Filing summary
Entity and period: The supplied filing is Ensco plc’s Form 10-K for the fiscal year ended December 31, 2010, filed February 24, 2011. It is not a Valaris-branded filing; the text identifies the registrant as Ensco plc. Although the request specifies 2010 Q4, this is an annual report; it includes unaudited quarterly results but no separate Q4 narrative summary.
Business context and financial performance
Ensco provided offshore contract drilling services primarily under day-rate contracts. At year-end it operated 40 jackups, five ultra-deepwater semisubmersibles and one barge rig, with three deepwater rigs under construction. The filing reports four operating segments: Deepwater, Asia Pacific, Europe and Africa, and North and South America.
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $1,696.8 million | $1,888.9 million | Down 10% |
| Operating income | $626.3 million | $926.4 million | Down 32% |
| Operating margin | 36.9% | 49.0% | Down 12.1 percentage points |
| Income from continuing operations | $548.5 million | $755.2 million | Down 27% |
| Net income attributable to Ensco | $579.5 million | $779.4 million | Down 26% |
| Diluted EPS | $4.06 | $5.48 | Down 26% |
| Cash flow from continuing operations | $816.7 million | $1,185.6 million | Down 31% |
| Capital expenditures | $875.3 million | $857.2 million | Up 2% |
| Cash and cash equivalents at year-end | $1,050.7 million | $1,141.4 million | Down $90.7 million |
| Working capital / current ratio | $1,087.7 million / 4.1 | $1,167.9 million / 3.4 | Working capital lower; ratio higher |
| Long-term debt, net of current maturities | $240.1 million | $257.2 million | Down $17.1 million |
Operating cash flow less reported capital expenditures was negative $58.6 million in 2010. Total debt reported before current maturities was $257.3 million; the company also had no borrowings outstanding under its $700 million revolving credit facility at year-end. The long-term-debt-to-total-capital ratio was 3.9%, versus 4.5% in 2009.
Average fleet utilization was 77%, versus 75% in 2009, while average day rate fell to $128,784 from $163,568. Deepwater revenue rose 87% to $475.2 million as newly delivered rigs entered service, but results were affected by Gulf of Mexico permitting delays. Jackup-market weakness reduced Asia Pacific and Europe and Africa revenue; North and South America utilization improved, but lower day rates weighed on revenue.
Material changes and notable items
- Revenue and operating income continued to decline amid lower jackup utilization and day rates, excess rig supply and weaker drilling activity. The BP Macondo incident and related Gulf of Mexico permitting and regulatory actions also affected utilization and customer activity.
- Deepwater revenue increased with the start-up of ENSCO 8500, ENSCO 8501 and ENSCO 8502. The company sold four jackups during 2010 for aggregate cash proceeds of $167.5 million and acquired ENSCO 109 for $186.0 million.
- The company recorded a $12.2 million impairment of its cold-stacked barge rig, ENSCO I. Gains on sales of ENSCO 50, 51, 57 and 60 contributed to 2010 discontinued-operations income; the reported net income from discontinued operations was $37.4 million.
- General and administrative expense increased 35% to $86.1 million, attributed primarily to higher share-based compensation, London headquarters costs and reorganization-related professional fees.
- Quarterly cash dividends increased from $0.025 to $0.35 per share in 2010; cash dividends paid totaled $153.7 million.
Liquidity, backlog, outlook and risks
Contract backlog was $3,068.7 million as of February 1, 2011, up from $2,955.1 million a year earlier. Management said cash, operating cash flow and backlog were expected to support operations and rig construction, but cautioned that 2011 revenue, operating income and cash flow might not match 2010 levels. The filing says the prior market downturn and Gulf of Mexico regulatory effects were expected to continue weighing on results during 2011.
Management projected 2011 capital expenditures of approximately $190 million for ENSCO 8500 Series construction, $95 million for two new harsh-environment jackups, $125 million for enhancements and $100 million for minor upgrades and improvements. The existing 2010-end contractual-obligations table does not include all commitments from the two jackups contracted for construction in February 2011 or the disclosed $340 million deferral of certain construction payments.
On February 6, 2011, Ensco agreed to acquire Pride International for cash and shares, with estimated total consideration of approximately $7.4 billion. The proposed transaction was subject to shareholder and regulatory approvals and other closing conditions, with a second-quarter 2011 closing anticipated. Ensco arranged a $2.75 billion unsecured bridge commitment to help fund the cash consideration. The filing described expected increased leverage, dilution, integration costs and execution, regulatory and financing risks; completion was not assured.
- Operational and market risks: cyclical offshore drilling demand, new rig supply, customer contract termination or renegotiation, and customer concentration. The five largest customers represented 43% of 2010 revenue; Chevron and PEMEX represented 14% and 11%, respectively.
- Gulf of Mexico exposure: new safety rules, permit delays and possible further restrictions following the Macondo incident. Gulf of Mexico operations generated $421.3 million, or 25%, of 2010 revenue.
- Insurance and contingencies: Ensco did not buy windstorm loss or damage insurance for its nine Gulf of Mexico jackups and retained that risk. ENSCO 74-related claims and wreck removal, ENSCO 69 insurance recovery and litigation, ENSCO 29 wreck removal, and asbestos claims remained relevant contingencies.
- Compliance: The FCPA investigation relating to former Nigerian operations was essentially concluded; the SEC said it did not intend to recommend enforcement action, while a Department of Justice determination remained pending. Potential outcomes and costs were not clear.
- Investments and taxes: $50.1 million par value of auction-rate securities remained illiquid, carried at $44.5 million. Tax outcomes related to the U.K. redomestication, tax rules and audits were uncertain.
Important facts for investors to verify
- Confirm the requested issuer and period: the source is Ensco plc’s FY2010 10-K, not a Valaris filing or a standalone Q4 filing.
- Review the audited statements and quarterly data for the full-year decline in earnings and cash flow, and reconcile operating cash flow with the elevated capital spending.
- Check subsequent developments in the Pride transaction, including approvals, financing, final consideration, debt assumed and integration results.
- Monitor Gulf of Mexico permitting, utilization and day rates, and whether customer contracts or backlog convert into revenue as expected.
- Assess the timing, cost and funding of newbuild commitments, including the payment deferral and the rigs still without contracts.
- Track outcomes and insurance recoveries for the ENSCO 69, ENSCO 74 and ENSCO 29 matters, the remaining FCPA process, and liquidity or valuation changes in auction-rate securities.