolving credit facility. The Group borrowing

facilities include springing maturity provisions which mean that in the event that we have not refinanced the May 2018 notes byJanuary 2018 the revolving credit and term loan facilities, which otherwise mature in 2019 and 2020, become repayable inJanuary 2018. As part of the refinancing process negotiations the Directors will also seek to revise the covenant requirements as a

precautionary measure to improve the headroom under any new facilities.

Based on advice received from professional advisers the Directors believe that the Group has a high probability of refinancing the

$500 million senior secured notes and securing revised terms under its revolving credit facilities.

Taking account of the uncertainties described above the Directors expect that the Group will have adequate liquidity over the next12 months and have reasonable expectations that the Group will meet the covenant obligations under the groups borrowingfacilities. Therefore the Group is expected to have adequate resources to maintain its operations for the foreseeable future, being

at least 12 months from the date of approval of the 2016 Annual Report and Financial Statements. For these reasons the Directorsconsider it appropriate to prepare the Group’s financial statements on a going concern basis.

N Gilchrist

Chief Financial Officer, KCA Deutag Alpha Limited3 March 2017


Corporate Information

15

Board of Directors

R EllisN McKay

J HalstedP Hickey (resigned 11 May 2016)A Knaster (resigned 9 May 2016)

D MerrittN GilchristD Trucano

M Lonnqvist (appointed 9 May 2016)V Farzad (appointed 11 May 2016)

Company Secretary

A Byrne

Registered Office

3 Colmore CircusBirmingham

B4 6BH

Principal Bankers

HSBC Bank plc95 – 99 Union StreetAberdeen

AB11 6BD

Independent Auditors

PricewaterhouseCoopers LLPChartered Accountants and Registered Auditors

7th FloorThe Capitol431 Union Street

AberdeenAB11 6DA


Directors' report for the year ended 31 December 2016

16

The Directors present their report on the affairs of KCA Deutag Alpha Limited ("the Company") and its subsidiary undertakings(together "the Group"), together with the audited consolidated financial statements, for the year ended 31 December 2016.

Strategic and Operating Review and Principal Activities

The Company's principal activity is a holding Company whose principal subsidiary undertakings provide drilling and related welland facilities engineering services on a worldwide basis to the energy industry.

Further information regarding the Group, including important events and its progress during the year, events since the year end

and likely future development is contained in the Chairman's Statement and in the Strategic and Operating Review on pages 1 to10. The information that fulfils the requirements of the Strategic and Operating Review (as required the Companies Act 2006),which is incorporated in this Directors' Report by reference, can be found on the following pages of this Annual Report:

Information Location PagesDevelopment and performance during the financial year Chairman’s Statement;

Strategic and Operating Review14

Position at the year end including analysis and key performance indicators Strategic and Operating Review;Financial Review

411

Other performance including environmental and employee matters Strategic and Operating Review 4

Principal risks and uncertainties facing the business Strategic and Operating Review 4Explanation of amounts included in the financial statements Financial Review;

Notes to the Financial Statements1126

Explanation of financial risk management Note 18 49Explanation of exceptional items Financial Review;

Note 8 to the Financial Statements1240

Results and Dividends

The Group made a loss after taxation of $102.4 million (2015: loss $144.4 million) which has been added to the retained earnings

deficit. The audited financial statements for the year ended 31 December 2016 are set out on pages 21 to 68. The Directors donot recommend the payment of a dividend.

Directors

The Directors who served during the year and up to these financial statements being signed were as follows:

R EllisN McKay

J HalstedP Hickey (resigned 11 May 2016)A Knaster (resigned 9 May 2016)

D MerrittN GilchristD Trucano

M Lonnqvist (appointed 9 May 2016)V Farzad (appointed 11 May 2016)

Substantial Shareholdings

The Company's ultimate controlling company is PHM Holdco 14 S.a.r.l. which is registered in Luxembourg. PHM Holdco 14S.a.r.l. is in turn controlled by Pamplona Capital Partners II L.P. At 31 December 2016, the Company's ordinary shares werewholly owned by KCA Deutag Alpha II Limited, a company incorporated in England and Wales.

Supplier Payment Policy

The Group's policy is to agree terms of payment with suppliers prior to entering into contractual relationships and to abide bythose terms of payment. As the Company is principally a holding company it has no trade creditors and accordingly no disclosure

is made of the year end creditor days.


Directors' report (continued)

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Employees

The Group is committed to involving employees in the business through a policy of communication and consultation.Arrangements have been established for the regular provision of information to all employees through internal newsletters,

briefings and well-established formal consultation procedures.

Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes and abilities of theapplicant. If employees become disabled every effort is made to ensure that their employment with the Group continues and that

appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of a disabledperson should, as far as possible, be identical to that of a person who does not suffer from a disability.

Health and Safety at Work

The well-being of the employees is given the highest priority throughout the Group and it is the Group's policy not only to complywith health and safety measures, as required by law, but to act positively to prevent injury and ill health, and damage to theenvironment arising from its operations.

Environment

The Company has various subsidiaries that provide drilling and related well and facilities engineering services both onshore andoffshore. In the execution of these services they undertake environmental risk assessments and site appraisals as standard. These

assessments are discussed with the clients to improve the environmental performance of the operation as a whole, through thepreparation and implementation of site specific environmental plans.

Directors' Responsibilities Statement

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law andregulations.

Company Law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have

prepared the Group and parent Company financial statements in accordance with International Financial Reporting Standards(IFRSs) as adopted by the European Union. Under Company Law the Directors must not approve the financial statements unlessthey are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss

of the Group for that year.

In preparing these financial statements, the Directors are required to:

Select suitable accounting policies and then apply them consistently;

Make judgements and accounting estimates that are reasonable and prudent;

State whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures

disclosed and explained in the financial statements.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's

transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enablethem to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding theassets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other

irregularities.

The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdomgoverning the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors' Statement as to Disclosure of Information to Auditors

a) So far as each Director is aware, there is no relevant audit information of which the auditors are unaware; and

b) Each of the Directors has taken all the steps that he ought to have taken as a Director in order to make himself aware of any

relevant audit information and to establish that the Company's auditors are aware of that information.


Directors' report (continued)

18

Independent Auditors

The Directors will place a resolution before the Annual General meeting to appoint PricewaterhouseCoopers LLP to hold officeuntil the conclusion of the next General Meeting at which financial statements are laid before the Company.

On behalf of the Board of Directors

N McKayDirector3 March 2017


Independent Auditors' Report to the Members of KCA Deutag Alpha Limited

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Independent auditors’ report to themembers of KCA DeutagAlpha Limited

Report on the financial statements

Our opinion

In our opinion:

KCA Deutag Alpha Limited’s group financial statements and parent company financial statements (the “financialstatements”) give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December2016 and of the group’s loss and the group’s and the parent company’s cash flows for the year then ended;

the group financial statements havebeen properly prepared in accordance with International Financial ReportingStandards (“IFRSs”) as adopted by the European Union;

the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by theEuropean Union and as applied in accordance with the provisions of the Companies Act 2006; and

the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

What we have audited

The financial statements, included within the Annual Report and Financial Statements (the “Annual Report”), comprise:

the Balance Sheets as at 31 December 2016;

the Consolidated Income Statement and the Consolidated Statement of Comprehensive Income for the year thenended;

the Cash Flow Statements for the year then ended;

the Company Statement of Changes in Shareholder's Equity and the Consolidated Statement of Changes inShareholder's Equity for the year then ended; and

the notes to the financial statements, which include a summary of significant accounting policies andotherexplanatory information.

The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by theEuropean Union and, as regards the parent company financial statements, as applied in accordance with the provisions of theCompanies Act 2006, and applicable law.

In applying the financial reporting framework, the directors have made a number of subjective judgements, for example in respectof significant accounting estimates. Inmaking such estimates, they have made assumptions and considered future events.

Opinions on other matters prescribed by the Companies Act 2006

In our opinion, based on the work undertaken in the course of the audit:

the information given in theStrategic Report and the Directors’ Report for the financial year for which the financialstatements are prepared is consistent with the financial statements; and

the Strategic Report and theDirectors’ Report have been prepared in accordance with applicable legal requirements.

In addition, in light of the knowledge and understanding of the group, the parent company and their environment obtained in thecourse of the audit, we are required to report if we have identified any materialmisstatements in the Strategic Report and theDirectors’ Report. We have nothing to report in this respect.

Other matters on which we are required to report by exception

Adequacy of accounting records and information and explanations received

Under the Companies Act 2006we are required to report to you if, in our opinion:


Independent Auditors' Report to the Members of KCA Deutag Alpha Limited

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we have not received all the information and explanations we require for our audit; or

adequate accounting records have not been kept by the parent company, or returns adequate for our audit have notbeen received from branches not visited by us; or

the parent company financial statements are not in agreement with the accounting records and returns.

We have no exceptions to report arising from this responsibility.

Directors’ remuneration

Under the Companies Act 2006we are required to report to you if, in our opinion, certain disclosures of directors’ remunerationspecified by law are notmade. We have no exceptions to report arising from this responsibility.

Responsibilities for the financial statements and the audit

Our responsibilities and those of the directors

As explained more fully in the Directors’ Responsibilities Statement set out on page 17, the directors are responsible for thepreparation of the financial statements and for being satisfied that they give a true and fair view.

Our responsibility is to audit and express an opinion on the financial statements in accordancewith applicable law andInternational Standards on Auditing (UKand Ireland) (“ISAs (UK & Ireland)”). Those standards require us to comply with theAuditing Practices Board’s Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the parent company’smembers as a body in accordance withChapter 3 of Part 16 of the Companies Act 2006 and for no other purpose.We do not, in giving these opinions, accept or assumeresponsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come savewhere expressly agreed by our prior consent in writing.

What an audit of financial statements involves

We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts anddisclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from materialmisstatement, whether caused by fraud or error. This includes an assessment of:

whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have beenconsistently applied and adequately disclosed;

the reasonableness of significant accounting estimates made by the directors; and

the overall presentation of the financial statements.

We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our ownjudgements, and evaluating the disclosures in the financial statements.

We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide areasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantiveprocedures or a combination of both.

In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies withthe audited financial statements and to identify any information that is apparently materially incorrect basedon, or materiallyinconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent materialmisstatements or inconsistencies we consider the implications for our report. With respect to the Strategic Report and Directors’Report, we consider whether those reports include the disclosures required by applicable legal requirements.

Kevin Reynard (Senior Statutory Auditor)for and on behalf of PricewaterhouseCoopers LLPChartered Accountants and Statutory AuditorsAberdeen3 March 2017


Consolidated Income Statementfor the year ended 31 December 2016

21

2016 2015

Note $m $m

Revenue 4 1,252.2 1,668.8Cost of sales (1,087.3) (1,503.2)Gross profit 164.9 165.6

Administrative expenses (48.2) (53.6)Amortisation of intangible assets 11 (17.4) (19.5)Share of results of associates 12c (0.7) 1.0

Operating profit before exceptional items 98.6 93.5Exceptional items, net operating costs 8 (14.7) (28.3)Exceptional items, impairment of other non-current assets 9 - (41.1)

Operating profit 83.9 24.1Finance costs 5 (161.1) (147.8)Finance income 5 15.4 15.0

Loss before taxation 6 (61.8) (108.7)Taxation 7 (40.6) (35.7)Loss for the year (102.4) (144.4)

The Company has taken advantage of the exemption in Section 408 of the Companies Act 2006 not to present its own IncomeStatement and Statement of Comprehensive Income. The loss for the Company for the year was $17.9 million (2015: loss $14.2million).

Consolidated Statement of Comprehensive Incomefor the year ended 31 December 2016

2016 2015

Note $m $m

Loss for the year (102.4) (144.4)Other comprehensive income (expense):

Fair value movement on cash flow hedges 0.3 -Exchange differences on foreign operations 7.0 (17.7)Remeasurements on defined benefit pension schemes 25 (5.9) 7.8

Total other comprehensive income (expense) for year - net of tax 1.4 (9.9)Total comprehensive expense for the year - net of tax (101.0) (154.3)

All items, with the exception of the remeasurements on defined benefit pension schemes, may subsequently be reclassified to the

Income Statement.

The Notes on pages 26 to 68 form an integral part of the financial statements.


