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, 2014—not a filing under the name Valaris Ltd. The text identifies Ensco as an offshore drilling contractor with Floater and Jackup reporting segments. KPMG performed an interim review, not an audit.
Financial performance and liquidity
| Metric | Q2 2014 | Six months 2014 |
|---|---|---|
| Revenue | $1,203.0 million, up 6% year over year | $2,332.9 million, up 7% |
| Operating income (loss) | $(540.1) million | $(140.1) million |
| Net income (loss) attributable to Ensco | $(1,172.7) million | $(880.2) million |
| Basic and diluted EPS | $(5.07) | $(3.82) |
| Operating cash flow from continuing operations | Not separately provided for the quarter | $989.3 million |
| Capital expenditures | Not separately provided for the quarter | $631.8 million |
Results included a $991.5 million noncash impairment charge on four older floaters in continuing operations and a $508.8 million after-tax impairment on five floaters classified as held for sale and reported in discontinued operations. Discontinued operations also included operating losses and disposal gains. Contract drilling expense rose 9% in Q2 and 12% for the half, faster than revenue; depreciation and general and administrative expense were comparatively smaller contributors.
At June 30, cash and cash equivalents were $145.0 million and short-term investments were $33.3 million. Working capital was $685.8 million and the current ratio was 1.6. Total debt was $4,726.6 million; debt to total capital was 29.0%, versus 27.1% at year-end 2013. The $2.0 billion revolving credit facility and commercial paper program had no amounts outstanding. Six-month dividends paid were $351.2 million, or $1.50 per share.
Material changes versus the prior comparable period
- Revenue increased, primarily due to newbuild rigs entering service and higher average day rates, partly offset by lower utilization.
- Floater utilization fell to 77% in Q2 from 87% a year earlier; average floater day rates rose to $479,176 from $430,281. Jackup utilization was 89% versus 87%, and average jackup day rates rose to $134,456 from $121,631.
- Operating results shifted from income to loss, primarily because of the floater impairments and weaker floater utilization. Q2 net loss attributable to Ensco compares with net income of $360.9 million in Q2 2013.
- Continuing-operations operating cash flow increased to $989.3 million from $731.3 million for the six-month period. Capital spending increased to $631.8 million from $591.4 million, while cash dividends rose to $351.2 million from $233.3 million.
- Five older floaters were classified as held for sale; four additional older floaters were impaired. Goodwill of the Floaters reporting unit was not impaired, but its estimated fair value exceeded carrying value by only about 7%.
Outlook, risks and unusual items
Management described the floater market as increasingly competitive: operator spending reductions, drilling-program delays and newbuild supply were pressuring utilization and day rates, particularly for older, lower-specification rigs. Management expected this pressure to persist, while anticipating opportunities for premium rigs in several regions. Jackup demand was described as generally strong, but newbuild deliveries and shorter contract terms could pressure rates and utilization.
Management reported $10.7 billion of contract backlog and approximately $2.0 billion of borrowing capacity, and expected to fund operations, capital projects and dividends primarily through operating cash flow and, if needed, borrowing. It intended to continue quarterly dividends, subject to the board’s review of financial and investment needs. Estimated 2014 capital expenditures were approximately $800 million for newbuild construction, $570 million for rig enhancements and $330 million for minor upgrades and improvements. The filing also lists $2.71 billion of remaining construction-contract payments, with timing dependent partly on shipyard milestones.
In July 2014, the U.K. enacted tax changes expected to increase second-half 2014 income tax expense by approximately $25 million. Significant risks include market oversupply and further impairment, project delays and cost overruns, operational downtime, hurricane exposure, and regulatory or tax changes. Ensco retained windstorm loss risk for eight Gulf of Mexico jackups and nine floaters after choosing not to purchase hull and machinery windstorm coverage. The filing also describes asbestos claims, environmental assessments, an ENSCO 29 wreck-removal demand, and unresolved Pride-related governmental inquiries; outcomes or exposure are not fully estimable in several matters.
Most important facts for investors to verify
- Confirm issuer identity and whether this Ensco plc filing is the intended document for the Valaris request.
- Review the assumptions supporting the $991.5 million and $508.8 million floater impairment charges, the held-for-sale valuations, and the narrow goodwill valuation cushion.
- Track floater utilization, day rates, newbuild deliveries, contract backlog conversion, and the status of rigs and shipyard projects.
- Assess whether operating cash flow and available borrowing capacity can support planned capital spending and dividends if market conditions deteriorate.
- Monitor Gulf of Mexico hurricane exposures, tax changes, litigation and environmental matters, including potential uninsured or unquantified losses.