Business context and reporting period
Filing identity: The supplied filing is Ensco plc’s Form 10-K for the fiscal year ended December 31, 2017, filed February 27, 2018—not a Valaris Ltd filing. It reports the Atwood Oceanics acquisition from October 6, 2017; Atwood contributed $23.3 million of revenue after closing.
Ensco provided offshore contract drilling services through Floater and Jackup segments, operating globally on day-rate contracts. The company reported a 62-rig fleet plus three rigs under construction; its year-end rig-count table lists 65 rigs including construction and held-for-sale units.
Financial and operating metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $1.843 billion | $2.776 billion |
| Operating income (loss) | $(132.0) million | $929.3 million |
| Net income (loss) attributable to Ensco | $(303.7) million | $890.2 million |
| Operating cash flow, continuing operations | $259.4 million | $1.077 billion |
| Capital expenditures, continuing operations | $536.7 million | $322.2 million |
| Cash and short-term investments | $885.4 million | $2.602 billion |
| Long-term debt | $4.751 billion | $4.943 billion |
| Working capital | $853.5 million | $2.425 billion |
| Contract backlog at year-end | $2.821 billion | $3.621 billion |
Revenue fell about 34%. Operating margin was approximately -7.2% versus 33.5% in 2016; net margin was approximately -16.5% versus 32.1%. Operating cash flow was about 14.1% of revenue, down from 38.8%. 2017 included a $182.9 million non-cash impairment charge and a $140.2 million bargain-purchase gain from the Atwood merger. Cash flow and comparisons were also affected by $205 million of contract termination payments recorded in 2016.
Fleet utilization declined to 55% from 58% (Floaters 45% from 54%; Jackups 60% in both years). Average day rate fell to $158,484 from $192,427 (Floaters $327,736 from $359,758; Jackups $84,913 from $110,682). Quarterly dividend was $0.01 per share; total 2017 dividends were $0.04 per share.
Material changes versus the prior period
- Revenue declined amid fewer contracted floater days, lower day rates and asset sales; the Atwood fleet was added in the fourth quarter.
- Contract drilling expense decreased 9% to $1.190 billion, but not enough to offset the revenue decline. General and administrative expense rose to $157.8 million, including merger-related and integration costs.
- 2017 shifted from 2016 profitability to a net loss. The 2016 result included significant contract termination revenue and a $287.8 million pre-tax gain on debt extinguishment.
- Backlog decreased by $800.3 million. Year-end cash and short-term investments fell substantially, while debt declined; debt-to-capitalization was 35.2%, compared with 39.0% in 2016.
Outlook, risks, contingencies and unusual items
- Outlook: Management expected results to continue declining into 2018 as above-market contracts expired and replacements were awarded at lower rates. It described demand recovery as gradual and said meaningful day-rate increases required further demand improvement and/or rig supply reduction. Planned 2018 capital expenditures were approximately $475 million: $375 million for newbuilds, $40 million for enhancements and $60 million for upgrades; $207.4 million for ENSCO 123 was paid in January 2018.
- Post-year-end financing: In January 2018, Ensco issued $1.0 billion of 7.75% notes due 2026 and repurchased or redeemed $650.4 million principal amount of notes due 2019–2021. Management reported that remaining maturities before 2024 were $194.3 million in 2020 and $113.5 million in 2021. These are subsequent events, not year-end balances.
- Liquidity and credit: The $2.0 billion revolving facility was undrawn at year-end, and Ensco reported covenant compliance. Credit ratings were below investment grade, increasing borrowing costs and potentially limiting access to financing. The facility limits dividends to $0.01 per share per quarter absent waiver or amendment.
- Commercial and asset risks: Oversupply, depressed day rates, contract terminations or renegotiations, customer concentration and further impairments could pressure cash flows. The ENSCO DS-8 contract was under customer discussions; termination or revised terms could reduce revenue. Three rigs under construction were uncontracted in the filing’s risk discussion.
- Legal and tax matters: Petrobras declared the ENSCO DS-5 contract void; Ensco disputed the claim and pursued arbitration, while reserving the related receivables. A separate arbitration tribunal found Samsung Heavy Industries liable for $10 million or proven damages, with the amount dependent in part on the Petrobras case. Brazilian anti-corruption inquiries continued. U.S. tax reform effects were provisionally recorded, including $16.5 million net tax expense, and could be adjusted during 2018.
- Other exposures: Ensco retained windstorm risk for six jackups and six floaters in the U.S. Gulf of Mexico because it did not purchase first-party windstorm insurance for them. Insurance renewal for much of the program was scheduled for May 31, 2018.
Investor facts to verify
- Confirm the issuer and filing scope: this is Ensco plc FY 2017, not Valaris Ltd or a standalone Q4 filing.
- Review the cash-flow decline, remaining liquidity and the effect of the January 2018 bond issuance and debt repurchases on pro forma debt and maturities.
- Assess backlog conversion, contract repricing, utilization and the status and economics of uncontracted or newly contracted rigs.
- Track the DS-8 customer discussions, Petrobras and Samsung arbitrations, and any resulting recoveries, liabilities or revenue effects.
- Check impairment assumptions, Atwood integration and synergy realization, and final purchase-accounting and U.S. tax-reform adjustments.