Balance Sheets as at 31 December 2016

22

2016Group

2015Group

2016Company

2015Company

Note $m $m $m $m

AssetsNon-current assetsProperty, plant and equipment 9 822.4 927.9 - -

Goodwill 10 550.9 550.9 - -Other intangible assets 11 101.6 118.4 - -Investments 12a,c 2.1 3.1 2,170.9 2,170.9

Deferred tax assets 20 27.6 30.6 - -Financial assets - derivative financial instruments 18 0.8 - - -

1,505.4 1,630.9 2,170.9 2,170.9

Current assetsInventories and work in progress 13 106.3 118.9 - -Trade and other receivables 14 236.8 329.0 - -

Amounts owed by parent company 30 4.5 8.6 4.4 4.3Amounts owed by subsidiaries 12b, 30 - - 118.5 118.5

Financial assets - derivative financial instruments 18 1.3 - - -Cash, cash equivalents and other deposits 15 181.4 52.3 - -

530.3 508.8 122.9 122.8

Total assets 2,035.7 2,139.7 2,293.8 2,293.7LiabilitiesCurrent liabilities

Trade and other payables 16 (242.8) (279.4) (0.6) (0.5)Bank overdrafts 15 (19.5) (54.4) - -Tax liabilities 7 (35.1) (37.9) - -

Financial liabilities – derivative financial instruments 18 (0.1) (0.5) - -Financial liabilities – borrowings 17 (22.1) (5.3) - -Provisions and other payables 19 (1.7) (1.8) - -

(321.3) (379.3) (0.6) (0.5)Non-current liabilitiesDeferred income (32.5) (36.9) - -

Financial liabilities – borrowings 17 (1,257.0) (1,208.3) - -Amounts owed to parent company 30 (167.1) (150.7) (166.8) (145.1)Amounts owed to subsidiaries 30 - - (28.6) (32.4)

Deferred tax liabilities 20 (45.1) (49.3) - -Retirement benefit obligations 25 (127.1) (128.2) - -Provisions and other payables 19 (3.5) (3.4) - -

(1,632.3) (1,576.8) (195.4) (177.5)Total liabilities (1,953.6) (1,956.1) (196.0) (178.0)Net assets 82.1 183.6 2,097.8 2,115.7

Capital and reservesShare capital 21 - - - -Share premium 22 14.2 14.2 14.2 14.2

Other reserves 2,169.3 2,162.0 2,074.2 2,074.2Retained earnings (deficit) surplus 23 (2,101.4) (1,992.6) 9.4 27.3Total shareholder’s surplus 82.1 183.6 2,097.8 2,115.7

The financial statements on pages 21 to 68 were approved by the Board of Directors on 3 March 2017 and signed on its behalf by

N McKay N Gilchrist Registered Number: 06433748Director Director


Consolidated Statement of Changes in Shareholders' Equityfor the year ended 31 December 2016

23

Attributable to owners of the parent company

Other reserves

Sharecapital

Sharepremium

Retainedearnings

Capitalcontribution

reserveMergerreserve

Hedgingreserves

Currencytranslation

reserves

Non-controlling

interestsTotal

equity$m $m $m $m $m $m $m $m $m

(Note 21) (Note 22) (Note 23)At 1 January 2016 - 14.2 (1,992.6) 2,074.2 104.4 13.1 (4.7) (25.0) 183.6Comprehensive expenseLoss for the year - - (102.4) - - - - - (102.4)Other comprehensive income(expense)Fair value movement on cashflow hedges - - - - - 0.3 - - 0.3Exchange differences on foreignoperations - - - - - - 7.0 - 7.0Remeasurements on definedbenefit pension schemes - - (5.9) - - - - - (5.9)Total other comprehensive(expense) income - - (5.9) - - 0.3 7.0 - 1.4Total comprehensive (expense)income - - (108.3) - - 0.3 7.0 - (101.0)Transactions with ownersDividend paid to minorityshareholder - - (0.5) - - - - - (0.5)At 31 December 2016 - 14.2 (2,101.4) 2,074.2 104.4 13.4 2.3 (25.0) 82.1

Other reserves

Sharecapital

Sharepremium

Retainedearnings

Capitalcontribution

reserveMergerreserve

Hedgingreserves

Currencytranslation

reserves

Non-controlling

interestsTotal

equity$m $m $m $m $m $m $m $m $m

(Note 21) (Note 22) (Note 23)At 1 January 2015 - 14.2 (1,856.0) 1,857.4 104.4 13.1 13.0 - 146.1Comprehensive expenseLoss for the year - - (144.4) - - - - - (144.4)Other comprehensive(expense) incomeExchange differences onforeign operations - - - - - - (17.7) - (17.7)Remeasurements on definedbenefit pension schemes - - 7.8 - - - - - 7.8Total other comprehensiveincome (expense) - - 7.8 - - - (17.7) - (9.9)

Total comprehensive expense - - (136.6) - - - (17.7) - (154.3)Transactions with ownersIncrease in non-controllinginterests - - - - - - - (25.0) (25.0)Capital contribution - - - 216.8 - - - - 216.8

At 31 December 2015 - 14.2 (1,992.6) 2,074.2 104.4 13.1 (4.7) (25.0) 183.6

Other reserves in the Balance Sheet consist of the hedging reserve, capital contribution reserve, merger reserve, currencytranslation reserve and non-controlling interests. The merger reserve of $104.4 million relates to the acquisition of Global TenderBarges which was accounted for under predecessor accounting. The capital contribution reserve of $2,074.2 million relates to the

conversion to equity of intercompany loans payable to KCA Deutag Alpha II Limited with $216.8 million being converted in2015.

The movement in non-controlling interests relates to additional shares acquired in the Group's subsidiary Oman KCA DeutagDrilling Company (LLC) during 2015.


Company Statement of Changes in Shareholders' Equityfor the year ended 31 December 2016

24

Share capitalShare

premiumRetainedearnings

Capitalcontribution

reserve Total equity$m $m $m $m $m

(Note 21) (Note 22) (Note 23)At 1 January 2016 - 14.2 27.3 2,074.2 2,115.7Comprehensive expenseLoss for the year - - (17.9) - (17.9)Total comprehensive expense - - (17.9) - (17.9)At 31 December 2016 - 14.2 9.4 2,074.2 2,097.8

Share capitalShare

premiumRetainedearnings

Capitalcontribution

reserve Total equity$m $m $m $m $m

(Note 21) (Note 22) (Note 23)At 1 January 2015 - 14.2 41.5 1,857.4 1,913.1Comprehensive expense

Loss for the year - - (14.2) - (14.2)Total comprehensive expense - - (14.2) - (14.2)Transactions with ownersCapital contribution - - - 216.8 216.8

At 31 December 2015 - 14.2 27.3 2,074.2 2,115.7

Other reserves in the Balance Sheet consist of the capital contribution reserve. The capital contribution reserve of $2,074.2 millionrelates to the conversion to equity of an intercompany loan payable to KCA Deutag Alpha II Limited with $216.8 million being

converted in 2015.


Cash Flow Statementsfor the year ended 31 December 2016

25

2016 2015 2016 2015

Group Group Company Company

Note $m $m $m $m

Cash generated from (used in) operating activities 26 281.5 293.6 (4.7) (4.8)Tax paid (38.6) (49.6) - -

Net cash generated from (used in) operating activities 242.9 244.0 (4.7) (4.8)

Cash flows from investing activitiesPurchase of property, plant and equipment (102.9) (119.9) - -

Proceeds from sale of property, plant and equipment 61.6 13.9 - -Purchase of intangible assets 11 (2.7) (8.1) - -Interest received 21.1 19.5 7.3 7.0

Net cash (used in) generated from investing activities (22.9) (94.6) 7.3 7.0Cash flows from financing activitiesNet bank loan drawdowns (repayments) 56.0 (18.8) - -Arrangement fees paid (1.6) - - -Finance lease payments (3.0) (3.4) - -

Interest paid, including capitalised interest (127.3) (125.7) (2.6) (2.2)Dividend paid to minority shareholders (0.5) - - -Acquisition of non controlling interest in subsidiary - (25.0) - -

Net cash used in financing activities (76.4) (172.9) (2.6) (2.2)Effect of exchange rate changes on cash and cash equivalents 20.4 (6.6) - -

Net increase (decrease) in cash and cash equivalents 164.0 (30.1) - -

Cash and cash equivalents at beginning of year (2.1) 28.0 - -

Cash and cash equivalents at end of year 15 161.9 (2.1) - -

Cash and cash equivalents as set out in the above Cash Flow Statement include overdraft facilities which form part of the Group'scash management strategy.


Notes to the consolidated financial statementsfor the year ended 31 December 2016

26

1 Basis of preparation

These financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by theEuropean Union (IFRSs as adopted by the EU), IFRIC Interpretations and the Companies Act 2006 applicable to companies

reporting under IFRS. The financial statements have been prepared under the historical cost convention modified for fair valuesunder IFRS. A summary of the more important Group accounting policies is set out below.

The Directors’ assessment of going concern concludes that the preparation of the financial statements on a going concern basis is

appropriate based upon projections prepared by management, projected liquidity and access to funds under the Group’s borrowingfacilities. See page 13 of the Financial Review for further details. These financial statements do not contain any adjustments thatwould result from the going concern basis not being appropriate.

2 Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies havebeen consistently applied to all the years presented, unless otherwise stated.

a) Basis of consolidation

(i) Subsidiaries

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the

Company for the year to 31 December 2016. An investor controls an investee when it is exposed, or has rights, to variablereturns from its involvement with the investee and has the ability to affect those returns through its power over theinvestee. Subsidiaries are fully consolidated or deconsolidated from the effective date control is transferred to or from the

Company. On acquisition, the assets and liabilities of a subsidiary are measured at their fair values at the date ofacquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognisedas goodwill. Any excess of the fair values of the identifiable net assets over the cost of acquisition is recognised directly in

the Income Statement.

All intra-group transactions, balances, income and expenses are eliminated on consolidation. Where necessary, adjustmentsare made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the

Group.

(ii) Associates and joint ventures

An associate is an entity over which the Group is in a position to exercise significant influence, but not control or joint

control, through participation in the financial and operating policy decisions of the investee. The results and assets andliabilities of associates are incorporated in the financial statements using the equity method of accounting. The Group'sshare of its associates' post-acquisition profits or losses is recognised in the Income Statement within operating profit and

its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movementsare adjusted against the carrying amount of the investment. Losses of the associates in excess of the Group's interest inthose associates are not recognised.

Any excess of the costs of acquisition over the Group's share of the fair values of the identifiable net assets of the associateat the date of acquisition is recognised as goodwill and included within the carrying amount of the associate. Any excessof the Group's share of the fair values of the identifiable net assets of the associate over the costs of acquisition is

recognised directly in the Income Statement.

Where a Group company transacts with an associate, profits and losses are eliminated to the extent of the Group's interest

in the relevant associate. Losses may provide evidence of an impairment of the asset transferred in which case appropriateprovision is made for impairment.

Investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual

rights and obligations of each investor. The Group has assessed the nature of its joint arrangements and determined them tobe joint ventures. Joint ventures are accounted for using the equity method.

Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to

recognise the Group's share of the post-acquisition profits or losses and movements in other comprehensive income.



27

2 Summary of significant accounting policies (continued)

a) Basis of consolidation (continued)

(ii) Associates and joint ventures (continued)

When the Group's share of losses in a joint venture equals or exceeds its interests in the joint ventures (which includes anylong-term interests that, in substance, form part of the Group's net investment in the joint ventures), the Group does not

recognise further losses, unless it has incurred obligations or made payments on behalf of the joint ventures.

Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group's

interest in the joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of animpairment of the asset transferred. Accounting policies of the joint ventures have been changed where necessary to ensureconsistency with the policies adopted by the Group.

b) Foreign currency translation

(i) Functional and presentation currency

The consolidated financial statements are presented in US Dollars. Items included in the financial statements of each of theGroup's entities are measured using the currency of the primary economic environment in which the entity operated (thefunctional currency). The Company's functional and presentation currency is the US Dollar.

The exchange rates used in respect of the major currencies in which the Group operates, compared to the US Dollar, are asfollows:

Average rate for year Closing rate

GBP 0.7478 0.8171NOK 8.4365 8.6513

EUR 0.9093 0.9533RUB 66.6888 60.6321

(ii) Transactions and balances

Transactions denominated in foreign currencies are translated and recorded at the rate of exchange ruling at the date of thetransaction. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates ruling atthe Balance Sheet date. Gains and losses arising on retranslation are recognised in the Income Statement for the year,

except where hedge accounting is applied.

(iii) Group companies

On consolidation, the assets and liabilities of the Group's non US Dollar functional entities are translated at exchange rates

prevailing on the Balance Sheet date. Income and expense items are translated at average monthly exchange rates (unlessthis average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, inwhich case the actual transaction rate will be used).

All resulting exchange differences are recognised as a separate component of equity. Such translation differences arerecognised in the Income Statement in the year in which the operation is disposed of.

(iv) Goodwill and fair value adjustments

Goodwill and fair value adjustments arising on the acquisition of a non US Dollar functional entity are treated as assets andliabilities of the non US Dollar functional entity and translated at the closing exchange rate.

c) Segmental reportingOperating segments are reported in a manner consistent with the internal reporting provided to the chief operatingdecision-maker. The chief operating decision-maker, who is responsible for allocating resource and assessing performance

of the operating segments, has been identified as the Group's Board of Directors that make all strategic decisions. Keyperformance measures include EBITDA and rig utilisation.



28


d) Business combinations and goodwill

(i) Business combinations accounted for using the acquisition method

Business combinations are accounted for using the acquisition method. All assets and liabilities of the acquiree aremeasured at fair value at the date of acquisition. The cost of an acquisition is measured as the aggregate of theconsideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the

acquiree. Acquisition costs incurred are expensed and included in administrative expenses.

Goodwill arising on acquisition (representing the excess of fair value of the consideration given over the fair value of theseparable net assets acquired) is recognised as an asset and reviewed for impairment at least annually. On disposal of an

entity, the attributable amount of remaining goodwill is included in the determination of profit and loss on disposal.

Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date.Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability will be

recognised in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. If thecontingent consideration is classified as equity, it will not be remeasured. Subsequent settlement is accounted for withinequity. In instances where the contingent consideration does not fall within the scope of IAS 39, it is measured in

accordance with the appropriate IFRS.

When deferred consideration is payable on the acquisition of a business, an estimate of the amount payable is made at the

date of acquisition and reviewed regularly thereafter, with any subsequent change in the estimated liability being reflectedin the Income Statement. Where deferred consideration is payable after more than one year the estimated liability isdiscounted using an appropriate rate of interest.

(ii) Business combinations under common control

It is the Group's policy to account for business combinations involving entities under common control using predecessoraccounting. Under predecessor accounting, the Group has elected to include the acquired entity's results and capital

structure from the date of acquisition.

A merger reserve, recognised in equity, represents the differences on consolidation arising on the adoption of predecessoraccounting. This comprises the difference between consideration paid and the book value of net assets acquired in the

transaction. No additional goodwill is created or gain recognised.

e) Other intangible assets

Intangible assets are recognised at cost less accumulated amortisation. On acquisition of an entity, intangible assets are

identified and evaluated to determine the fair value on the acquisition Balance Sheet. Amortisation is provided to write offthe cost of each asset over its estimated useful life, using the straight-line method, on the following basis:

Trade names up to 21 years

Customer relationships and contracts up to 13 yearsTechnology up to 10 years

f) Property, plant and equipment

Property, plant and equipment held for use in the Group’s operations, or for administrative purposes, are stated in the

Balance Sheet at cost, net of accumulated depreciation and any provision for impairment. Cost includes professional feesand, for qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy.

Depreciation is provided on all property, plant and equipment, other than freehold land, at rates calculated to write off the

cost, less estimated residual value, of each asset over their estimated useful life.

Drilling rigs and equipment

The depreciation for drilling rigs and equipment is calculated by dividing the total number of days a rig is operational in

any year (regardless of revenue generated) over the total estimated number of operational days in the life of the asset. Thisequates to a useful life of between 3 and 25 years. Should a rig not be operational for an extended period, a charge todepreciation will be made based on its estimated useful life remaining.



29


f) Property, plant and equipment (continued)

Other assets

Other assets are depreciated by the straight line method on the following basis:

Freehold buildings 50 yearsLeasehold improvements - land and buildings 50 years (or over the unexpired lease, if shorter)

Plant, machinery and vehicles 2-10 years

Assets in the course of construction are not depreciated until ready for use.

