Business context and reporting period
The supplied filing is Ensco plc’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017—not a filing by Valaris Ltd. The filing describes Ensco as an offshore contract-drilling company operating floater and jackup rigs. KPMG conducted an interim review, not an audit, and reported no material modifications needed for GAAP conformity.
At June 30, Ensco reported 53 operating rigs, two rigs under construction and two rigs held for sale. The company also had a pending all-stock agreement to acquire Atwood Oceanics, expected to close in the third quarter of 2017 subject to closing conditions.
Financial results and liquidity
Amounts are in U.S. dollars; financial statement figures are in millions except per-share data and day rates.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $457.5 | $909.6 | $928.6 | $1,723.6 |
| Operating income | $27.8 | $419.6 | $85.6 | $733.2 |
| Operating margin | 6.1% | 46.1% | 9.2% | 42.5% |
| Net income (loss) attributable to Ensco | $(45.5) | $590.6 | $(71.2) | $765.9 |
| Diluted EPS | $(0.15) | $2.04 | $(0.24) | $2.92 |
| Operating cash flow from continuing operations | Not presented for quarter | Not presented for quarter | $130.5 | $800.2 |
- Six-month capital expenditures were $332.6, including $286.6 for new rig construction. Operating cash flow less capital expenditures was negative $202.1 for the period.
- At June 30, cash and cash equivalents were $169.6 and short-term investments were $1,680.4, totaling $1.85 billion. Working capital was $2,028.8 and the current ratio was 5.0.
- Total debt was $4,744.7, down from $5,274.5 at December 31, 2016; debt-to-total-capitalization was 36.7%. No borrowings were outstanding under the $2.25 billion revolving credit facility, and Ensco reported covenant compliance.
- Backlog was $3.3 billion, down from $3.6 billion at year-end 2016. Quarterly dividends were $0.01 per share in each of the first two quarters.
Material changes versus the prior comparable period
- Revenue fell 50% year over year in Q2 and 46% in the first half. Excluding $205.0 million of prior-year lump-sum termination settlements for ENSCO DS-9 and ENSCO 8503, management said revenue declined 35% in Q2 and 39% in the first half.
- Management attributed the decline mainly to fewer contracted rig days, lower average day rates, contract terminations and the termination and sale of ENSCO 6003 and ENSCO 6004. Contract-drilling expenses fell, but by less than revenue.
- Utilization and day rates weakened overall. Q2 floater utilization was 43% versus 57%, and jackup utilization was 64% versus 63%. Average day rates were $338,675 for floaters versus $359,575 and $88,583 for jackups versus $111,791.
- Prior-year earnings included a $260.8 million gain on debt extinguishment. Q2 2016 revenue also included the $205.0 million termination settlements. These unusual items materially affect headline comparisons.
- Cash from continuing operations declined to $130.5 million from $800.2 million in the first half. Management attributed the decline, excluding the prior-year settlements, chiefly to lower net cash receipts from drilling services.
Outlook, risks and unusual items
- Management expected operating results to decline through 2017 and into 2018 as contracts expired and rigs went uncontracted or renewed at lower rates. It described offshore drilling markets as oversupplied and day rates as depressed, despite increased customer inquiries, particularly for shallow-water work.
- Ensco expected 2017 capital expenditures of approximately $500 million for newbuilds, $65 million for enhancements and $70 million for minor upgrades. It accelerated a $75 million final ENSCO DS-10 payment into Q3 2017. Remaining construction commitments at June 30 included $79.0 million for 2017 and $215.3 million for 2018.
- The proposed Atwood transaction was an all-stock acquisition at 1.60 Ensco shares per Atwood share; estimated consideration was approximately $711 million based on Ensco’s July 18 share price. The merger faced shareholder and other conditions, merger-related lawsuits, integration and execution risks, and potential additional debt repayment. Atwood had approximately $850 million outstanding on its revolver and up to $449 million of notes subject to a change-of-control purchase offer.
- Ensco was below investment grade, which management said could constrain capital-market access and increase refinancing costs. It also disclosed Brazil-related anti-bribery inquiries and a Petrobras contract dispute and arbitration; management could not estimate the potential exposure. Separately, a customer lawsuit was settled for $9.8 million, recorded in contract-drilling expense.
- Other material risks include rig oversupply and contract cancellations, impairment of long-lived assets, operational and environmental events, foreign-exchange exposure, and the possibility of further declines in backlog and operating cash flow. The filing states the Petrobras receivables related to the disputed contract were fully reserved.
- Management expected to adopt revenue and lease accounting standards concurrently on January 1, 2018; it estimated $60–$80 million of right-of-use assets and lease liabilities for leases where Ensco is the lessee, while other effects remained under evaluation.
Important facts for investors to verify
- Confirm the issuer: this source is Ensco plc, not Valaris Ltd, and verify that Ensco is the intended company for the requested summary.
- Review subsequent developments and final terms or completion status of the Atwood merger, including merger litigation, debt obligations and integration outcomes.
- Assess whether backlog, utilization, day rates and operating cash flow continued to weaken as contracts expired, and whether projected capital spending was reduced or funded as planned.
- Verify refinancing capacity and covenant headroom given below-investment-grade ratings, debt maturities and the cash required for construction and any Atwood debt repayment.
- Follow developments in the Petrobras dispute and Brazil investigations, including any change to reserved receivables, claims, penalties or other potential liabilities.