Business context and reporting period
Ensco plc’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2018. The filing identifies the registrant as Ensco plc; it is not filed under the name Valaris. Ensco provides offshore contract drilling services through floater and jackup operations. Its 2018 results include Atwood Oceanics, acquired in October 2017, so comparisons with 2017 are affected by the added fleet.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $458.5 million | $457.5 million | $875.5 million | $928.6 million |
| Operating income (loss) | $(32.6) million | $27.8 million | $(83.9) million | $85.6 million |
| Net loss attributable to Ensco | $(151.0) million | $(45.5) million | $(291.1) million | $(71.2) million |
| Operating cash flow from continuing operations | Not reported separately for quarter | Not reported separately for quarter | $(18.0) million | $130.5 million |
- Q2 operating margin was approximately -7.1%, versus 6.1% a year earlier; six-month operating margin was approximately -9.6%, versus 9.2%.
- Q2 contract drilling expense rose 18% to $344.3 million, while revenue was nearly flat. For six months, revenue fell 6% as lower day rates outweighed revenue added by Atwood and ENSCO DS-10.
- At June 30, cash and cash equivalents were $485.5 million and short-term investments were $255.0 million. Working capital was $913.0 million and the current ratio was 2.7.
- Total debt was $4.995 billion, or 37.2% of total capitalization, compared with $4.751 billion and 35.2% at year-end 2017. The $2.0 billion revolving facility was undrawn; the company reported covenant compliance.
- Capital expenditures were $331.9 million for the first half, including $277.7 million for newbuild construction. Cash and investments totaled $740.5 million at quarter-end.
Changes, outlook, and risks
- Fleet utilization improved year over year to 61% overall in Q2 (floaters 53%, jackups 66%), but average day rates declined to $135,343 overall from $155,946. Floater rates fell to $237,513 from $338,675; jackup rates to $78,408 from $88,583.
- Management described the offshore recovery as gradual and the market as highly competitive. It expected 2018 operating results to continue declining as above-market contracts expire and new work is contracted at lower rates; operating cash flow was also expected to weaken near term.
- Backlog was $2.3 billion at June 30, down from $2.8 billion at December 31, 2017. Management warned that expirations could further reduce backlog, revenue, and operating cash flow. New contracts included three-year Saudi Aramco jackup awards; several were expected to commence in the second half of 2018.
- For 2018, management estimated capital spending of approximately $475 million: $360 million for newbuilds, $55 million for enhancements, and $60 million for minor upgrades. Two drillships were under construction, with scheduled delivery in 2019 and 2020.
- In January, Ensco issued $1.0 billion of 7.75% notes due 2026 and used proceeds in part to repurchase or redeem $721.8 million of principal in notes due 2019–2021. The transactions generated a $19.0 million pretax extinguishment loss. Moody’s had downgraded the senior unsecured rating to B3; Ensco was not investment grade. The quarterly dividend was $0.01 per share, and future dividends remained discretionary.
- Material contingencies include the Petrobras drilling-services arbitration, for which the company could not estimate potential exposure and was awaiting a liability decision, and a separate arbitration award finding Samsung Heavy Industries liable for at least $10 million or provable damages. Regulatory inquiries concerning alleged Brazil-related misconduct and environmental assessments also remained risks; Ensco reported no credible evidence its personnel were involved in alleged wrongdoing.
- Other risks highlighted include weak offshore demand, oversupply and uncontracted newbuilds, contract cancellations, operating downtime, liquidity and refinancing constraints, foreign-exchange exposure, and potential impairment. The interim financial statements received a limited review by KPMG, not an audit.
Important facts for investors to verify
- Confirm the issuer and applicable share/security identity: this filing is for Ensco plc in 2018, despite the request’s Valaris label.
- Track utilization, realized day rates, contract starts and expirations, and backlog conversion against management’s near-term decline expectations.
- Assess cash generation against capital commitments, debt service, the $2.0 billion facility’s availability and covenants, and the company’s below-investment-grade ratings.
- Monitor outcomes and potential financial effects of the Petrobras and Samsung arbitrations, Brazil investigations, and environmental proceedings.
- Reconcile future results for Atwood fleet integration costs, foreign-exchange effects, tax items, and possible rig impairments or disposals.