The gain or loss arising on the disposal of an asset is determined as the difference between the sales proceeds and the

carrying amount of the asset and is recognised in the Income Statement.

Asset lives and residual values are assessed at each Balance Sheet date.

g) Impairment

The Group performs impairment reviews in respect of goodwill annually, and other intangible assets and property, plantand equipment when circumstances indicate that the carrying amount may not be recoverable. An impairment loss is

recognised when the recoverable amount of an asset, calculated as the higher of the asset's recoverable amount and itsvalue per an independent third party valuation, is less than its carrying amount. In the absence of comparable markettransactions, a discounted cash flow model has been used to value the assets, as such a model is equivalent to what a

market participant would use as a methodology for asset valuation.

Any impairment loss is firstly allocated to goodwill then pro-rata across other remaining assets.

For the purpose of impairment testing, assets are allocated to the appropriate cash generating unit ("CGU"). The CGUs are

aligned to the structure the Group uses to manage its business. Cash flows are discounted in determining the recoverableamount.

h) Net borrowing costs and interest income

Borrowing costs directly attributable to the construction of qualifying assets such as property, plant and equipment areadded to the cost of those assets, until such time as the assets are substantially ready for their intended use. All otherborrowing costs are recognised in the Income Statement in the year in which they are incurred.

Interest income is accrued on a time basis, by reference to the principal amount outstanding and the effective interest rateapplicable.

i) Investments in subsidiaries, associates and intercompany loans

Investments held as non-current assets are measured at cost less appropriate provision for impairment where the Directorsconsider that an impairment in value has occurred. Intercompany loans which are classified as investments are accounted

by amortised cost. Investments are considered for impairment at least annually. In respect of the accounting treatment forinvestments in associates for Group purposes please see Note 2a) above.

j) Inventories

Inventories of spare parts which are held for use in the Group’s drilling operations are stated at weighted average cost lessa provision in respect of those spares attached to the older rigs and equipment. Other inventory and work in progress are

valued at the lower of cost and net realisable value. Cost is calculated using the weighted average method.

k) Cash, cash equivalents and other deposits

Cash and cash equivalents comprise cash in hand, deposits with maturities of less than three months held with banks and

bank overdrafts.



30


l) Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective

interest method less provision for impairment, if applicable. A provision for impairment of trade receivables is establishedwhen there is objective evidence that the Group will not be able to collect all amounts due.

m) Taxation

The tax charge represents the sum of tax currently payable, deferred tax and management's estimated provision for currenttax claims. Tax currently payable is based on the taxable profit for the year. Taxable profit differs from the profit reportedin the Income Statement due to items that are not taxable or deductible in any year and also due to items that are taxable or

deductible in a different year. The Group's liability for current tax is calculated using tax rates enacted or substantivelyenacted at the Balance Sheet date.

Deferred income tax is provided, using the full liability method, on temporary differences arising between the tax bases of

assets and liabilities and their carrying amounts in the consolidated financial statements.

The principal temporary differences arise from depreciation on property, plant and equipment, pension liabilities, tax lossescarried forward and, in relation to acquisitions, the difference between the fair values of the net assets acquired and their

tax base.

Tax rates enacted, or substantively enacted, by the Balance Sheet date are used to determine deferred income tax.

Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which

the temporary differences can be utilised. Future taxable profits are determined based on business plans for individualsubsidiaries in the Group. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no

longer probable that the related tax benefit will be realised; such reductions are reversed when the probability of futuretaxable profits improves.

A tax charge is created to reflect management's best estimate of the amount payable in relation to a portfolio of tax claims

and the risk of occurrence of each claim as at the Balance Sheet date.

n) Employee benefits - pension obligations

A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The

Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to payall employees the benefits relating to employee service in the current and prior periods. A defined benefit plan is a pensionplan that is not a defined contribution plan.

Typically, defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usuallydependent on one or more factors such as age, years of service and compensation.

The liability recognised in the Balance Sheet in respect of defined benefit pension plans is the present value of the defined

benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation iscalculated annually by independent actuaries using the projected unit credit method. The present value of the definedbenefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality

corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturityapproximating to the terms of the related pension obligation. In countries where there is no deep market in such bonds, themarket rates on government bonds are used.

The interest income on scheme assets and the increase during the period in the present value of the scheme's liabilitiesarising from the passage of time are included in finance income/expense.

Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or

credited to equity in other comprehensive income in the period in which they arise.

Past-service costs are recognised immediately in the Income Statement.

For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance planson a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions havebeen paid. The contributions are recognised as employee benefit expense when they are due. Prepaid contributions are

recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.



31

•

•


o) Financial assets and liabilities

Financial assets and financial liabilities are recognised on the Group's Balance Sheet when the Group becomes a party to

the contractual provisions of the instrument.

(i) Derivative financial instruments and hedge accounting

The Group's activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest

rates. The Group uses foreign exchange forward contracts and interest rate swap contracts to hedge these exposures. TheGroup does not use derivative financial instruments for speculative purposes.

Derivatives are initially recognised at fair value on the date the contract is entered into and are subsequently remeasured at

their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as ahedging instrument, and if so, the nature of the item being hedged.

The Group designates certain derivatives as either: hedges of the fair value of recognised assets or liabilities or a firm

commitment (fair value hedge); hedges of highly probable forecast transactions (cash flow hedges); or hedges of netinvestments in foreign operation (net investment hedges). The Group currently only uses cash flow hedges and did notenter into any fair value or net investment hedges during the reporting period.

Where hedging is to be undertaken, the Group documents at the inception of the transactions the relationship between thehedging instrument and the hedged item, as well as its risk management objective and strategy for undertaking the hedgetransaction.

The Group also documents its assessment, both at hedge inception and on an on-going basis, of whether the derivativesthat are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.The Group performs effectiveness testing on an annual basis.

Changes in the fair value of cash flow hedges that are designated and effective as hedges of future cash flows arerecognised directly in other comprehensive income and the ineffective portion is recognised immediately in the IncomeStatement. If the cash flow hedge of a firm commitment or forecasted transaction results in the recognition of a

non-financial asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses on thederivative that had previously been recognised in equity are included in the initial measurement of the asset or liability.

If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to

net profit or loss for the year.

For hedges that do not result in the recognition of an asset or a liability, amounts deferred in equity are recognised in theIncome Statement in the same year in which the hedged item affects net profit or loss.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longerqualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity isretained in equity until the forecasted transaction occurs.

Fair value measurements are classified using a fair value hierarchy that reflects the significance of the inputs used in themeasurements, according to the following levels:

The fair value of the interest rate swaps is estimated based on the discounting of expected future cash flows at

prevailing interest rates at the Balance Sheet date, which is classified as level 2.

The fair value of forward currency contracts has been estimated based on market forward exchange rates at theBalance Sheet date, which is classified as level 2.

(ii) Bank borrowings

Interest-bearing bank loans and overdrafts are initially recorded at fair value including directly attributable transaction

costs. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transactioncosts) and the redemption value is recognised in the Income Statement over the period of the borrowings using theeffective interest method.

Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it isprobable that some or all of the facility will be drawn down.



32


o) Financial assets and liabilities (continued)

(iii) Embedded derivatives

Embedded derivatives are recognised at fair value based on calculations using an established option pricing model, and aresubsequently annually remeasured at their fair value. The carrying amount of an embedded derivative is reported within

the same consolidated Balance Sheet category as the host contract.

p) Capital management

Where possible the Group seeks to secure long term debt financing which provides access to funds for a number of yearsinto the future. Current secured debt facilities for example have no significant capital repayments required until 2018. The

Group has sought to diversify its access to debt markets away from wholly traditional bank debt towards institutional debtby way of the corporate bond markets. The Group will seek to refinance these debt facilities as repayment dates get closerand to take advantage of market conditions. The Group also seeks to secure debt facilities with a light covenant structure

and monitors these closely. Periodic reviews of interest rate exposures are also made looking at fixed rate and variable rateexposures with the aim of maintaining a balance between fixed and variable rates.

The Company also works closely with its principal shareholders to discuss potential future financing requirements. All

significant growth capital expenditure is approved by the Board. In the past our shareholders have supported the Companythrough the injection of additional equity to support growth plans.

q) Provisions

Provisions are measured at the net present value of the Directors' best estimate of the expenditure required to settle thepresent obligation at the Balance Sheet date. A discount is applied to the provision for the time value of money where thisis significant. Provisions are provided where there is a present obligation based on past events that it is probable that an

outflow will be required and the financial outcome can be reliably measured.

r) Revenue recognition

Revenue is recognised based on the gross amount received or receivable for services provided in the normal course of

business, net of value-added tax and other sales related taxes.

Revenue from land and offshore platform drilling operations is recognised in the accounting period in which the servicesare rendered, typically based on a day rate for rigs or manpower provided to the customer. In offshore platform drilling, the

Group provides personnel to operate and maintain customer owned assets based on contractually agreed rates. In landdrilling, the Group typically provides the drilling rig and crew to the customer on a day rate which fluctuates dependent onactivity.

Recognition of revenue from engineering contracts is described in s) below.

The Group recognises flow through revenue, which relates to reimbursable costs, based on the gross amount received orreceivable in respect of its performance under the sales contract with the customer.

Incentive income is recognised when earned. Incentive income is earned in respect of contract Key PerformanceIndicators (KPIs).

Mobilisation income on significant contracts is recognised over the period of the contract to which it relates.

Mobilisation costs which are incurred in relation to the mobilisation of new rigs are capitalised and depreciated over thelife of the rig. Any subsequent transportation costs for moving the rigs to new locations are expensed as incurred.

Interest income is accrued on a time basis, by reference to the principal amount outstanding and the effective interest rateapplicable.



33


s) Engineering contracts

Where the outcome of a long term engineering contract can be estimated reliably, revenue and costs are recognised by

reference to the stage of completion of the contract activity at the Balance Sheet date. This is normally measured by theproportion that contract costs incurred for work performed to date bear to the estimated total contract costs, except wherethis would not be representative of the stage of completion. Revenue variations in contract work, claims and incentive

payments are included to the extent that they have been agreed in writing by the customer.

Where the outcome of an engineering contract cannot be estimated reliably, contract revenue is recognised on thepercentage of completion basis as costs are incurred. Under this method, revenue is recognised according to the stage of

completion reached in the contract by reference to the value of work done. No profit is recognised before the outcome ofthe contract can be measured reliably. Contract costs are recognised as expenses in the year in which they are incurred.

When it is probable that total contract costs will exceed total revenue, the expected loss is recognised in full as an expense

immediately.

Deferred income represents the value of advance payments received from customers for engineering contracts which are inexcess of the value of work done at the Balance Sheet date.

t) Leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as

operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to theIncome Statement on a straight-line basis over the period of the lease.

The Group leases certain property, plant and equipment. Leases of property, plant and equipment where the Group has

substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at thelease's commencement at the lower of the fair value of the leased property and the present value of the minimum leasepayments.

Each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net offinance charges, are included in other long term payables. The interest element of the finance cost is charged to the IncomeStatement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability

for each period. The property, plant and equipment acquired under finance leases is depreciated over the shorter of theuseful life of the asset and the lease term.

u) Trade payables

Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business fromsuppliers. Trade accounts payable are classified as current liabilities if payment is due within one year or less (or in the

normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade payables areinitially recognised at fair value and subsequently held at amortised cost.

v) Exceptional items

Exceptional items are those significant non-recurring items which are separately disclosed by virtue of their size orincidence to enable a full understanding of the Group's financial performance. Transactions which may give rise to

exceptional items include write-downs or impairments of assets including goodwill, refinancing costs, restructuring costs,asset or business disposals and litigation settlements.

w) Share capital

Ordinary shares and share premiums are classified as equity.

x) Dividends

Dividend distributions on ordinary shares are recognised as a liability in the Group's financial statements when they havebeen approved by Company's shareholders. Interim dividends are recognised when paid. Dividend income is recognised

when the right to receive payment is established.



34

•

•

•

•

•


y) Disclosure of impact of accounting standards

(a) New standards and interpretations relevant to the Group

No new standards, amendments or interpretations, effective for the first time for the financial year beginning on or after 1

January 2016 have had a material impact on the Group or parent company.

(b) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early

adopted by the Group

The following relevant standards and amendments and interpretations to existing standards have been published and are

mandatory for the Group’s accounting year beginning on or after 1 January 2017 or later years, but the Group has not early

adopted them:

IFRS 9 ‘Financial Instruments’

IFRS 15 ‘Revenue from contracts with customers’

IFRS 16 ‘Leases’

Amendment to IAS 7

Amendment to IAS 12 on recognition of deferred tax assets for unrealised losses

The adoption of the above standards and amendments and interpretations to existing standards may result in additional

disclosures in the financial statements. Management are assessing the potential impacts on the financial statements.

There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material

impact on the Group.

3 Significant accounting judgements and estimates

The preparation of the financial statements requires the use of estimates and assumptions that affect the reported amounts of assetsand liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Althoughthese estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ

from those estimates. Where significant estimates or assumptions have been applied in estimating balances in the financialstatements, these have been disclosed in the relevant Notes to those balances. Significant judgements and estimates in thesefinancial statements have been made with regard to goodwill and tangible fixed asset depreciation and impairment testing,

including sensitivities in relation to key assumptions used in arriving at the recoverable amount for each CGU (Note 9 and 10),provisions (Note 19), current tax balances and recoverability of deferred tax balances (Note 7 and Note 20), other intangible assetvalues (Note 11), retirement benefit obligations (Note 25) and contingent liabilities (Note 27). An explanation of key uncertainties

or assumptions used by management in accounting for these items is explained, where material, in the respective Notes.



35

4 Segmental reporting

The Group's primary segment reporting format is determined to be business segments. The Group is currently organised into fourcontinuing business segments, which are as follows:

Operating Segment Principal Activities

Offshore Services the provision of offshore platform drilling servicesRDS the provision of engineering servicesLand Drilling the provision of land rig drilling services

Bentec the provision of drilling rig design, construction and components

Reportable operating segments are identified as those that when aggregated represent at least 75% or more of the Group's externalrevenue. Central overheads have been shown separately to provide additional information as a reconciliation to the primarystatements. Central overheads consist of administration and related expenses of the Group. The KPI used to measure divisional

profitability is EBITDA.

