Business context and reporting period
The document is Ensco plc’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The request identifies Valaris Ltd, but the filing itself identifies the registrant as Ensco plc; confirm the issuer and filing before relying on this summary. KPMG performed an interim review, not an audit.
Ensco provided offshore contract drilling services through its floater and jackup segments. On October 6, 2017, after quarter-end, Ensco completed its acquisition of Atwood Oceanics. Atwood’s results are not included in the reported 2017 results. Ensco issued 134.1 million shares for the acquisition, valued at $782 million, and estimated a $167.8 million bargain purchase gain for recognition in the fourth quarter.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $460.2 million | $548.2 million | $1,388.8 million | $2,271.8 million |
| Operating income | $35.8 million | $115.4 million | $121.4 million | $848.6 million |
| Operating margin | 7.8% | 21.1% | 8.7% | 37.4% |
| Net income (loss) attributable to Ensco | $(25.4) million | $85.3 million | $(96.6) million | $851.2 million |
| Diluted EPS | $(0.08) | $0.28 | $(0.32) | $3.07 |
| Operating cash flow, continuing operations | Not provided for the quarter | $219.6 million | $994.8 million | |
| Capital expenditures | Not provided for the quarter | $474.1 million | $255.5 million |
At September 30, 2017, cash and cash equivalents were $724.4 million, short-term investments $1,069.8 million, and total debt $4.748 billion. Working capital was $1.973 billion, with a 5.0 current ratio. Debt represented 36.8% of total capitalization; there were no borrowings under the revolving credit facility. Following the acquisition and repayment of Atwood debt, pro forma cash and short-term investments were $926.5 million and debt was 34.2% of pro forma capitalization.
Reported nine-month operating cash flow less capital expenditures was negative $254.5 million, calculated from the filing’s figures. The company paid $0.01 per share in quarterly dividends.
Changes versus the prior comparable period
- Q3 revenue fell 16% year over year; nine-month revenue fell 39%. Excluding $205 million of lump-sum termination payments included in 2016, nine-month revenue declined 33%.
- Q3 operating income fell from $115.4 million to $35.8 million, and Ensco moved from net income to a net loss. Nine-month operating income and net income also fell sharply.
- Management attributed weaker revenue mainly to lower day rates, fewer days under contract, and rig shipyard work, along with contract terminations and rig sales. Nine-month 2016 results also benefited from the $205 million termination payments and $279 million of debt-extinguishment gains.
- Operating cash flow declined substantially; excluding the 2016 termination payments, management reported a 72% decline. Capital expenditures increased, principally reflecting newbuild construction.
- Q3 utilization was 46% for floaters and 60% for jackups, versus 48% and 55%, respectively, in 2016. Average day rates fell to $334,218 for floaters and $88,272 for jackups, from $353,187 and $109,379.
Outlook, management commentary and risks
- Management expected results to decline through 2017 and into 2018 as contracts expired and rigs went uncontracted or renewed at materially lower rates. It described the offshore market as oversupplied, with depressed rates and many newbuild rigs uncontracted.
- Management expected 2017 capital expenditures of approximately $456 million for newbuilds, $57 million for rig enhancements, and $73 million for minor upgrades and improvements. Remaining construction commitments, including rigs acquired with Atwood, totaled $544.7 million as of September 30, subject to timing and other stated exclusions.
- Reported backlog was $3.0 billion at September 30, 2017, or $3.2 billion pro forma for Atwood, compared with $3.6 billion at year-end 2016. Management warned that expirations could reduce backlog, revenue, and operating cash flow.
- The October credit-facility amendment extended final maturity to September 2022, with capacity of $2.0 billion through September 2019 and $1.2 billion thereafter. October rating downgrades by Moody’s and S&P increased borrowing margins and commitment fees. The company was below investment grade and warned further downgrades could constrain or increase the cost of financing.
- Key legal matters include the Petrobras drilling-services agreement dispute and related Brazil investigation. Ensco disputed Petrobras’s allegations, reported that its internal investigation found no credible evidence of company involvement, and said it could not estimate potential exposure. SEC and DOJ matters remained relevant; the SEC tolling agreement ran through March 2018. Petrobras and Samsung Heavy Industries arbitrations were unresolved.
- The filing also describes environmental assessments and other proceedings, and $83.5 million of outstanding letters of credit and surety bonds. Ensco said it could not predict outcomes of certain matters.
- The merger’s integration, expected synergies, and provisional fair values were uncertain; acquisition-related costs included $8.0 million for the first nine months and a further $11.8 million after closing. Management’s liquidity expectations relied on cash, investments, operating cash flow, and potential facility borrowings.
Important facts for investors to verify
- Confirm the registrant identity: the supplied filing is for Ensco plc, despite the request metadata naming Valaris Ltd.
- Review the Atwood acquisition’s final purchase-price allocation, realized integration costs and synergies, and the fourth-quarter recognition of the estimated $167.8 million bargain purchase gain.
- Assess near-term contract expirations, backlog conversion, utilization, day rates, and the timing or cancellation of newbuilds against management’s outlook.
- Reconcile liquidity after the acquisition and debt repayment, facility capacity and covenants, upcoming maturities, and the effect of lower credit ratings on borrowing costs and access.
- Track the Petrobras dispute and investigations, including potential financial, regulatory, and business consequences; the filing does not provide a clear estimate of exposure.
- Consider the unusual 2016 termination receipts and debt-extinguishment gains when comparing periods, and note that interim financial statements are unaudited.