Ensco Rowan plc (now associated with Valaris) — Q1 2019 Form 10-Q
Issuer and period: The supplied filing is Ensco Rowan plc’s unaudited quarterly report for the three months ended March 31, 2019; it is not filed under the name Valaris Ltd. The quarter’s reported financial results exclude Rowan, whose results were consolidated beginning April 11, 2019, when the combination closed. KPMG performed an interim review, not an audit.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $405.9 million | $417.0 million |
| Operating loss | $81.3 million | $51.3 million |
| Net loss attributable to Ensco Rowan | $190.4 million | $140.1 million |
| Loss per share, basic and diluted | $1.75 | $1.29 |
| Cash used in operating activities | $24.4 million | Cash provided of $39.5 million |
| Capital expenditures | $29.0 million | $269.3 million |
- Operating margin was approximately negative 20.0%, versus negative 12.3% a year earlier, calculated from reported revenue and operating loss.
- Contract drilling expense rose 2% to $332.6 million; depreciation increased 9% to $125.0 million. Net interest expense was $81.0 million, compared with $65.6 million.
- At March 31, cash and cash equivalents were $298.4 million and short-term investments were $245.0 million. Working capital was $695.0 million and the current ratio was 2.3.
- Long-term debt carrying value was $5.019 billion; debt principal was $5.161 billion, or 39.5% of total capitalization. The company had no borrowings under its credit facility at March 31.
Changes and business developments
- Revenue declined 3% year over year, primarily because of two rig sales and lower floater day rates, partly offset by higher jackup utilization. Floater revenue fell 10%; jackup revenue rose 9%.
- Overall utilization increased to 58% from 54%; floater utilization was 43% versus 44%, and jackup utilization was 68% versus 61%. Average day rates declined to $120,935 from $132,486 overall, including a decrease in floaters to $240,440 from $262,661.
- On April 11, 2019, the company completed its all-stock Rowan combination, issued 88.3 million shares valued at approximately $1.4 billion, changed its name to Ensco Rowan plc and effected a four-for-one reverse stock split. The combined fleet was described as 81 rigs, excluding two Rowan rigs slated for retirement and ENSCO 97, which was scrapped.
- The combination’s preliminary purchase accounting indicated a $753.7 million bargain purchase gain, expected to be recorded in Q2 2019. The estimate was provisional and subject to measurement-period adjustments. Rowan’s approximately $2.5 billion of debt principal raised combined-company pro forma debt principal to $7.681 billion.
- Q1 pro forma results assuming Rowan had been combined from January 1, 2018 were revenue of $580.4 million and net loss of $271.6 million in 2019, versus revenue of $628.2 million and net loss of $191.4 million in 2018. These are supplemental, unaudited figures, not reported consolidated results.
Outlook, liquidity and risks
- Management expected near-term offshore drilling conditions to remain challenging, despite a gradual recovery in demand. It noted excess rig supply, competitive bidding and pressure on day rates; expiring above-market contracts and new contracts at lower rates could further reduce revenue, margins and operating cash flow.
- Management warned operating cash flow could remain negative or decline further. It expected 2019 capital expenditures of approximately $320 million: $160 million for newbuilds, $70 million for minor upgrades and improvements, and $90 million for rig enhancements, subject to market conditions and Board approval.
- As of March 31, backlog was $2.0 billion, down from $2.2 billion at December 31, 2018; pro forma for Rowan, it was $2.6 billion. The company said backlog may decline as contracts are performed and above-market contracts expire.
- Following the combination, credit-facility borrowing capacity was increased to $2.3 billion through September 30, 2019 and $1.7 billion through September 30, 2022. The company reported covenant compliance at March 31 and cited cash, investments, facility availability and possible future financing as liquidity sources.
- Risks include integration and realization of merger benefits; debt service and access to financing; weak utilization and day rates; rig downtime and operating hazards; regulatory, tax and currency exposures; and the possibility of long-lived asset impairment. ARO-related additional capital contributions could reach a maximum aggregate $1.25 billion.
- Contingencies include a pending arbitration against Samsung Heavy Industries, for which the company awaited a damages decision and could not estimate recovery; governmental inquiries connected to historical Pride FCPA matters; and environmental proceedings in Brazil and Spain. The company did not expect other ordinary-course matters to materially affect results, but outcomes remain uncertain.
Important facts for investors to verify
- Confirm the filing entity and reporting scope: Q1 results exclude Rowan, while merger pro forma data are supplemental.
- Review Rowan’s acquired debt, the refinancing and maturity profile, and the combined company’s actual liquidity after closing.
- Track post-merger integration costs, realized synergies and any revisions to the provisional bargain purchase gain.
- Monitor backlog conversion, contract awards, utilization, day rates and operating cash flow against management’s challenging near-term outlook.
- Assess capital spending and shipyard commitments for the two drillships under construction, as well as ARO funding exposure and legal or environmental outcomes.