In 2016 KCA Deutag had 4 Business Units. Following the gradual reduction in significance of our mobile offshore drilling unitsto our overall business, and the transition of day to day management of the residual activities to Offshore Services, the results of

the mobile offshore drilling units are now included within the Offshore Services business segment.

The following tables present revenue, profit (loss) and certain asset and liability information regarding the Group's businesssegments for the year ended 31 December 2016.

Year ended 31 December 2016OffshoreServices RDS

LandDrilling

BentecCentral

Overheads Eliminations Total$m $m $m $m $m $m $m

RevenueExternal revenue 553.6 75.2 568.4 55.0 - - 1,252.2Inter segment revenue - - 1.3 20.4 0.5 (22.2) -Total revenue 553.6 75.2 569.7 75.4 0.5 (22.2) 1,252.2ResultsEBITDA 91.6 5.1 186.5 (1.1) (19.2) - 262.9Exceptional items, net (4.4) (0.1) (1.0) (6.2) (3.0) - (14.7)Depreciation (4.8) (0.6) (138.1) (2.0) (1.4) - (146.9)

Intangible asset amortisation (5.0) - (4.6) (3.7) (4.1) - (17.4)

Operating profit (loss) 77.4 4.4 42.8 (13.0) (27.7) - 83.9Net finance costs - - - - (145.7) - (145.7)Profit (Loss) before taxation 77.4 4.4 42.8 (13.0) (173.4) - (61.8)Taxation (40.6)Loss for the year (102.4)

Assets and liabilitiesSegment assets 400.7 129.3 1,093.6 211.0 10.8 - 1,845.4Unallocated assets 190.3Total assets 2,035.7Segment liabilities (97.5) (10.8) (296.8) (46.8) (35.9) - (487.8)Unallocated liabilities (1,465.8)Total liabilities (1,953.6)Other segment informationCapital expenditureProperty, plant and equipment 1.3 - 94.5 0.4 8.8 - 105.0Intangible assets - - 0.2 0.9 1.6 - 2.7



36

4 Segmental reporting (continued)

The following tables present revenue, profit (loss) and certain asset and liability information regarding the Group's businesssegments for the year ended 31 December 2015.

Year ended 31 December 2015OffshoreServices RDS

LandDrilling Bentec

CentralOverheads Eliminations Total

$m $m $m $m $m $m $mRevenue

External revenue 772.1 156.2 599.3 141.0 0.2 - 1,668.8Inter segment revenue - 11.9 1.4 94.4 0.4 (108.1) -Total revenue 772.1 168.1 600.7 235.4 0.6 (108.1) 1,668.8ResultsEBITDA 111.8 15.9 164.2 19.0 (21.1) - 289.8Exceptional items, net (18.7) (0.1) (6.9) - (2.6) - (28.3)Depreciation (21.4) (2.7) (150.3) (2.2) (0.2) - (176.8)Intangible asset amortisation (7.5) - (4.5) (3.5) (4.0) - (19.5)Impairment of tangible assets (32.9) - (8.2) - - - (41.1)Operating profit (loss) 31.3 13.1 (5.7) 13.3 (27.9) - 24.1Net finance costs - - - - (132.8) - (132.8)Profit (Loss) before taxation 31.3 13.1 (5.7) 13.3 (160.7) - (108.7)Taxation (35.7)Loss for the year (144.4)

Assets and liabilitiesSegment assets 424.1 150.1 1,265.0 230.1 6.3 - 2,075.6Unallocated assets 64.1Total assets 2,139.7Segment liabilities (98.7) (18.2) (337.4) (58.4) (23.4) - (536.1)Unallocated liabilities (1,420.0)Total liabilities (1,956.1)Other segment informationCapital expenditureProperty, plant and equipment 4.5 - 115.1 1.1 4.2 - 124.9Intangible assets - - - 1.8 6.3 - 8.1

2016 2015Included in the above revenue figures are the following amounts of flow through turnover: $m $mOffshore Services 79.5 127.0RDS 17.8 20.6Land Drilling 42.0 40.2

Flow through turnover is defined as turnover in respect of the purchase of equipment and materials on behalf of customers whichis recharged at minimal or no margin. Seasonality has no effect on the financial results of the Group.

Unallocated assets and liabilities represent investments, cash, derivatives, tax and borrowings.

All inter-segment revenues are priced on an arm's length basis and are fully eliminated on consolidation. Results arising fromrevenues between segments are not material.

Central overheads includes exchange gains and losses arising on the retranslation of non-functional currency trading balances.

The impact in 2016 is an exchange loss of $0.3 million (2015: loss of $2.8 million).



37

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•

•

•

•

4 Segmental reporting (continued)

Geographical Segments

The Group manages its business segments on a global basis divided into five geographical areas and does not manage nor

maintain information on a country by country basis. It therefore presents the geographical segmental information on an area basis.The UK is the home country of the parent. The five main geographical areas are as follows:

North Sea and Europe

Caspian and Russia

Middle East

Africa

Other

The following tables present revenue, expenditure and certain asset information regarding the Group's geographical segments for

the years ended 31 December 2016 and 2015.

Year ended 31 December 2016

North Sea

and Europe

Caspian and

Russia Middle East Africa Other Total

$m $m $m $m $m $mRevenue 419.7 370.8 218.5 194.7 48.5 1,252.2Other segment informationSegment assets 617.3 487.6 379.6 321.1 39.8 1,845.4Unallocated assets 190.3Total assets 2,035.7Capital expenditure of continuing operationsProperty, plant & equipment 12.0 20.4 34.7 9.9 28.0 105.0Intangible assets 2.5 0.2 - - - 2.7

Year ended 31 December 2015North Sea

and EuropeCaspian and

Russia Middle East Africa Other Total

$m $m $m $m $m $mRevenue 633.1 408.6 226.2 299.8 101.1 1,668.8

Other segment informationSegment assets 633.5 516.9 470.9 377.5 76.8 2,075.6

Unallocated assets 64.1

Total assets 2,139.7Capital expenditure of continuing operationsProperty, plant & equipment 7.9 29.7 73.5 11.0 2.8 124.9Intangible assets 1.8 - - - 6.3 8.1



38

5 Finance costs - net

2016 2015$m $m

Interest payable to immediate parent company (21.3) (18.5)Interest payable on bank borrowings (102.6) (101.5)Interest payable on finance leases (1.0) (1.5)

Less amounts included in the cost of property, plant and equipment - 5.0Commitment fees (2.4) (2.0)Amortisation of arrangement fees (8.6) (8.2)

Amortisation of discount assets (a) (4.8) (4.4)Other finance costs (c) (1.4) (2.6)Exchange losses (b) (19.0) (14.1)

Finance costs (161.1) (147.8)Bank interest receivable 1.0 0.4Other finance income (c) 4.8 0.5

Exchange gains (d) 9.6 14.1Finance income 15.4 15.0Finance costs - net (145.7) (132.8)

a) The amortisation of the discount assets relates to: a) an original issue discount of $20 million which was deducted from theproceeds of $500 million generated by a bond issue completed in May 2013 and b) a discount of $3.8 million which was deducted

from the proceeds of $375 million relating to a term loan facility obtained in May 2014 (see Note 17).

b) Exchange losses represent the exchange movements during the year on mainly non-functional currency debt arising on therevaluation of US Dollar debt held by a subsidiary company whose functional currency is denominated in Sterling.

c) Other finance income includes $4.3 million reflecting a decrease during the year in the valuation of an embedded derivativeliability from $5.5 million to $1.2 million - see Note 17 (2015: Other finance costs include $1.9 million reflecting an increase inthe embedded derivative liability during 2015).

d) Exchange gains represent the exchange movements during the year on cash held in Kwanzas in Angola which can neither berepatriated nor be converted to another currency, and also the exchange movements during the year on non-functional currencypension liabilities which are largely denominated in Euros.

6 Loss before taxation

2016 2015

The following items have been included in arriving at the Group’s loss before taxation: $m $mIncluded within cost of sales:- Cost of inventories recognised as an expense 39.0 59.0

- Depreciation of property, plant and equipment (Note 9) 146.9 176.8- Net loss on disposal of property, plant and equipment 0.7 11.4- Net foreign exchange loss 0.3 2.8

Included within both cost of sales and administration expenses:- Employee benefit expense (Note 24) 493.5 652.3Operating lease rentals payable:

- Properties 14.8 19.3- Vehicles, plant and equipment 6.5 5.3Impairment of trade receivables (Note 14) 17.3 37.2

Amortisation of other intangible assets (Note 11) 17.4 19.5



39

6 Loss before taxation (continued)

Auditor remuneration / services provided by the Group's auditor and its associates

2016 2015

$m $mAudit of the financial statements 0.4 0.4Audit of subsidiaries 0.9 0.9

Total audit 1.3 1.3

Fees payable to the Group’s auditor and its associates for other services

Taxation compliance services 0.4 0.4All taxation advisory services 0.2 0.1Other non-audit services not covered above 0.1 0.1

Total non-audit services 0.7 0.6Total fees 2.0 1.9

7 Taxation

2016 2015$m $m

Current tax 44.8 51.3

Adjustments in respect of previous years (3.2) (6.5)

41.6 44.8

Deferred tax (7.0) (7.3)Adjustments in respect of previous years 6.0 (1.8)

(1.0) (9.1)

Total tax charge 40.6 35.7

The Group has substantial activities in overseas jurisdictions where different rates of tax apply. The Group’s effective rate of taxis therefore subject to fluctuations depending upon where the Group obtains contracts, the effective tax rates in the countries

concerned and the availability of double tax relief. In many countries the Group’s tax liability is calculated on the profits earnedin local currency including exchange differences on the translation of US Dollar assets and liabilities into the local currency.During the year such exchange differences, as well as being unable to obtain tax relief on a substantial element of its interest

costs, have had a material effect on the Group’s tax charge.

The tax charge for the year varied from the standard effective rate of corporation tax in the UK for 2016 of 20.00% (2015:20.25%) due to the following factors:

2016 2015$m $m

Loss before taxation (61.8) (108.7)Share of results of associates 0.7 (1.0)

(61.1) (109.7)

Loss before taxation at standard rate of corporation tax in the UK 20.00% (2015: 20.25%) (12.2) (22.2)

Effects of:

Permanent differences 0.7 -Adjustments in respect of previous years 2.8 (8.3)Impairment in the fair value of the Group’s drilling assets - 6.6

Non-recognition of current year losses 9.6 12.6Non-recognition of deferred tax assets relating to property, plant and equipment and othertemporary differences in the UK 11.1 24.6

Deemed profit tax on overseas profits 6.1 25.5Different effective tax rates on overseas profits including the impact of taxes not computed inUS Dollars and current year losses where no offset available 22.5 (3.1)

Total tax charge 40.6 35.7



40

7 Taxation (continued)

Factors affecting current and future tax charges

The Finance Act 2013 reduced the UK corporation tax rate from 21% to 20% with effect from 1 April 2015. The Finance Act

2015 (No2) further reduced the rate to 19% from 1 April 2017 and 18% from 1 April 2020. The Finance Act 2016 which wassubstantively enacted on 15 September 2016, reduced the FY2020 rate further to 17%.

Summary of current tax liabilities:

2016 2015$m $m

At 1 January 37.9 46.9

Charge to Income Statement 41.6 44.8Tax paid (38.6) (49.6)Offset of withholding tax (1.8) (3.7)

Exchange and other movements (4.0) (0.5)At 31 December 35.1 37.9

Net income tax liabilities in the Group Balance Sheet include $18.6 million relating to uncertain tax positions where managementhas had to exercise judgement in determining the most likely outcome in respect of the relevant issue. Where the final outcome onthese issues differs to the amounts provided, the Group’s tax charge will be impacted.

8 Exceptional items, net operating costs

2016 2015$m $m

Reorganisation costs (a) (10.9) (12.8)Ben Rinnes loss on disposal/impairment charge (b) (2.8) (3.3)Loss on disposal of Ben Loyal (c) (0.2) (12.9)

Impairment of Tender Barges – disposal costs (d) - (1.4)Write-down and subsequent collections/proceeds on disposal of Libya assets (e) 0.8 2.1Others (f) (1.6) -Net charge to Income Statement (14.7) (28.3)

a) Reorganisation costs primarily relate to the Group’s cost reduction, restructuring and redundancy expenditure.

b) Represents a loss on disposal and disposal costs for the sale of the Ben Rinnes completed in June 2016. The carrying value of

the inventory had been impaired by $3.3 million in 2015.

c) Loss on disposal of the Ben Loyal jack-up rig.

d) Arising from the disposal of the Tender Barges business, a provision of $1.4 million was recognised in 2015.

e) A credit to the Income Statement of $0.8 million in 2016 recorded for monies received in respect of assets previously writtendown due political unrest in prior years and the decision to cease operations in Libya. $2.1 million was recovered in 2015.

f) Other exceptional items include a provision of $0.9 million against cash in a severely distressed bank in Iraq limiting the

Group's ability to access the funds and various other non-recurring project items.



41

9 Property, plant and equipment

Land andbuildings-

long leaseholdimprovements

and freehold

Drillingrigs and

equipment

Plant,machinery

and vehicles Total

Group $m $m $m $mCostAt 1 January 2016 26.5 1,858.8 121.7 2,007.0

Additions at cost 8.9 94.0 2.1 105.0Disposals (5.5) (475.6) (19.9) (501.0)Exchange adjustments (0.1) (4.6) 0.5 (4.2)

At 31 December 2016 29.8 1,472.6 104.4 1,606.8

Accumulated depreciation

At 1 January 2016 7.6 1,042.1 29.4 1,079.1Charge for year 1.9 140.0 5.0 146.9Disposals (5.5) (413.7) (19.8) (439.0)

Exchange adjustments 0.8 (4.3) 0.9 (2.6)At 31 December 2016 4.8 764.1 15.5 784.4Net carrying amount

At 31 December 2016 25.0 708.5 88.9 822.4

Land andbuildings-

long leasehold

improvementsand freehold

Drilling

rigs andequipment

Plant,

machineryand vehicles Total

Group $m $m $m $m

CostAt 1 January 2015 26.5 1,916.3 120.8 2,063.6Additions at cost 1.7 119.5 3.7 124.9

Disposals (1.4) (156.1) (1.9) (159.4)Exchange adjustments (0.3) (20.9) (0.9) (22.1)At 31 December 2015 26.5 1,858.8 121.7 2,007.0

Accumulated depreciation

At 1 January 2015 6.3 982.5 25.1 1,013.9Charge for the year 2.8 167.2 6.8 176.8Impairment charge - 41.1 - 41.1

Disposals (1.3) (133.4) (1.8) (136.5)Exchange adjustments (0.2) (15.3) (0.7) (16.2)At 31 December 2015 7.6 1,042.1 29.4 1,079.1

Net carrying amountAt 31 December 2015 18.9 816.7 92.3 927.9

The net book value of fixed assets held under finance leases at 31 December 2016 was $25.7 million (2015: $28.9 million).

