Business context and reporting period
Filing identity: The supplied filing is Ensco plc’s Form 10-K for the fiscal year ended December 31, 2011, filed February 24, 2012—not a Valaris Ltd filing. It includes fourth-quarter 2011 data. Ensco provided offshore contract drilling services under day-rate contracts and reported Deepwater, Midwater and Jackup segments.
Ensco completed its $7.4 billion acquisition of Pride International on May 31, 2011. Accordingly, 2011 results include Pride only from that date; reported year-over-year comparisons are not like-for-like. The combined fleet comprised 77 rigs, including rigs under construction, operating across more than 20 countries.
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $2,842.7 million | $1,696.8 million |
| Operating income | $794.3 million | $626.3 million |
| Net income attributable to Ensco | $600.4 million | $579.5 million |
| Diluted EPS | $3.08 | $3.80 |
| Operating cash flow | $732.3 million | $816.7 million |
| Capital expenditures | $741.6 million | $875.3 million |
- Reported revenue increased 68% and operating income 27%, largely reflecting Pride consolidation. Net income attributable to Ensco rose about 4%; diluted EPS fell from $3.80 to $3.08, with weighted-average diluted shares increasing from 141.0 million to 192.6 million.
- Operating margin was approximately 28% in 2011, versus 37% in 2010; net income attributable to Ensco was approximately 21% of revenue, versus 34%. The filing attributes lower operating performance, excluding the merger contribution, mainly to weaker Jackup day rates, ENSCO 7500 downtime and merger-related costs.
- By segment, 2011 revenue and operating income were Deepwater $1,284.7 million and $446.9 million; Midwater $273.8 million and $70.5 million; Jackup $1,231.8 million and $434.4 million.
- Fourth-quarter 2011 revenue was $1,001.4 million, operating income $305.5 million, net income attributable to Ensco $229.4 million and diluted EPS $0.99. Fourth-quarter 2010 comparatives were $408.5 million, $142.9 million, $132.9 million and $0.93, respectively; the increase principally reflects the acquisition and is not a comparable-fleet growth rate.
- At December 31, cash and equivalents were $430.7 million, working capital $321.3 million and current ratio 1.2, down from $1,050.7 million, $1,087.7 million and 4.1, respectively, at year-end 2010.
- Total debt rose to $5,050.1 million from $257.3 million; debt was 31.7% of total capitalization versus 4.2%. The company had $125 million of commercial paper outstanding, no borrowings under its $1.45 billion five-year revolver or $450 million 364-day facility, and $10.7 billion of stated available revolving credit and commercial-paper capacity combined.
- Contract backlog was $9.666 billion at year-end 2011, compared with $3.069 billion a year earlier; the increase largely reflects Pride and new Deepwater contracts. Backlog is firm commitments as defined by the company, but contracts may be terminated or suspended.
Material changes, outlook and risks
- Acquisition and funding: The Pride transaction was funded with $2.8 billion cash and 85.8 million Ensco ADSs, alongside debt issuance and assumed Pride debt. Goodwill was $3.289 billion at year-end, including approximately $2.953 billion recognized in the acquisition. The company reported no goodwill impairment in its 2011 annual test.
- Investment plans: Management expected 2012 capital spending of approximately $1.2 billion for newbuilds, $380 million for rig enhancements and $250 million for minor upgrades. Construction commitments totaled $1.815 billion, with $920.5 million scheduled for 2012. One of three new harsh-environment jackups was contracted; management also expected to secure work for certain newbuilds, but this was not assured.
- Market commentary: Management cited improving 2011 tender activity and demand in Deepwater and Jackup markets, improving U.S. Gulf of Mexico permit issuance, and potential near-term day-rate improvement in several regions. It expected Midwater utilization and rates to remain pressured near term. More than 150 industry newbuild rigs were reported on order or under construction, creating oversupply risk.
- Liquidity and dividends: Management expected operating cash flow, commercial paper and credit facilities to support near-term needs and construction commitments, while noting cash flows would be directed principally to newbuild spending and debt service. The company paid $1.40 per share in 2011 dividends and said it intended to continue quarterly dividends, subject to board discretion and financial needs.
- Operational, regulatory and insurance risks: Offshore accidents, equipment downtime, hurricanes, permit delays and post-Macondo safety requirements could reduce utilization, delay work or increase costs. Ensco had no Gulf of Mexico windstorm damage insurance for 11 jackups and retained significant related loss exposure; coverage for other rigs also had deductibles and limits.
- Legal and contingent items: Pride’s prior FCPA settlement involved $56.2 million in penalties, disgorgement and interest; Ensco assumed obligations under a DOJ deferred prosecution agreement and disclosed preliminary foreign-authority inquiries. A $43.7 million payment followed Mexico’s draw on Seahawk-related letters of credit; recovery was uncertain. Other disclosed matters included ENSCO 74 wreck removal and litigation, asbestos claims, and environmental proceedings in Brazil and Spain. The filing recorded a $2.0 million liability for Brazilian assessments.
- Reporting controls: The financial statement audit opinion was unqualified. Management and the auditor excluded Pride from the 2011 internal-control assessment; Pride represented 39% of consolidated revenue and 46% of year-end assets. Management concluded Ensco’s assessed controls were effective.
Most important facts for investors to verify
- Confirm the issuer and filing period: this is Ensco plc FY 2011, not Valaris Ltd or a standalone Q4 filing.
- Separate acquired Pride’s contribution from legacy Ensco performance when assessing revenue, earnings, margins and cash flow.
- Review debt maturities, interest costs, covenant headroom and the funding plan for 2012 capital commitments and dividends.
- Track backlog conversion, contract commencements, day rates, utilization and any cancellations or delays, particularly for newbuilds.
- Assess uninsured Gulf of Mexico hurricane exposures, post-Macondo permitting and regulatory effects, and shipyard delivery and cost risks.
- Monitor outcomes and potential recoveries relating to the Pride FCPA matter, Seahawk/Mexico credit support and disclosed litigation and environmental contingencies.