Filing summary
Entity and period: The supplied filing is Ensco plc’s unaudited Form 10-Q for the quarter ended June 30, 2011, filed August 9, 2011. It is not filed under the name Valaris Ltd; the filing identifies Ensco plc as the registrant. Results include Pride International only from the May 31, 2011 merger date, so comparisons with 2010 are not like-for-like.
Business context
Ensco completed its $7.4 billion acquisition of Pride on May 31, funded with cash and 85.8 million Ensco ADSs and including assumed debt. The combined company reported a 76-rig fleet and organized operations into Deepwater, Midwater and Jackup segments. Pride contributed $151.2 million of revenue and $24.3 million of net income after closing during the quarter.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $564.2m | $411.4m | $925.7m | $860.0m |
| Operating income | $147.0m | $131.5m | $227.3m | $325.4m |
| Operating margin | 26.1% | 32.0% | 24.6% | 37.8% |
| Net income attributable to Ensco | $101.9m | $126.3m | $166.5m | $316.1m |
| EPS, diluted | $0.59 | $0.89 | $1.06 | $2.22 |
| Cash from continuing operations | Not provided for quarter | Not provided for quarter | $175.8m | $375.4m |
For Q2, revenue increased 37% year over year, substantially reflecting Pride’s inclusion for one month. Excluding the merger contribution, revenue was described as comparable to the prior-year quarter, while operating income declined $10.4 million, primarily due to merger-related general and administrative costs. For the six-month period, excluding Pride’s post-close contribution, revenue declined $85.5 million (10%) and operating income declined $124.0 million (38%), driven mainly by lower Jackup day rates, ENSCO 7500 downtime and merger costs.
Six-month contract drilling expense was $477.9 million, depreciation $143.0 million and general and administrative expense $77.5 million. Merger-related transaction costs were $23.8 million for the six months, including $17.3 million in Q2. Interest expense, net of capitalized interest, was $23.7 million for the six months; all comparable-period 2010 interest expense was capitalized.
Financial position and liquidity
At June 30, 2011, cash and cash equivalents were $554.0 million, working capital $371.6 million and the current ratio 1.3, compared with $1,050.7 million, $1,087.7 million and 4.1 at December 31, 2010. Long-term debt was $4.917 billion, versus $240.1 million at year-end; the filing reports long-term debt at 31.7% of total capitalization. The balance sheet also shows $89.9 million of short-term commercial paper and $47.5 million of current maturities.
Six-month investing cash outflow was $2.882 billion, including $2.656 billion for the Pride acquisition and $265.6 million of property and equipment additions. Financing provided $2.209 billion, principally from $2.463 billion of senior-note proceeds. Cash decreased $496.7 million over the period. Ensco had $1.45 billion available under its five-year revolver and $450 million under a 364-day facility, with no borrowings under either at quarter-end; commercial paper outstanding was $89.9 million. The company reported $1.780 billion of remaining construction commitments as of June 30.
Outlook, risks and unusual items
- Management expected 2011 capital expenditures, excluding acquisition cash consideration, of approximately $630 million for newbuilds, $235 million for rig enhancements and $150 million for other upgrades and improvements. It anticipated funding construction and debt service from cash, operating cash flow and available borrowing capacity. This was expenditure planning, not earnings guidance.
- Management described improving tender activity in deepwater and jackup markets but near-term pressure in midwater from competition and potential oversupply. More than 70 deepwater and 70 jackup newbuilds were reported under construction industry-wide, creating supply and utilization risks.
- Macondo-related permitting delays and new Gulf of Mexico regulatory and blowout-preventer requirements continued to affect utilization and day rates. Gulf of Mexico operations generated 28% of Q2 revenue and 31% of first-half revenue.
- Ensco retained windstorm risk for 11 Gulf of Mexico jackups after electing not to insure them for hull loss or damage. The filing also identifies hurricane exposure, rig downtime, construction delays, debt service, integration execution, impairment and customer contract termination as material risks.
- Legal and contingent matters include Pride’s FCPA deferred prosecution agreement and potential inquiries by other authorities; Seahawk bankruptcy claims and approximately $50 million of related credit support; and legacy rig-loss, environmental, shareholder and asbestos matters. Management generally did not expect these matters to have a material adverse effect, while noting outcomes could not be assured. A $10.8 million ENSCO 69 insurance settlement gain was expected upon receipt in Q3 2011.
- The interim statements received an independent accountant’s review, not an audit opinion. Management said disclosure controls were effective and planned to exclude Pride from its year-end internal-control assessment.
Facts investors should verify
- Confirm the issuer and security being analyzed: this filing is for Ensco plc, not Valaris Ltd.
- Assess post-merger operating performance on a comparable basis, separating Pride’s contribution and one-time merger expenses from legacy Ensco trends.
- Review debt service, covenant headroom, refinancing needs and the funding plan for the $1.780 billion of construction commitments.
- Test the durability and cancellation terms of the reported $9.266 billion contract backlog, particularly amid permitting delays and industry newbuild supply.
- Confirm actual capital spending, rig delivery and contract-start timing, and any material changes in Gulf of Mexico insurance coverage or contingent liabilities.