All finance leases relate to drilling rigs and equipment.



42

9 Property, plant and equipment (continued)

During our annual assessment in 2015 of the Group's asset carrying values in respect of the Offshore Services cash generating unit(CGU), we obtained an independent third party valuation for the remaining jack-up rig within this CGU. The recoverable amount

of the assets in the CGU was less than the carrying value of the assets at the Balance Sheet date by $32.9 million. As such animpairment charge in relation to the Offshore Services CGU was taken in the 2015 financial statements against property, plant andequipment. In 2015, land rigs were also impaired by $8.2 million split across 3 rigs in Nigeria.

As at 31 December 2016 cumulative capitalised interest of $19.1 million (2015: $21.1 million) is included in the carrying value ofdrilling rigs and equipment. For the year ended 31 December 2015 interest was capitalised at a rate of 7.7%. No interest wascapitalised in 2016.

In relation to assets in the course of construction as at 31 December 2016, there are amounts included as follows: $11.7 million(2015: $15.3 million) included in drilling, rigs and equipment; $1.2 million (2015: $1.1 million) in plant, machinery and vehicles;and $0.5 million (2015: $1.1 million) in land and buildings - long leasehold improvements and freehold. No depreciation has been

charged in respect of these assets.

The Company held no property, plant and equipment as at 31 December 2016 (2015: nil).

10 Goodwill

2016 2015

Group $m $mCost and carrying amountAs at 1 January and 31 December 550.9 550.9

The Group acquired 100% of the share capital of Abbot Group plc in 2008. All tangible and intangible assets were recognised attheir fair value at acquisition and the residual excess over the net assets acquired was recognised as goodwill.

The carrying amounts of goodwill by business segment are Offshore Services $205.2 million (2015: $205.2 million), RDS $116.5

million (2015: $116.5 million), Land Drilling $123.9 million (2015: $123.9 million), and Bentec $105.3 million (2015: $105.3million). The Directors will continue to keep the carrying value of goodwill, intangible and tangible assets under review in thecoming year. There is no impairment charge in respect of these balances in 2016 (2015: nil).

The Group tests goodwill annually for impairment or more frequently if there are any indications that goodwill may be impaired.Goodwill acquired through business combinations is allocated, at acquisition, to relevant CGUs. The recoverable amount, basedon the fair value less costs of disposal is compared to the carrying value to identify any impairment.

The recoverable amount of the CGUs are determined from the higher of discounted cash flow calculations and third partyvaluations. The key assumptions for the discounted cash flow calculations are those regarding discount rates, growth rates, rigdayrates, rig utilisation and capital investment. Management estimates discount rates using post tax rates that reflect current

market assessments of the time value of money and risks specific to each of the CGUs.

The Group prepared revised financial forecasts in 2016, and extrapolated cash flows for five years based on expected growth ratesfor each CGU. These revised forecasts took into account current market conditions combined with management's view of future

market conditions including rig dayrates and rig utilisations, and capital investment. A terminal value has been applied to takeaccount of the expected growth of each CGU in to perpetuity.



43

10 Goodwill (continued)

Key assumptions used in the impairment test are:

OffshoreServices RDS Land Drilling Bentec

Revenue growth rate 2016 5.7% 20.8% 1.8% 34.4%

2015 3.1% 10.1% (0.9)% 15.6%Discount rate (post tax) 2016 11.0% 12.0% 12.0% 12.0%

2015 11.0% 12.0% 12.0% 12.0%

EBITDA margin 2016 15.8% 10.0% 31.9% 9.3%2015 14.5% 9.4% 32.3% 11.0%

Undiscounted free cash flow ($ million) 2016 67.3 6.1 93.0 13.8

2015 60.2 6.9 99.7 15.0Annual capital expenditure ($ million) 2016 2.4 - 47.5 1.4

2015 2.4 0.1 59.3 2.3

Recoverable amount of the CGU ($ million) 2016 865.9 139.4 1,090.7 188.52015 847.2 153.2 1,162.8 222.7

Revenue growth rate is the average annual anticipated increase in each of the CGU's revenues over the five year forecast period.

The long term growth rate has been assumed to be 2.5% (2015: 2.5%) for each of the CGUs after the end of the five year growthperiod.

EBITDA margin is the annual EBITDA expressed as a percentage of annual revenues. The percentages in the table above showthe average EBITDA margins for each of the CGUs over the five year forecast period.

Free cash flow is the average operating cash flow for each of the CGUs over the five year period.

Annual capital expenditure represents the average annual amount spent to purchase tangible fixed assets in the five year forecast

period for the Group’s Land Drilling fleet. No capital expenditure for the building of additional land rigs is included in futureyears, similarly EBITDA for the Land Drilling CGU is based on the portfolio of rigs operated by the Group as at 31 December2016.

Sensitivity analysis

Offshore

Services RDS Land Drilling BentecHeadroom ($ million) 2016 568.1 21.0 311.0 26.8

2015 569.3 21.7 246.7 53.0

The table above showing headroom for each CGU demonstrates that each of the Group’s CGUs has significant headroom andunless there were significant deteriorations in the Group’s operating performance the carrying value of each CGU's assets at 31

December 2016 does not require to be impaired.

The variables which could result in the Group’s trading performance deteriorating are discussed in the Business Review –Principal Risks and Uncertainties section on pages 8 to 10 of the Annual Report.

The table below shows the potential impact on CGU recoverable amount of a 1% movement in each of our CGUs’ keyassumptions:

Offshore

Services RDS Land Drilling BentecTerminal revenue growth rate: 1% sensitivity 2016 69.5 12.4 81.3 14.5

2015 70.8 13.3 85.9 18.2

Discount rate (post tax): 1% sensitivity 2016 91.1 16.2 107.1 19.22015 92.3 17.3 111.9 24.4

EBITDA margin: 1% sensitivity 2016 74.3 14.7 62.0 18.1

2015 82.3 18.4 64.4 23.7



44

11 Other intangible assets

Customerrelationships

and contracts Trade names Technology Total

Group $m $m $m $mCostAt 1 January 2016 196.0 176.3 43.6 415.9

Additions - - 2.7 2.7Disposals - - (5.5) (5.5)Exchange - - (4.5) (4.5)

At 31 December 2016 196.0 176.3 36.3 408.6

Accumulated amortisation

At 1 January 2016 190.0 79.8 27.7 297.5Charge for the year 4.1 7.9 5.4 17.4Disposals - - (5.5) (5.5)

Exchange - - (2.4) (2.4)At 31 December 2016 194.1 87.7 25.2 307.0Net carrying amount

At 31 December 2016 1.9 88.6 11.1 101.6Remaining useful life 1-4 years 12 years 2 years

Customerrelationships

and contracts Trade names Technology Total

Group $m $m $m $mCost

At 1 January 2015 196.0 176.3 35.5 407.8Additions - - 8.1 8.1At 31 December 2015 196.0 176.3 43.6 415.9

Accumulated amortisationAt 1 January 2015 183.4 71.9 22.7 278.0

Charge for the year 6.6 7.9 5.0 19.5At 31 December 2015 190.0 79.8 27.7 297.5

Net carrying amount

At 31 December 2015 6.0 96.5 15.9 118.4Remaining useful life 2-5 years 13 years 3 years

The Company has no other intangible assets (2015: nil).



45

12 Investments

2016 2015Company Company

$m $ma) Shares in subsidiariesAt 1 January and 31 December 2,170.9 2,170.9

b) Loans to subsidiariesAt 1 January 118.5 118.9Decrease in loans to subsidiaries - (0.4)

At 31 December 118.5 118.5

Investments in subsidiaries are stated at cost. The carrying value of the Company's shares in subsidiaries is reviewed forimpairment annually by management. The recoverable amount of the Group's CGUs is compared to the carrying value to

determine whether any impairment charge is required. No impairment charge is necessary in 2016 (2015: nil).

A list of subsidiary undertakings is given in Note 31.

For the purposes of the Company cash flow statement, inflows from Group lendings include movements on loans to Group

undertakings and movements in short-term Group lendings are included within trade and other receivables and trade and otherpayables.

Loans to subsidiaries are interest bearing and are repayable on demand.

2016 2015Group Group

$m $m

c) Other investments – associatesAt 1 January 3.1 5.9Share of (losses) profits of associates (0.7) 1.0

Dividend received from associate - (3.2)Exchange adjustments (0.3) (0.6)At 31 December 2.1 3.1

13 Inventories and work in progress

2016 2015

Group Group$m $m

Materials and consumables 88.2 92.4

Work in progress - engineering contracts 18.1 26.5106.3 118.9

The value of provisions against inventory was $16.4 million (2015: $21.3 million).

Engineering contracts

Accrued contract revenue of nil (2015: $17.0 million) has been recognised as an asset on the Balance Sheet at the year end.

The status of contracts in progress at the end of the year is as follows:


$m $m

Contract costs incurred and recognised profits (less recognised losses) to date - 17.0Gross amount due from customers for contract work presented within trade receivables - 6.2Gross amount due to customers for contract work presented as a liability - 10.7

The Company has no inventories (2015: nil).



46

14 Trade and other receivables

2016 2015 2016 2015Group Group Company Company

$m $m $m $mTrade receivables 216.0 293.2 - -Other receivables 13.3 20.5 - -

Prepayments and accrued income 7.5 15.3 - -236.8 329.0 - -

The Group operates in over 20 countries around the world and in certain of these countries slow or late payment of outstanding

accounts is the norm. In respect of unprovided debts more than 180 days overdue, these largely represent sums due in respect ofcontracted revenue and management do not anticipate problems with the recovery of amounts due.

2016 2015The following table details the age of the Group’s trade receivables: $m $mTotal 272.2 340.7

Less provision for doubtful trade receivables (56.2) (47.5)Total trade receivables, net 216.0 293.2

The increase in provision for doubtful trade receivables is principally due to delayed collections in Africa.

2016 2016 2016 2015

Grossreceivables

Provision forimpairment Net receivables Net receivables

$m $m $m $m

Current 150.6 - 150.6 219.2Past due less than 90 days 20.8 - 20.8 52.0Past due more than 90 days less than 180 days 11.7 - 11.7 12.0

Past due more than 180 days 89.1 (56.2) 32.9 10.0Total trade receivables 272.2 (56.2) 216.0 293.2

The movement on the provision of impairment for trade receivables is as follows: 2016 2015$m $m

At 1 January (47.5) (17.2)

Provided (17.3) (37.2)Released 8.6 6.7Exchange difference - 0.2

At 31 December (56.2) (47.5)

The Group monitors the credit worthiness and viability of its customers on a regular basis. As the majority of the Group’s

revenues arise from sales to multi-national, blue-chip and national oil companies, it is considered that payment will be receivedfrom customers for those balances which have not been provided for at the year end.

15 Cash, cash equivalents and other deposits

2016 2015 2016 2015

Group Group Company Company$m $m $m $m

Cash at bank and in hand 83.0 52.3 - -

Cash held on money market funds 98.4 - - -Cash and cash equivalents 181.4 52.3 - -Bank overdrafts (19.5) (54.4) - -

Cash and cash equivalents - net 161.9 (2.1) - -



47

15 Cash, cash equivalents and other deposits (continued)

All bank overdrafts bear interest at floating rates. The average interest rate of the Group's overdrafts at 31 December 2016 was6.3% (2015: 4.3%).

At 31 December 2016 a total of $98.4 million was held on two money market fund accounts (2015: nil). Both funds have 'AAA'credit ratings. The funds are immediately accessible, and the weighted average yield on the two accounts as at 31 December 2016was 0.5%.

At 1 January

2016 Cash flow

Non-cash

movements

Exchange

movements

At 31December

2016Analysis of net debt $m $m $m $m $mCash, cash equivalents and other deposits (2.1) 164.2 - (0.2) 161.9

Financial liabilities - borrowings short term (5.3) 7.1 (23.3) (0.6) (22.1)Financial liabilities - borrowings long term (1,208.3) (58.3) 10.3 (0.7) (1,257.0)

(1,215.7) 113.0 (13.0) (1.5) (1,117.2)

The net total of non-cash movements of $13.0 million primarily relates to amortisation of capitalised arrangement fees anddiscount assets.

16 Trade and other payables


$m $m $m $m

Trade payables 51.1 46.5 - -Other tax and social security payable 16.3 16.8 - -Other payables 38.5 39.7 - -

Accruals 116.5 141.6 0.6 0.5Payments received on account 4.3 19.9 - -Deferred income 16.1 14.9 - -

242.8 279.4 0.6 0.5

17 Financial liabilities - borrowings


$m $m $m $m

Current borrowingsBank loans - secured 17.9 1.9 - -Bank loans - derivative liability 0.2 1.3 - -

Finance lease liabilities 4.0 2.1 - -22.1 5.3 - -

Non-current borrowings

Bank loans - secured 398.5 353.6 - -Bank loans - derivative liability 1.0 4.2 - -Senior secured notes 855.5 844.8 - -

Finance lease liabilities 2.0 5.7 - -1,257.0 1,208.3 - -1,279.1 1,213.6 - -



48

17 Financial liabilities - borrowings (continued)

Maturity of financial liabilities

The maturity profile of the carrying amount of the non-current

financial liabilities at the Balance Sheet date was as follows:

2016

Group

2015

Group

2016

Company

2015

Company$m $m $m $m

In more than one year, but not more than five years:

Bank loans - secured 408.3 13.6 - -Bank loans - derivative liability 1.0 3.1 - -Senior secured notes 875.0 500.0 - -

Finance lease liabilities 2.0 5.7 - -1,286.3 522.4 - -

In more than five years:

Bank loans - secured - 350.4 - -Bank loans - derivative liability - 1.1 - -Senior secured notes - 375.0 - -

- 726.5 - -Less: net capitalised arrangement fees (bank loans) (7.5) (7.6) - -Less: net capitalised arrangement fees (senior secured notes) (13.1) (19.6) - -

Less: net discount asset (bank loans) (2.3) (2.8) - -Less: net discount asset (senior secured notes) (6.4) (10.6) - -

1,257.0 1,208.3 - -

The average interest rate of the Group's borrowings at the Balance Sheet date including interest rate swaps was 7.8% (2015:7.8%).

