Business context and reporting period
Filing identity: The supplied filing is Ensco plc’s Form 10-Q for the quarter ended September 30, 2011—not a filing identified as Valaris Ltd. Verify that this is the intended issuer and filing.
Ensco provides offshore contract drilling services. On May 31, 2011, it completed its $7.4 billion acquisition of Pride International, expanding its fleet and adding deepwater, midwater and jackup operations. 2011 results include Pride only from the merger date, so comparisons with 2010 are not like-for-like. The interim financial statements were reviewed by KPMG, not audited.
Key financial metrics
| Metric (USD millions, except per-share data) | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | 915.6 | 428.3 | 1,841.3 | 1,288.3 |
| Operating income | 261.5 | 158.0 | 488.8 | 483.4 |
| Net income attributable to Ensco | 204.5 | 130.5 | 371.0 | 446.6 |
| Diluted EPS | $0.88 | $0.91 | $2.03 | $3.13 |
| Cash from continuing operations | Not reported by quarter | Not reported by quarter | 402.0 | 521.4 |
- Reported operating margin was approximately 28.6% for Q3 2011 versus 36.9% in Q3 2010; for the nine-month periods, approximately 26.5% versus 37.5%. The acquisition materially affects these comparisons.
- Excluding merger contribution, Q3 revenue increased $43.1 million (10%) and operating income increased $24.0 million (15%) year over year. For the nine-month period, excluding the merger, revenue declined $42.4 million (3%) and operating income declined $100.0 million (21%).
- At September 30, cash was $479.9 million, working capital $259.2 million and the current ratio 1.2, compared with $1,050.7 million, $1,087.7 million and 4.1 at December 31, 2010.
- Total debt was $5,124.6 million, including $175.0 million of commercial paper; debt-to-total-capital was 32.4%, up from 4.2%. Cash less total debt was approximately negative $4.6 billion.
- Operating cash flow of $402.0 million less $498.4 million of property and equipment additions implies a cash shortfall of about $96 million before acquisitions, financing and other investing flows. Cash decreased $570.8 million during the nine months.
- Quarterly and nine-month dividends were $0.35 and $1.05 per share, respectively. Nine-month cash dividends paid were $211.4 million.
Material changes versus prior comparable periods
- Reported revenue rose 114% in Q3 and 43% for the first nine months, principally reflecting Pride’s inclusion from May 31. Q3 net income attributable to Ensco increased, but diluted EPS fell from $0.91 to $0.88 as the weighted-average share count rose substantially after 85.8 million ADSs were issued in the merger.
- For the nine-month period, net income attributable to Ensco fell despite higher reported revenue; 2010 included $33.7 million of income from discontinued operations, while 2011 had higher interest expense following merger financing and lower legacy operating results excluding Pride.
- Debt increased from $257.3 million to $5.1 billion, while cash declined by $570.8 million. Property and equipment increased to $12.3 billion and goodwill to $3.3 billion, primarily due to the acquisition.
- Q3 contract drilling expense was $477.5 million versus $194.1 million; depreciation was $135.8 million versus $55.6 million; and G&A was $40.8 million versus $20.6 million. Merger-related transaction costs were $23.8 million for the nine months and were expensed.
Outlook, commentary, risks and unusual items
- Management expected 2011 capital expenditures, excluding the merger consideration, of approximately $660 million for newbuild construction, $235 million for rig enhancements and $200 million for other upgrades and improvements. It anticipated funding needs with cash, operating cash flow and commercial paper or credit facilities; cash flows were expected to support construction and debt service through 2014.
- Management described deepwater demand as stable to improving, with stronger tenders in Brazil and West Africa, but expected near-term midwater utilization and day rates to remain under pressure. Jackup demand and day-rate trends were viewed as improving in several regions, though newbuild deliveries and oversupply—especially standard-duty jackups—were risks. No specific earnings or revenue guidance was provided.
- Gulf of Mexico permitting and regulatory delays linked to the Macondo incident had affected utilization and day rates; management warned that further delays, safety requirements or permitting changes could materially harm results. The Gulf supplied 27% of Q3 and 29% of nine-month revenue.
- Other key risks include integration and synergy execution, increased debt service, shipyard and newbuild delays, rig downtime, commodity-driven drilling demand, political and currency exposure, insurance limits and possible asset or goodwill impairment. A hypothetical 10% adverse currency move implied approximately $15.5 million of unrealized losses before some offsets from hedged future transactions.
- Contingencies include Seahawk bankruptcy litigation and approximately $50 million of related credit support; the Pride FCPA deferred prosecution agreement and potential consequences of noncompliance; ENSCO 74 removal and third-party claims; ENSCO 29 wreck removal and an insurance coverage dispute; asbestos claims; and environmental assessments. Management generally did not expect these matters to have a material adverse effect, but outcomes remain uncertain. A $21 million ENSCO 74 removal liability was recorded with a corresponding recovery receivable.
- Unusual income items included an $10.8 million ENSCO 69 insurance settlement gain in Q3 and a $4.8 million nine-month gain on repurchase of auction-rate securities. Pride acquisition purchase-price allocations, including approximately $2.96 billion of goodwill, remained provisional.
Most important facts for investors to verify
- Confirm the issuer and security: this is Ensco plc’s 2011 filing, not a Valaris Ltd filing.
- Review post-merger, pro forma and legacy-only results separately; reported year-over-year growth incorporates Pride for only part of 2011.
- Assess the increased debt burden, interest costs, liquidity and funding plan against remaining rig-construction commitments and contract backlog.
- Check realized utilization, day rates, permit status and contract starts—particularly in the U.S. Gulf of Mexico and midwater markets.
- Track merger integration, provisional purchase accounting, potential impairments and the resolution or insurance recovery of material contingencies.