Filing identity and reporting period
The supplied filing is Ensco plc’s Form 10-K for the fiscal year ended December 31, 2015, filed February 24, 2016. Although the request metadata names Valaris Ltd, the registrant identified in this filing is Ensco plc; the filing does not report under the Valaris name. The business is an offshore contract drilling provider, operating floaters and jackups under day-rate contracts.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $4.063 billion | $4.565 billion |
| Operating income (loss) | $(1.244) billion | $(2.401) billion |
| Net income (loss) attributable to Ensco | $(1.595) billion | $(3.903) billion |
| Diluted loss per share | $(6.88) | $(16.88) |
| Cash provided by continuing operating activities | $1.698 billion | $2.058 billion |
| Capital expenditures on continuing operations | $1.620 billion | $1.567 billion |
| Cash and short-term investments at year-end | $1.301 billion | $1.422 billion |
| Total debt at year-end | $5.895 billion | $5.920 billion |
| Contract backlog at year-end | $5.757 billion | $9.690 billion |
Revenue fell 11% year over year, reflecting fewer contracted rig days, lower day rates and reduced ENSCO DS-5 revenue. Contract drilling expense declined 10% as stacking and cost controls reduced operating costs. Reported results included $2.746 billion of non-cash impairment charges; all goodwill was impaired and no goodwill remained on the year-end balance sheet. Cash flow from operations declined 17% year over year. Year-end working capital was $1.510 billion and the current ratio was 2.9. The $2.25 billion revolving credit facility was undrawn, and the company reported compliance with its covenants. Debt to total capitalization was 47.5%, compared with 41.9% in 2014.
For fourth-quarter 2015, revenue was $828.3 million and net loss attributable to Ensco was $2.472 billion, or $10.64 per diluted share. The quarter included $2.744 billion of impairment charges. The company also withheld recognition of $44.7 million in DS-5 revenue because collectability was not reasonably assured.
Material changes versus the prior period
- Backlog declined by approximately $3.9 billion from year-end 2014, primarily due to revenue earned, day-rate concessions and contract terminations; $79 million of disputed DS-5 backlog was excluded.
- Utilization fell from 85% to 72% overall: floaters from 79% to 69%, and jackups from 89% to 73%. Average day rates fell from $242,884 to $233,325 overall.
- Floaters revenue decreased 9% and jackups revenue decreased 19%. Operating cost reductions partly offset the revenue pressure.
- The annual dividend fell from $3.00 per share in 2014 to $0.60 in 2015. The board set the first-quarter 2016 dividend at $0.01 per share, down from $0.15 per quarter in 2015.
- The company issued $1.1 billion of senior notes in 2015 and used proceeds and cash to retire its 2016 notes and remaining MARAD obligations. Moody’s and S&P each downgraded the senior unsecured rating one notch during the fourth quarter, to Baa2 and BBB, respectively.
Outlook, risks and unusual items
Management described 2016 as increasingly challenging and expected weak utilization and day rates to persist until a meaningful recovery in commodity prices. It anticipated continued customer budget cuts, delayed or cancelled drilling programs, contract renegotiations and terminations, and further concessions during 2016. Management expected operating results to decline in 2016 and 2017 as higher-rate contracts expired. If prices remained near early-2016 levels, it did not expect meaningful improvement in offshore drilling demand.
Planned 2016 capital expenditures were approximately $450 million: $275 million for newbuild construction, $25 million for rig enhancements and $150 million for minor upgrades and improvements. Four rigs under construction were uncontracted; deliveries included two jackups scheduled for 2016, a drillship delayed to first-quarter 2017 and a jackup delayed to 2018. Management said liquidity needs were expected to be funded through cash, investments, operating cash flows and, if needed, the revolver, while warning that a prolonged downturn could materially weaken liquidity. Moody’s had placed its rating under review for downgrade.
- Petrobras/ENSCO DS-5: Petrobras declared the drilling services contract void effective January 4, 2016, citing alleged improper payments. Ensco disputed the claim and said its audit committee investigation had found no evidence of company or employee involvement. The company could not estimate the dispute’s outcome or potential exposure. DS-5 receivables were fully reserved at year-end.
- Additional asset risk: Management said further deterioration in market conditions could trigger additional material impairments. Six rigs were classified as held for sale; in February 2016, six more rigs were identified as likely to be scrapped or retired.
- Concentration and operating risks: The five largest customers generated 52% of 2015 revenue; BP contributed 18% and Petrobras 14%. Ensco retained windstorm-loss risk for eight jackups and nine floaters in the U.S. Gulf of Mexico. Insurance renewal was scheduled for May 31, 2016.
- Other contingencies: The filing discusses pending asbestos claims, environmental assessments and anti-bribery inquiries. The company said it could not predict the ultimate outcomes of certain matters, including the Brazil-related investigations.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether the $5.757 billion backlog converts to revenue as scheduled, and how much is affected by cancellations, renegotiations, downtime or day-rate cuts.
- The status and financial consequences of the Petrobras DS-5 contract dispute, related investigations and DS-5 receivable recovery.
- Liquidity, covenant headroom, credit ratings and access to the undrawn revolver if operating cash flow declines further.
- Actual 2016 capital spending, delivery timing and contracting prospects for the uncontracted newbuild rigs.
- Further fleet impairments, retirements or asset-sale proceeds, and the ability to sustain even the reduced dividend.