As at 31 December 2016, bank loans are wholly denominated in US Dollars and bear interest based on LIBOR although a term

loan debt of $365.6 million as at 31 December 2016 (2015: $369.4 million) has a contractual floor rate of 1.0% applied to thedefinition of LIBOR. The presence of a contractual floor rate of 1.0% has resulted in the reflection of an embedded derivativeliability valuation of $1.2 million (current $0.2 million; non current $1.0 million) being carried against the related borrowings.

This liability valuation has been calculated using an established option pricing model.

The term loan borrowings of $365.6 million (2015: $369.4 million) are wholly denominated in US Dollars and bear interestpayable every 3 months based on LIBOR with a floor rate of 1.0% (see above) plus a margin of 5.25%. The ultimate maturity date

of the term loan borrowings is in May 2020 with 0.25% of the original debt value of $375 million to be repaid quarterly.Repayments of $3.75 million have been made during 2016 (2015: $3.75 million).

The secured bank loans are subject to a single financial covenant - the ratio of Consolidated Total Net Debt to EBITDA.

The liabilities of $875 million in relation to the senior secured notes arose on completion of a $500 million bond issue in May2013 and a $375 million bond issue in May 2014. An original issue discount of $20 million was deducted from the proceeds ofthe $500 million bond issue and this discount asset is being amortised over the term of the senior secured notes. No original issue

discount was applied on the $375 million bond issue. The senior secured notes of $500 million are wholly denominated in USDollars and bear interest at a fixed rate of 9.625% payable every 6 months. The maturity date of the senior secured notes of $500million is in May 2018. The senior secured notes of $375 million are also wholly denominated in US Dollars and bear interest at a

fixed rate of 7.25% payable every 6 months. The maturity date of the senior secured notes of $375 million is in May 2021. Thesenior secured notes are listed on the Luxembourg Stock Exchange.

A discount of $3.8 million was deducted from the proceeds of $375 million and this discount asset is being amortised over the

term of the debt.

Borrowings of $80 million were secured in February 2016 in relation to financing of a project in Oman. The debt is repayableover a 5 year term to December 2020. Repayments totalling $16 million have been made during 2016.



49

17 Financial liabilities - borrowings (continued)

The Group's finance lease liabilities are denominated in the following currencies:


$m $mRussian Rouble (August 2018 maturity) 6.0 7.7Euro (March 2016 maturity) - 0.1

6.0 7.8

The finance lease liabilities are effectively secured as the rights to the leased assets would ultimately revert to the lessor in theevent of default.

18 Financial instruments

The Group's multi-national operations expose it to a variety of financial risks that include the effects of changes in foreigncurrency exchange rates and interest rates. The Group has in place a risk management policy that seeks to limit the adverseeffects on the financial performance of the Group by using foreign currency financial instruments and other instruments to fix

interest rates.

a) Market risk

(i) Foreign exchange risk

The Group has a number of subsidiary companies whose revenue and expenses are denominated in currencies other than the USDollar. The Group is exposed to foreign exchange risks primarily with respect to the US Dollar, Sterling, Euro, Norwegian Kroneand particularly the Russian Rouble, Angolan Kwanza and Azeri Manat. The Company is not exposed to any material foreign

exchange risks.

In order to protect the Group's Balance Sheet from movements in exchange rates, whenever practical, the Group seeks to achievenatural hedging by ensuring that expenses are borne in the same currency as related income. Where this is not possible, the Group

has entered, to an extent, into forward exchange contracts to hedge the foreign currency exposure of its subsidiary companies.Changes in the forward contract fair values are booked through the Income Statement. At 31 December 2016, the Group had 22foreign exchange forward contracts.

A movement of 10% is considered to represent a material fluctuation of exchange rates. Movements in all of the Group's majorexchange rate pairings against the US Dollar have been considered as each has the potential to impact on the reported US Dollarconsolidated profits and net assets.

If the US Dollar became 10% stronger against all other main currencies of the Group, as at 31 December 2016 this would giverise to exchange gains of $1.6 million (2015: gains of $0.9 million) impacting on operating profit. There would be negligibleimpact on the Company (2015: nil).

If the US Dollar became 10% weaker against all other main currencies of the Group, as at 31 December 2016 this would give riseto exchange losses of $1.8 million (2015: losses of $1.1 million) impacting operating profit. There would be negligible impact onthe Company (2015: nil).

If the US Dollar became 10% stronger against all other main currencies of the Group, as at 31 December 2016 this would giverise to an increase in net finance costs of $3.1 million (2015: increase in costs of $4.8 million). There would be no impact for theCompany (2015: nil).

If the US Dollar became 10% weaker against all other main currencies of the Group, as at 31 December 2016 this would give riseto a decrease in net finance costs of $3.5 million (2015: decrease in costs of $3.1 million). There would be no impact for theCompany (2015: nil).

(ii) Interest rate risk

The Group is exposed to interest rate risk on its interest-bearing borrowings. The Group's policy is to maintain a significantpercentage of its borrowings at fixed interest rates to generate the desired interest profile. At 31 December 2016, approximately

67% (2015: 71%) of current and non-current borrowings were at fixed rates. The Company had no external borrowings at 31December 2016 (2015: nil).



50

18 Financial instruments (continued)

a) Market risk (continued)

(ii) Interest rate risk (continued)

A movement of 1% is considered to represent a material fluctuation of interest rates.

If the average interest rate had been 1% higher during 2016, then the loss before taxation for the Group would have been $2.6million higher (2015: $1.6 million higher). The impact for the Company would be that the loss before taxation would have been

$1.2 million lower (2015: $1.2 million lower).

If the average interest rate had been 1% lower during 2016, assuming a floor rate of 0%, then the loss before taxation for theGroup would have been $0.1 million higher (2015: $0.1 million lower). The impact for the Company would be that the loss before

taxation would have been $0.6 million higher (2015: $0.2 million higher).

(iii) Price risk

Neither the Group nor the Company is exposed to any significant price risk in relation to financial instruments.

b) Credit riskThe Group's credit risk relates primarily to its trade receivables. The Group has a small number of customers who are primarilyeither well established international or national companies, or joint ventures thereof. An evaluation is carried out of the credit risk

of each new customer, and when appropriate, suitable protections put in place through the use of trade finance instruments.

Each month, management review an aged debtor analysis and focus on debts which are overdue for payment. In addition, there isalways a level of unbilled receivables which arise through certain contractual mechanisms and attention is also focused on getting

these amounts billed to customers as quickly as possible.

A table showing the ageing of trade receivables is provided in Note 14.

The Group's policy is to deposit cash at institutions with an 'A' rating or better where possible. The Group held $98.4 million on

deposit within money market fund accounts with 'AAA' ratings as at 31 December 2016 (2015: nil).

c) Liquidity riskThe Group actively maintains a mixture of long-term and short-term committed facilities that are designed to ensure that the

Group has sufficient available funds for operations and planned expansions. At 31 December 2016, 98% (2015: 99%) of theGroup's borrowing facilities were due to mature in more than one year. The Company had no external borrowings at 31 December2016 (2015: nil).

d) Capital riskThe Group monitors its share equity and long-term funding structure on the basis of its interest cover and the ratio of net debt toEBITDA.

The Group has complied with all Bank imposed covenant requirements during the year. There is no covenant requirement inrelation to the Company alone.

The table below analyses both the Group's and Company's derivative and non-derivative financial liabilities into relevant maturity

groupings based on the remaining period from the Balance Sheet date to the contractual maturity date. The amounts disclosed inthe table are the contractual undiscounted cash flows.

Group Less than

1 year

Between 1

and 5 years

More than 5

yearsAt 31 December 2016 $m $m $mBorrowings – bank loans and senior secured notes 20.3 1,606.7 -

Borrowings – finance lease liabilities 4.2 2.8 -Trade and other payables 226.5 - -

Less than1 year

Between 1and 5 years

More than 5years

At 31 December 2015 $m $m $m

Borrowings - bank loans and senior secured notes 3.9 1,078.0 520.0Borrowings – finance lease liabilities 3.6 5.8 -Trade and other payables 262.6 - -



51


d) Capital risk (continued)

Company Less than

1 year

Between 1

and 5 years

More than 5

yearsAt 31 December 2016 $m $m $mTrade and other payables 0.6 - -

Less than1 year


More than 5years

At 31 December 2015 $m $m $mTrade and other payables 0.5 - -

The table below analyses the Group's derivative financial instrument liabilities into relevant maturity groupings based on theremaining period from the Balance Sheet date to the contractual maturity date. The amounts disclosed in the table are the

contractual undiscounted cash flows:

Group Less than1 year


At 31 December 2016 $m $m

Forward foreign exchange contractsOutflow - settlement 0.1 -

Group Less than1 year


At 31 December 2015 $m $mForward foreign exchange contracts

Outflow - settlement - -

The Group had 22 forward foreign exchange contracts at 31 December 2016. The maturity dates of these contracts range from

January 2017 to August 2018.

The Group's derivative financial instrument assets are valued at $2.1 million as at 31 December 2016 (2015: nil). The Companyhas no derivative financial instrument assets or liabilities at 31 December 2016 (2015: nil).

All of the Group's forward foreign exchange contracts are categorised as cash flow hedges.



52


e) Fair value of non-derivative financial assets and financial liabilities

The fair value of short-term borrowings, trade and other payables, trade and other receivables, short-term deposits and cash atbank and in hand approximates to the carrying amount because of the short maturity of interest rates in respect of these

instruments. Long-term bank borrowings are generally rolled over for periods of six months or less, and as a result, book valueand fair value are considered to be the same while the senior secured notes are publicly traded and as such the fair value is subjectto fluctuation.

2016 2015 2016 2015Bookvalue

Bookvalue

Fairvalue

Fairvalue

Group $m $m $m $mFair value of long-term borrowingsSenior secured notes (Note 17) – level 1 855.5 844.8 807.1 627.6

Bank borrowings (Note 17) – level 2 398.5 353.6 357.2 254.8Bank borrowings - derivative liability (Note 17) – level 3 1.0 4.2 1.0 4.2Finance leases (Note 17) – level 2 2.0 5.7 2.0 5.7

Amounts owed to parent company (Note 30) – level 3 167.1 150.7 167.1 150.7

2016 2015 2016 2015

Bookvalue

Bookvalue

Fairvalue

Fairvalue

Group $m $m $m $m

Fair value of other financial assets and financial liabilitiesPrimary financial instruments held or issued to finance theGroup's operations:

Trade and other receivables (Note 14) – level 2 236.8 329.0 236.8 329.0Cash and cash equivalents (Note 15) – level 2 83.0 52.3 83.0 52.3Cash held on money market funds (Note 15) - level 2 98.4 - 98.4 -

Bank overdrafts (Note 15) – level 2 19.5 54.4 19.5 54.4Trade and other payables (Note 16) – level 2 226.5 262.6 226.5 262.6Bank borrowings (Note 17) – level 2 17.9 1.9 17.4 0.9

Bank borrowings - derivative liability (Note 17) – level 3 0.2 1.3 0.2 1.3Finance leases (Note 17) – level 2 4.0 2.1 4.0 2.1

2016 2015 2016 2015Bookvalue

Bookvalue

Fairvalue

Fairvalue

Company $m $m $m $mFair value of long term borrowingsAmounts owed to parent company (Note 30) – level 3 166.8 145.1 166.8 145.1

2016 2015 2016 2015Book

value

Book

value

Fair

value

Fair

valueCompany $m $m $m $mFair value of other financial assets and financial liabilities

Primary financial instruments held or issued to finance theGroup's operations:Trade and other payables (Note 16) – level 2 0.6 0.5 0.6 0.5



53


e) Fair value of non-derivative financial assets and financial liabilities (continued)

The levels referred to in the table on page 52 relate to the following Fair Value hierarchy:

Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities that can be accessed at the measurementdate;

Level 2: Valuations containing inputs other than quoted prices in active markets for identical assets and liabilities that are

observable either directly or indirectly; and

Level 3: Valuations containing unobservable inputs.

f) Derivative financial instruments

The fair value of derivative financial instruments at the Balance Sheet date was as follows:

2016 2015 2016 2015Assets Assets Liabilities Liabilities

Group $m $m $m $mForward foreign exchange contracts – cash flow hedges – current(level 2) 1.3 - 0.1 0.5

Forward foreign exchange contracts – cash flow hedges –non-current (level 2) 0.8 - - -

The Company had no derivative financial instruments at either 31 December 2016 or 2015.

The full fair value of a hedging derivative is classified as a non-current asset or liability if the remaining maturity of the hedgeditem is more than 12 months and, as a current asset or liability if the maturity of the hedged item is less than 12 months.

The Group's derivative financial instruments have been classified using the fair value hierarchy set out in the fair value accountingpolicy. The level in the fair value hierarchy that each instrument is categorised in is detailed in the table above.

There was no ineffectiveness recognised in the Income Statement from cash flow hedges in the year.

(i) Forward foreign exchange contracts

The notional principal amount of the outstanding forward foreign exchange contracts at 31 December 2016 was $8.0 million(2015: nil).

(ii) Interest rate swaps

The Group had no outstanding interest rate swaps at either 31 December 2016 or 2015.

The Group only uses cash flow hedges and did not enter into any fair value or net investment hedges during the reporting year.

19 Provisions and other payables

2016 2015Group $m $mAt 1 January 5.2 5.2

Provided during the year 3.1 1.8Utilised (2.6) (1.2)Released (0.6) (0.1)

Exchange adjustments 0.1 (0.5)At 31 December 5.2 5.2

Provisions and other payables have been analysed between current and non-current as follows:

2016 2015$m $m

Current 1.7 1.8

Non-current 3.5 3.45.2 5.2



54

19 Provisions and other payables (continued)

Provisions of $2.5 million (2015: $2.7 million) relate mainly to warranty obligations in respect of guarantees provided in the

normal course of business relating to equipment supplied. These are normally for a period of not more than two years. The effectof discounting is immaterial. Asset Retirement obligations of $2.7 million (2015: $2.5 million) are provided.

