Ensco plc Form 10-Q — quarter ended September 30, 2013
Entity note: The supplied filing is for Ensco plc, not Valaris Ltd. It reports the three and nine months ended September 30, 2013; interim financial statements are unaudited and were reviewed by KPMG.
Business context
Ensco operated 75 offshore drilling rigs, including six under construction. Its reportable segments are Floaters and Jackups. Management described demand as strong in both markets and highlighted the company’s fleet expansion and high-grading strategy.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,266.2m | $1,123.5m | $3,664.2m | $3,215.2m |
| Operating income | $456.3m | $433.6m | $1,310.6m | $1,183.1m |
| Net income attributable to Ensco | $378.8m | $343.5m | $1,056.8m | $950.2m |
| Diluted EPS | $1.62 | $1.48 | $4.53 | $4.10 |
| Operating cash flow from continuing operations | Not stated for quarter | Not stated for quarter | $1,432.4m | $1,596.6m |
- Q3 revenue grew 13% and operating income 5% year over year; nine-month revenue rose 14% and operating income 11%. Q3 operating margin was approximately 36.0%, versus 38.6% a year earlier; nine-month margin was approximately 35.8%, versus 36.8%.
- Growth reflected newbuild rigs entering service and higher average day rates, partly offset by lower floater utilization, increased personnel costs and higher drilling expenses. Q3 utilization was 79% for Floaters and 90% for Jackups; average day rates were $416,201 and $125,434, respectively.
- Cash and equivalents were $325.4m at September 30, down from $487.1m at year-end 2012. Working capital was $576.6m and the current ratio 1.6. Nine-month capital expenditures were $1,282.7m, implying operating cash flow less capex of approximately $149.7m.
- Total debt was $4,791.1m and debt to total capital was 27.6%. The company had no borrowings under its $2.0bn revolving facility or commercial paper program. The facility matures in 2018 and includes a maximum 50% debt-to-capital covenant.
- Nine-month dividends paid were $350.2m; the quarterly dividend was $0.50 per share. Cash declined by $161.7m over the nine months.
Material changes and unusual items
- Floater utilization fell to 79% in Q3 from 90% a year earlier, while Jackup utilization increased to 90% from 87%. Higher day rates lifted revenues in both segments.
- Q3 other income included a $30.6m reimbursement from the Mexican tax authority resolving a dispute connected with the Seahawk spin-off. The company recorded $7.4m of related tax liability.
- OGX’s financial condition deteriorated and it defaulted on an interest payment on October 1, 2013. Ensco did not recognize Q3 revenue for services where collection was not reasonably assured and recorded an $11.0m provision for doubtful accounts. Net OGX receivables were $3.6m; remaining OGX contract obligations were excluded from the reported $11.2bn backlog.
- Ensco sold the Pride Pennsylvania jackup during Q1 2013 for $15.5m net proceeds, recognizing a $1.1m loss. Discontinued operations reduced nine-month net income by $0.9m, compared with a $23.4m loss in the prior-year period.
Outlook, commitments and risks
- Management expected floater demand growth to continue into 2014, particularly for ultra-deepwater rigs, and described jackup markets as tight in several regions. It also warned that newbuild deliveries could pressure utilization and day rates; more than 100 floaters and 100 jackups were reported under construction industry-wide.
- Management projected 2013 capital spending of approximately $1.3bn on newbuilds, $300m on rig enhancements and $250m on minor upgrades. Six rigs were under construction, with $2.257bn of remaining contractual construction payments at September 30. Three new drillships were uncontracted, as were ENSCO 122 and ENSCO 110.
- Management said cash, operating cash flow and available borrowing capacity should fund investment, contractual needs and dividends. The company cited $11.2bn in backlog, subject to the OGX exclusion noted above.
- Key exposures include offshore operational downtime, storms, construction delays and cost, market competition and newbuild supply, customer credit, changing regulation, foreign exchange and insurance limitations. A hypothetical 10% adverse currency move was estimated to produce $18.9m of unrealized losses, with approximately $15.2m offset by derivatives.
- Contingencies include ENSCO 74-related tanker claims exceeding $5m and pipeline claims exceeding $26m, with trial scheduled for April 2014; asbestos claims involving approximately 100 plaintiffs, for which exposure could not be estimated; and other legal and environmental matters. Ensco said it did not expect these matters to materially affect results, but outcomes were uncertain.
Important facts for investors to verify
- Confirm the issuer identity: this filing is Ensco plc’s, despite the request naming Valaris Ltd.
- Track OGX collections, any contract recovery and the effects of unrecognized revenue and the doubtful-account provision.
- Assess whether utilization and day rates can hold up as newbuild rigs enter the market, especially for Floaters.
- Review construction schedules, remaining funding commitments, actual capital spending and whether uncontracted rigs secure work.
- Monitor cash generation after capital expenditures, liquidity, leverage and dividend coverage, along with the outcome of material legal contingencies.