Business context and reporting period
This is Ensco plc’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2014—not a filing under the name Valaris Ltd. Ensco operated a 71-rig offshore fleet, including seven rigs under construction, across Floaters and Jackups. KPMG performed an interim review, not an audit.
Financial results and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,261.2m | $1,162.2m | $3,594.1m | $3,332.8m |
| Operating income | $559.6m | $457.9m | $419.5m | $1,287.4m |
| Operating margin | 44.4% | 39.4% | 11.7% | 38.6% |
| Net income (loss) attributable to Ensco | $429.4m | $378.8m | $(450.8)m | $1,056.8m |
| Diluted EPS | $1.83 | $1.62 | $(1.97) | $4.53 |
| Cash from continuing operating activities | Not separately presented | Not separately presented | $1,585.3m | $1,349.4m |
- Q3 revenue rose 9%; operating income increased 22%. Q3 utilization was 88% versus 90%, while average day rate was $236,736 versus $224,640.
- Nine-month revenue grew 8%, but reported operating income fell sharply, principally reflecting a $991.5m non-cash impairment charge on four older floaters. A further $508.8m after-tax impairment on five floaters classified as held for sale was included in discontinued operations. Nine-month discontinued operations also included operating losses and disposal gains.
- For the nine months, operating cash flow increased 17% to $1.585bn. Capital expenditures were $1.247bn, dividends paid were $526.7m, and cash and cash equivalents increased to $1.174bn from $165.6m. The cash-flow statement reports $1.008bn net cash increase, including discontinued operations and financing.
- At September 30, cash was $1.174bn, restricted cash $211.8m, short-term investments $45.3m, working capital $1.899bn, and current ratio 2.7. Restricted cash related to rig-sale proceeds and was not freely available at quarter-end.
- Total debt was $5.958bn, up from $4.766bn at year-end 2013; debt-to-total-capital was 33.5%, versus 27.1%. The company issued $1.25bn of senior notes and reported no borrowings under its revolving credit facility or commercial paper program.
- Quarterly cash dividends were $0.75 per share; nine-month dividends were $2.25 per share.
Changes, outlook, risks and unusual items
- Management described the floater market as highly competitive: lower operator spending and newbuild supply pressured utilization and day rates, especially for older, less capable rigs. Jackup demand was described as relatively stable, but newbuild deliveries posed downside pressure in some markets.
- Management expected pressure on floater utilization and rates to persist and noted uncertainty about the effect of falling oil prices on customer drilling plans. It cited a $10.9bn contract backlog and anticipated 2014 capital expenditures of approximately $750m for newbuilds, $560m for enhancements and $340m for minor upgrades.
- Five older floaters were being marketed for sale; four other older floaters were impaired. Floater goodwill of $3.1bn was not impaired in the May test, but estimated fair value exceeded carrying value by only about 7%. Management said a 50-basis-point increase in discount rate, a 1.5% reduction in terminal growth, or a 5% reduction in forecast market day rates, each considered independently, would reduce estimated fair value below carrying value.
- Four contracted Pemex jackups were sold in a sale-leaseback for $211.8m; proceeds remained restricted at quarter-end. A $7.5m gain was recognized and $29.4m deferred over the charter terms.
- The $2.25bn revolving facility was extended to September 2019 and increased from $2.0bn. It requires debt to total capitalization of no more than 50%; reported leverage was 33.5%.
- Key exposures include new rig supply, weaker oil prices or customer spending, contract delays or cancellations, rig downtime and impairment risk. Disclosed contingencies include asbestos litigation, the ENSCO 29 wreck-removal demand, environmental proceedings, and preliminary government inquiries related to legacy Pride FCPA matters; outcomes or potential losses were not fully determinable in the filing.
- Management intended to continue quarterly dividends but said the board could change timing or amounts based on profitability, liquidity, financial condition, reinvestment opportunities and capital needs.
Investor verification priorities
- Confirm the issuer and security identity: the supplied filing is for Ensco plc, despite the request metadata naming Valaris Ltd.
- Review the assumptions underlying the $991.5m floater impairment and the held-for-sale valuations, and monitor for further impairment, including the $3.274bn goodwill balance.
- Track floater and jackup utilization, day rates, backlog conversion, newbuild deliveries and customer capital-spending plans.
- Distinguish unrestricted cash from the $211.8m restricted sale proceeds; assess planned capital spending, dividends, debt maturities and available facility capacity together.
- Monitor whether the five held-for-sale rigs are sold, the required redemption of the $19m ENSCO 7500-related MARAD bonds, and developments in material litigation and investigations.