20 Deferred tax

Deferred tax is calculated on temporary differences at the tax rate applicable to the country in which the liability or asset hasarisen. The following are the deferred tax liabilities and assets recognised by the Group and movements thereon during thecurrent and prior year.

Fair marketvalue

Plant, property& Equipment

Retirementbenefit

obligations

Otherincluding tax

losses Total

$m $m $m $m $mAt 1 January 2015 (49.6) (34.7) 14.1 48.1 (22.1)Credit (charge) to Income Statement 7.6 5.5 3.0 (5.0) 11.1

(Charge) credit to equity - - (1.8) 1.8 -Change in rate (1.2) (0.7) - (0.1) (2.0)Exchange adjustments - 9.6 (2.3) (13.0) (5.7)

At 31 December 2015 (43.2) (20.3) 13.0 31.8 (18.7)Credit (charge) to Income Statement 6.7 (13.3) (3.4) 10.5 0.5(Charge) credit to equity - - (1.2) 1.2 -

Change in rate - 0.1 - 0.4 0.5Exchange adjustments - (0.3) (0.7) 1.2 0.2At 31 December 2016 (36.5) (33.8) 7.7 45.1 (17.5)

There are no deferred tax liabilities or assets within the Company as at 31 December 2016 (2015: nil).

At 31 December 2016 the Group had deferred tax assets of $21.5 million arising from tax losses (2015: $25.0 million).

Fair market value relates to the unwinding of deferred tax liabilities arising on the acquisition of assets from Abbot Group plc in

2008.

Certain deferred tax assets and liabilities have been offset, including the asset balances analysed in the table above.

The following is an analysis of the deferred tax balances (before offset) for financial reporting purposes:


$m $m $m $mDeferred tax assets 27.6 30.6 - -Deferred tax liabilities (45.1) (49.3) - -

(17.5) (18.7) - -

Deferred tax has been recognised on unremitted earnings from overseas subsidiaries where payment is imminent. Where nopayment is expected deferred tax is not recognised. As these earnings are continually reinvested by the Group, no tax is expected

to be payable on them in the foreseeable future. If the earnings were remitted tax of $2.4 million would be payable (2015: $5.0million).

A deferred tax asset has not been recognised on $153.0 million of taxation losses (2015: $122.8 million) due to uncertainty of

future taxable income arising in the countries concerned.



55

21 Share capital

Authorised No of sharesAt 31 December 2015 and 2016 10,000

The nominal share capital of the Company is in Sterling and is translated at the ruling exchange rate at the date of the transaction.The nominal value of each share is £1.

Number of

shares

Group and

CompanyIssued shares $mAt 31 December 2015 and 2016 6,956 -

At the Balance Sheet date 6,956 ordinary £1 shares had been issued ($14,199).

22 Share premium

Group and

Company$m

At 31 December 2015 and 2016 14.2

23 Retained earnings - deficit

2016 2015 2016 2015


At 1 January (1,992.6) (1,856.0) 27.3 41.5

Loss for the year (102.4) (144.4) (17.9) (14.2)Remeasurements on defined benefit pension schemes (5.9) 7.8 - -Dividend to minority shareholder (0.5) - - -

At 31 December (2,101.4) (1,992.6) 9.4 27.3

24 Employees and Directors


Employee benefit expense for the Group during the year: $m $mWages and salaries 397.9 536.3Social security costs 76.7 96.7

Other pension costs 18.9 19.3493.5 652.3

The other pension costs shown above of $18.9 million (2015: $19.3 million) relate to contributions to defined contribution

schemes and current service costs relating to the defined benefit schemes.

2016 2015Average monthly number of people (including Executive Directors) employed: Group

Number

Group

NumberDrilling and engineering 5,503 6,529Support and administration 1,029 1,046

6,532 7,575



56

24 Employees and Directors (continued)

2016 2015Key management compensation: $m $mSalaries and short-term employee benefits 7.1 9.4

Post-employment benefits 0.3 0.37.4 9.7

2016 2015The key management compensation figures include remuneration of three executive Directors: $m $mAggregate emoluments, including retirement benefits 3.1 3.1

Included above are the emoluments of three Directors of the Company. The emoluments of the highest paid director, includingretirement benefit contributions, were $1.9 million (2015: $1.7 million). The Directors have no retirement benefits accruingunder a defined benefit scheme. The other Directors who served during the year received no emoluments from other Group

companies in respect of their services.

The Company has no employees.

25 Retirement benefit obligations

The Group operates a number of pension schemes in various countries. In respect of defined benefit schemes, the Group operatestwo funded schemes in the UK, whilst in Germany and Norway the particular schemes are unfunded in line with local practice inthose countries. The presentation below reflects the Group's adoption of IAS 19R from 1 January 2014.

a) UK schemes

The Group operates two funded defined benefit schemes in the UK as follows:

(i) The KCA Drilling defined benefit scheme has been closed to new members for a number of years with existing members

continuing to accrue benefits based on their current salary and number of years service with the Group.

The most recent actuarial valuation of the scheme was carried out at 31 December 2016 by the Group's pension advisers and the

principal assumptions made by the actuaries were:

2016 2015

% %Rate of increases in pensionable salaries 4.1 3.7Rate of increase in pensions in payment and deferred pensions 2.3 2.2

Discount rate 2.7 3.9Inflation assumption 3.5 3.1

The expected return on plan assets is based on market expectation at the beginning of the period for returns over the entire life of

the benefit obligation.

The life expectancy of a male member currently aged 40, retiring at age 65, is 91 years (2015: 91 years). The life expectancy of afemale member currently aged 40, retiring at age 65, is 93 years (2015: 94 years).

The amounts recognised in the Balance Sheet are determined as follows:

2016 2015$m $m

Present value of funded obligations (56.3) (55.6)

Fair value of scheme assets 43.1 47.8

Net liability (13.2) (7.8)

98% (2015: 98%) of the UK schemes assets are quoted and traded on recognised stock exchanges. The remainder of the assets arecash balances held by the schemes.



57

25 Retirement benefit obligations (continued)

The amounts recognised in the consolidated Income Statement are as follows:

2016 2015$m $m

Current service cost 0.2 0.2Interest cost 1.9 2.1Interest income (1.5) (0.9)

Total included within the Income Statement 0.6 1.4

Changes in the present value of the defined benefit obligation are as follows:

2016 2015$m $m

Present value of obligations at 1 January 55.6 58.6Service cost 0.2 0.2Interest cost 1.9 2.1

Remeasurements:Loss (gain) from change in financial assumptions 14.2 (1.7)Gain from change in demographic assumptions (0.9) -

Members contribution 0.1 0.1Benefits paid (3.9) (1.1)Exchange difference (10.9) (2.6)

Present value of obligations, 31 December 56.3 55.6

Changes in the fair value of plan assets are as follows:

2016 2015

$m $mFair value of plan assets at 1 January 47.8 50.3Interest income 1.5 0.9

Remeasurement: return on plan assets, excluding amounts included in interest expense/income 4.8 (1.1)Employer contributions 1.7 0.4Benefits paid (3.9) (1.1)

Member contributions 0.1 0.1Exchange difference (8.9) (1.7)Fair value of plan assets, 31 December 43.1 47.8

Analysis of the movement in the Balance Sheet liability:2016 2015

$m $mAt 1 January 7.8 8.3Total expense as above 0.6 1.4

Contributions (1.7) (0.4)Remeasurements 8.5 (0.6)Exchange difference (2.0) (0.9)

At 31 December 13.2 7.8

Contributions expected to be paid to the plan during the year beginning after the Balance Sheet date are $0.3 million (2015: $1.3million).



58


Average life expectancy:

2016 2015Longevity at age 65 for current pensioners

- Men 23 24- Women 25 26Longevity at age 65 for future pensioners

- Men 26 26- Women 28 29

The sensitivity of the defined obligation to changes in the weighted principle assumption is:

Impact on obligations

Change in assumptionIncrease inassumption

Decrease inassumption

$m $m

Discount rate 0.25% 2.5 2.7Inflation rate 0.25% 1.7 1.7

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice,this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of thedefined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligation

calculated with the projected unit credit method at the end of the reporting period) has been applied when calculating the pensionliability recognised within the statement of financial position.

The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to previous year.

The fair value of the plan assets was:

2016 2015$m $m

Cash 0.9 0.3Equity 33.2 38.2Debt 9.0 9.3

43.1 47.8

(ii) The OIS Teesside Ltd defined benefit scheme is closed and the Group is responsible for the ongoing funding of the scheme.

The most recent actuarial valuation of the scheme was carried out at 31 December 2016 by the Group's pension advisers and theprincipal assumptions made by the actuaries were:

2016 2015% %

Rate of increase in pensions in payment and deferred pensions 3.4 3.1


The life expectancy of a male member currently aged 40, retiring at age 65, is 87 years (2015: 90 years). There are no female

plan members.



59


The amounts recognised in the Balance Sheet are determined as follows:

2016 2015

$m $mPresent value of funded obligations (13.2) (11.7)Fair value of plan assets 11.6 12.8

Net (liability) asset (1.6) 1.1


2016 2015

$m $mInterest cost 0.4 0.4Interest income (0.4) (0.5)

Total included within the Income Statement - (0.1)

Changes in the present value of the defined benefits obligation are as follows:2016 2015

$m $mPresent value of obligations at 1 January 11.7 12.4Interest cost 0.4 0.4

Remeasurements:(Gain) loss from change in demographic assumptions (0.3) -Loss (gain) from change in financial assumptions 4.1 (0.4)

Benefits paid (0.3) (0.2)Exchange difference (2.4) (0.5)Present value of obligations, 31 December 13.2 11.7

2016 2015$m $m

Fair value of plan assets at 1 January 12.8 12.8Interest income 0.4 0.5Contributions - 0.2

Benefits paid (0.3) (0.2)Remeasurement: return on plan assets, excluding amounts included in interest expense/income 1.1 0.1Exchange difference (2.4) (0.6)

Fair value of plan assets, 31 December 11.6 12.8

Analysis of the movement in the Balance Sheet (asset) liability:2016 2015

$m $mAt 1 January (1.1) (0.4)Total expense as above - (0.1)

Contributions - (0.2)Remeasurements 2.7 (0.5)Exchange difference - 0.1

At 31 December 1.6 (1.1)

Contributions expected to be paid during the annual year after the Balance Sheet date are nil (2015: $0.2 million).


2016 2015Longevity at age 65 for current pensioners- Men 22 22

- Women n/a n/aLongevity at age 65 for future pensioners- Men 24 25

- Women 27 28



60



Impact on obligations

Change in assumption

Increase in

assumption

Decrease in

assumption$m $m

Discount rate 0.25% 0.7 0.8

Inflation rate 0.25% 0.8 0.7

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice,

this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of thedefined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligationcalculated with the projected unit credit method at the end of the reporting period) has been applied when calculating the pension

liability recognised within the statement of financial position.


The fair value of the plan assets was:

2016 2015$m $m

Cash - 0.2

Equity 5.9 6.5Debt 5.7 6.1

11.6 12.8

b) Germany schemes

The Group operates four defined benefit schemes in Germany. The schemes are unfunded in common with local practice and thetotal liabilities of the schemes are included as a Balance Sheet provision.

The schemes have been closed to new members for a number of years with existing members continuing to accrue benefits basedon their current salary levels and number of years service with the Group.

The life expectancy of a male member currently aged 40, retiring at age 65, is 87 years (2015: 87 years). The life expectancy of a

female member currently aged 40, retiring at age 65, is 91 years (2015: 91 years).

The most recent actuarial valuation of the scheme was carried out at 31 December 2016 by the Group's pension advisers and theprincipal assumptions made by the actuaries were:

2016 2015

% %Rate of increase in pensionable salaries 2.0 2.3Rate of increase in pensions in payment and deferred pensions 1.0 1.8


The amount recognised in the Balance Sheet is:

2016 2015$m $m

Present value of unfunded obligations 112.3 121.5


2016 2015$m $m

Current service cost 1.0 1.2Interest cost 2.9 2.6Total included within the Income Statement 3.9 3.8



61


Changes in the present value of the defined benefit obligations as included in the Balance Sheet are as follows:

2016 2015

$m $mPresent value of obligations at 1 January 121.5 142.9Service cost 1.0 1.2

Interest cost 2.9 2.6Remeasurements:- gain from change in financial assumptions (0.2) (7.7)

- experience (gain) loss (4.3) 1.0Benefits paid (4.1) (3.8)Exchange differences (4.5) (14.7)

Present value of obligations, 31 December 112.3 121.5


2016 2015Longevity at age 65 for current pensioners- Men 19 19

- Women 23 23Longevity at age 65 for future pensioners- Men 22 22

- Women 26 26


Impact on obligationsChange in

assumptionIncrease inassumption

$m

Decrease inassumption

$mDiscount rate 0.25% 4.0 4.2Inflation rate 0.25% 3.9 3.7

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice,this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the

defined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligationcalculated with the projected unit credit method at the end of the reporting period) has been applied when calculating the pensionliability recognised within the statement of financial position.


c) Norway schemes

The Group operates three unfunded benefit schemes relating to early retirement of employees between the ages of 62 and 67 and

disability benefits to eligible employees.

During 2010 legislative changes to early retirement plans in Norway were finalised. For two of the schemes in Norway the Group

is no longer required to hold a liability for future early retirement pensions in respect of employees who were younger than 62 at 1

January 2011. In addition, employees are included in the early retirement scheme (AFP) with the right to retire at the age of 62.

The AFP is a multi-employer plan, where the Norwegian government finances 1/3 of the contribution plans. The AFP pension

plan is a defined benefit plan administered by a separate legal entity. The plan is temporarily accounted for as a defined

contribution plan, as the plans administrators have not been able to calculate the pension obligation for each entity participating in

the plan.

During 2015 the remaining benefits in relation to the early retirement schemes were paid out, resulting in a nil present value ofunfunded obligations at 31 December 2015 and 2016.



62


The total provision in the consolidated Balance Sheet relating to pension liabilities is analysed as follows:

2016 2015

$m $mUK schemes- KCA 13.2 7.8

- OIS 1.6 (1.1)Germany schemes 112.3 121.5At 31 December 127.1 128.2

Cumulative remeasurement (gains) losses recognised in equity are as follows:

2016 2015$m $m

At 1 January 44.2 59.2Net remeasurements recognised in the year 5.9 (7.8)Exchange differences (1.0) (7.2)

At 31 December 49.1 44.2

Included within the net remeasurements recognised in the period are exchange differences of $0.8 million (2015: nil).

The Group also made contributions to defined contribution plans of $17.7 million (2015: $17.9 million).

26 Cash generated from (used in) operating activities

2016 2015 2016 2015


Cash generated from (used in) operating activities

Loss before taxation (61.8) (108.7) (17.9) (14.2)Adjustments for:- depreciation 146.9 176.8 - -

- impairment of fixed assets - 41.1 - -- amortisation of intangible assets – customer relationships 4.1 6.6 - -- amortisation of intangible assets - other 13.3 12.9 - -

- loss on sale of property, plant and equipment 0.7 11.4 - -Net movement in provisions and other liabilities andretirement benefit obligations (8.2) (3.5) - -

Net finance costs 145.7 132.8 16.4 13.6Share of results of associates 0.7 (1.0) - -Dividend received from associate - 3.2 - -

Changes in working capital:- decrease in inventories and work in progress 11.6 24.4 - -- decrease (increase) in trade and other receivables 92.1 115.8 (0.1) (3.8)

- decrease in trade and other payables (43.0) (99.5) (3.1) (0.4)Net exchange differences from operating activities (20.6) (18.7) - -Cash generated from (used in) operating activities 281.5 293.6 (4.7) (4.8)



63

27 Contingent liabilities

The Company is a guarantor for Group senior debt facilities. Security is given by a fixed and floating charge over the net assets ofthe Company.

28 Operating lease commitments - minimum lease payments

Property Other Property Other

2016 2016 2015 2015$m $m $m $m

Commitments due under non-cancellable operating leases:

Within one year 10.2 0.7 14.0 4.2Later than one year and less than five years 17.7 0.3 24.3 0.9After five years 31.9 - 43.9 -

59.8 1.0 82.2 5.1

The Group leases various properties and yards under non-cancellable operating lease agreements. The terms of each leaseagreement are specific to each particular property and yard. The material lease agreements range from within one year to twenty

years.

The Group also leases plant and equipment and vehicles under non-cancellable operating lease agreements included under 'Other'above.

29 Capital and other financial commitments

2016 2015$m $m

Contracts placed for future capital not provided in the financial statements 7.6 14.9

30 Related party transactions

The following balances relate to transactions carried out with the Group's associates and its Parent Company:

2016 2015

Group $m $m

Amounts owed by parent company 4.5 8.6Amounts owed to parent company (167.1) (150.7)

2016 2015

Company $m $m

Amounts owed to subsidiaries (28.6) (32.4)Amounts owed by subsidiaries 118.5 118.5Amounts owed by parent company 4.4 4.3

Amounts owed to parent company (166.8) (145.1)



64

30 Related party transactions (continued)

Amounts owed by the company to its parent company comprise: $75.0 million (2015: $75.0 million) loan which is interestbearing at 14.5% and also repayable on demand but not before 1 January 2018 with $74.3 million (2015: $55.0 million) interestadded to this loan, $16.4 million (2015: $14.3 million) loan interest accrual plus $1.1 million (2015: $0.8 million) of

inter-company charges.

Key management compensation is disclosed in Note 24.

The following balances relate to transactions carried out with Group's ultimate parent company and its subsidiaries:

2016 2015$m $m

Sales - 0.5

Finance costs (21.3) (18.5)

The terms of loans made to subsidiaries are disclosed in Note 12.

31 Subsidiary undertakings, other related undertakings and ultimate controllingparty

KCA Deutag Alpha Limited is a company incorporated in England and Wales and domiciled in Scotland.

A full list of subsidiaries is shown below.

The Company's ultimate controlling company is PHM Holdco 14 S.a.r.l., which is registered in Luxembourg. PHM Holdco 14S.a.r.l is in turn controlled by Pamplona Capital Partners II L.P. The Company's immediate parent company is KCA Deutag AlphaII Limited, a company incorporated in England and Wales.

The Group's subsidiaries registered at 3 Colmore Circus, Birmingham, B4 6BH are as follows:

Name Relationship to Company Country of IncorporationAbbot Group Limited Direct subsidiary Great Britain

KCA DEUTAG Rig Co. Limited Indirect subsidiary Great Britain

Land Rig SPV Limited Indirect subsidiary Great Britain

KCA DEUTAG UK Finance Plc Indirect subsidiary Great Britain

KCA DEUTAG Enterprises Limited Indirect subsidiary Great Britain

Rig Design Services Holdings Limited Indirect subsidiary Great Britain

Rig Design Services Limited Indirect subsidiary Great Britain

Abbot Investments (North Africa) Limited Indirect subsidiary Great Britain

Abbot Holdings Limited Indirect subsidiary Great Britain

KCA DEUTAG Drilling Group Limited Indirect subsidiary Great Britain

KCA European Holdings Limited Indirect subsidiary Great Britain

KCA DEUTAG Caspian Limited Indirect subsidiary Great Britain



65

31 Subsidiary undertakings, other related undertakings and ultimate controllingparty (continued)

The Group's subsidiaries registered at Group Headquarters, Bankhead Drive, City South Office Park, Portlethen,Aberdeenshire, AB12 4XX are as follows:Name Relationship to Company Country of Incorporation

KCA DEUTAG Europe BV Indirect subsidiary Netherlands/Great Britain

SET Drilling Company Limited Indirect subsidiary Great Britain

KCA DEUTAG Drilling Limited Indirect subsidiary Great Britain

KCA DEUTAG Drilling Services (UK) Limited Indirect subsidiary Great Britain

KCA DEUTAG Offshore UK Limited Indirect subsidiary Great Britain

KCA DEUTAG Technical Support Limited Indirect subsidiary Great Britain

KCA DEUTAG Rig Design Services Limited Indirect subsidiary Great Britain

KCA DEUTAG Limited Indirect subsidiary Great Britain

ProRig Limited Indirect subsidiary Great Britain

Abbot Keystone Limited Indirect subsidiary Great Britain

The Group's subsidiaries registered at 10 Anson Road, #32-15 International Plaza, Singapore 079903 are as follows:

Name Relationship to Company Country of Incorporation

KCA DEUTAG Drilling PTE Limited (in liquidation) Indirect subsidiary Singapore

The Group's subsidiaries registered at 11757 Katy Freeway, Suite 600, Houston, TX, 77079, USA are as follows:Name Relationship to Company Country of Incorporation

KCA DEUTAG LLC Indirect subsidiary USA

KCA DEUTAG US Finance LLC Indirect subsidiary USA

The Group's subsidiaries registered at 32 City House, 19 Themistocles Dervis Street, Nicosia 1066, Cyprus are as follows:Name Relationship to Company Country of Incorporation

KCA DEUTAG Overseas Limited Indirect subsidiary Cyprus

KCA DEUTAG Holdings Limited Indirect subsidiary Cyprus

KCA DEUTAG (Cyprus) Limited Indirect subsidiary Cyprus

The Group's subsidiaries registered at Deilmannstrasse 1, 48455 Bad Bentheim, Germany are as follows:Name Relationship to Company Country of Incorporation

Abbot Verwaltungsgesellshaft mbH Indirect subsidiary Germany

KCA DEUTAG GmbH Indirect subsidiary Germany

KCA DEUTAG Tiefbohrgesellschaft mbH Indirect subsidiary Germany

KCA DEUTAG Drilling GmbH Indirect subsidiary Germany

Bentec GmbH Drilling and Oilfield Systems Indirect subsidiary Germany/Great Britain

Bentec Personalservice GmbH Indirect subsidiary Germany



66

31 Subsidiary undertakings, other related undertakings and ultimate controllingparty (continued)

The Group's subsidiaries registered at Espehaugen 37, 5258 Blomsterdalen, 1201 Bergen, Norway are as follows:


KCA DEUTAG Holdings Norge AS Indirect subsidiary Norway

KCA DEUTAG Drilling Norge AS Indirect subsidiary Norway

KCA DEUTAG MODU Operations AS Indirect subsidiary Norway

Abbot Holdings Norge AS Indirect subsidiary Norway

KCA DEUTAG Offshore AS Indirect subsidiary Norway

KCA DEUTAG Drilling Offshore Services AS Indirect subsidiary Norway/Great Britain

The Group's subsidiaries registered at Hengelosestraat 581, 7521AG Enschede, The Netherlands are as follows:


KCA DEUTAG Nederland BV Indirect subsidiary Netherlands

KCA DEUTAG Investments BV Indirect subsidiary Netherlands

The Group's subsidiary registered at Unit No. 2301-2, 23rd Floor Rasa Tower I, 555 Paholyothin Road, KwaengChatuchak, Khet Chatuchak, Bangkok is as follows:


KCA DEUTAG Drilling (Thailand) Limited

(in liquidation)Indirect subsidiary Thailand

The Group's subsidiary registered at One Marina Boulevard # 28-00 Singapore 018989 is as follows:


KCA DEUTAG Tender Barges (Offshore) Pte Ltd Indirect subsidiary Singapore

KCA DEUTAG PTE Limited Indirect subsidiary Singapore/Great Britain

The Group's associate registered at 23B, Jalan 52/1, 46200 Petaling Jaya, Selangor, Malaysia is as follows:


Global Tender Barges Malaysia Sdn Bhd (in liquidation) Indirect subsidiary Malaysia

The Group's subsidiary registered at San Blas 2 San Joaquin, Coudad del Carmen, Campeche 24157 is as follows:Name Relationship to Company Country of Incorporation

Global Tender Barges Mexico, S. de R.L. de C.V. Indirect subsidiary Mexico

The Group's subsidiary registered at 10/8 International Commercial Centre, Casemates Square, Gibraltar is as follows:Name Relationship to Company Country of Incorporation

International Air Drilling Company Limited Indirect subsidiary Gibraltar

The Group's subsidiary registered at Erbil, English Village, Villa 357, Kurdistan is as follows:Name Relationship to Company Country of Incorporation

Performance Drilling for Oil Services Limited Indirect subsidiary Iraq

The Group's subsidiary registered at Caledonian House, PO Box 1043, George Town, Grand Cayman, KY1-1102 Cayman

Islands is as follows:


ILI Corporation Limited Indirect subsidiary Cayman Islands



67

31 Subsidiary undertakings, other related undertakings and ultimate controlling

party (continued)

The Group's subsidiary registered at Lot 1, 2nd Floor, Wisma Siamloh, Jalan Kemajuan, 87007 Federal Territory ofLabuan, Malaysia is as follows:


Global Tender Barges Labuan Limited (in liquidation) Indirect subsidiary Labuan

The Group's subsidiary registered at BC # 672960, PO Box 3340, Road Town, Tortola, British Virgin Islands is as

follows:Name Relationship to Company Country of Incorporation

KCA DEUTAG Investments Limited Indirect subsidiary British Virgin Islands

The Group's subsidiary registered at Oman KCA DEUTAG Drilling Company LLC, P.O. Box 74, Postal Code 328,

Rumais, Sultanate of Oman is as follows:


Oman KCA DEUTAG Drilling Company (LLC) Indirect subsidiary Oman

The Group's associate registered at Km 16, PH-Aba Expressway, Opposite INTELS, Rumukurusi, Port Harcourt, Nigeria

is as follows:


KCA DEUTAG Nigeria Limited Indirect subsidiary Nigeria

The Group's subsidiary registered at Lot 5475, Simpang 68, Jalan Kerma Negara, Kuala Belait KA1931, Brunei

Darussalam is as follows:


KCA DEUTAG Drilling (Brunei) Sdn Bhd Indirect subsidiary Brunei

The Group's subsidiary registered at 2 km of Stary Tobolsky trakt, 8a, 625014 Tyumen, Russia is as follows:


Bentec Drilling and Oilfield Systems LLC Indirect subsidiary Russia

KCA DEUTAG Russia LLC Indirect subsidiary Russia

The Group's subsidiary registered at Ulitsa im. Kosmanavta Popvicha 100, Yuzhno-Sakhalinsk, Russia, 693007 is asfollows:


KCA DEUTAG Drilling LLC Indirect subsidiary Russia

The Group's subsidiary registered at Schottegatweg Oost 44, Willemstad, Curaçao is as follows:


Deutag Overseas (Curaçao) NV Indirect subsidiary Netherlands Antilles

The Group's subsidiary registered at PO Box 4327, Al Khobar 31952, Kingdom of Saudi Arabia is as follows:


KCA DEUTAG Drilling Saudi Arabia Limited Indirect subsidiary Saudi Arabia



68

31 Subsidiary undertakings, other related undertakings and ultimate controlling

party (continued)

The Group's subsidiary registered at 2F, 59, Jangpyeong1-ro, Geoje-si, Gyeongsangnam-do, South Korea is as follows:

Name Relationship to Company Country of IncorporationKCA DEUTAG Drilling Korea Co. Limited Indirect subsidiary South Korea

The Group's subsidiary registered at 100 New Gower Street, Suite 1100, Cabot Place, PO Box 5038, St. John's, NewFoundland and Labrador, Canada is as follows:Name Relationship to Company Country of Incorporation

KCA DEUTAG Drilling Canada Inc. Indirect subsidiary Canada

The Group's subsidiary registered at No.4 Rajeyan St., Goyabadi St., Zafar Ave., Tehran, Iran is as follows:Name Relationship to Company Country of Incorporation

KCA DEUTAG Iran Kish Drilling Company (in

liquidation)

Indirect subsidiary Iran

The Group's subsidiary registered at Unit No. 302, Swiss Tower, Plot No. Y3, Jumeirah Lakes Towers, Dubai, UAE is as

follows:


KCA DEUTAG Operations Services DMCC Indirect subsidiary UAE

The Group's joint venture registered at 15 Chaikovsky Street, Almaty, Republic of Kazakhstan is as follows:


Bentec Kazakhstan Limited Liability Partnership Joint venture Kazakhstan

The Group's joint venture registered at P.O. Box 12 78, PC 133 Al-Khuwair / Sultatane of Oman is as follows:


International Drilling Technology LLC Joint venture Oman

Documents

KCA Deutag Alpha Limited Annual Report and … Reports/KCAD Alpha Limited 2016 Statutory...KCA Deutag Alpha Limited Annual Report and Financial Statements for the year ended 31 December