Valaris Ltd. request: filing identity and reporting period
Important: The supplied filing is Ensco plc’s Form 10-K, filed February 28, 2019, for the fiscal year ended December 31, 2018. It is not identified as a Valaris Ltd. filing. The 10-K presents annual results and unaudited quarterly data, including Q4 2018.
Ensco provided offshore contract drilling services through floater and jackup fleets, operating across 14 countries. At year-end it reported 56 operating rigs and three rigs under construction.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $1,705.4 million | $1,843.0 million |
| Operating income (loss) | $(235.9) million | $(132.0) million |
| Net income (loss) attributable to Ensco | $(639.7) million | $(303.7) million |
| Basic and diluted loss per share | $(1.47) | $(0.91) |
| Cash from continuing operating activities | $(55.7) million | $259.4 million |
| Capital expenditures | $426.7 million | $536.7 million |
| Long-term debt | $5,010.4 million | $4,750.7 million |
Annual revenue fell 7%. Operating margin was approximately negative 13.8% (operating loss divided by revenue). Contract drilling expense rose 11% to $1,319.4 million, while depreciation was $478.9 million. The company recorded a $40.3 million non-cash impairment charge in Q4 for an older jackup. Net other expense was $303.0 million, compared with $64.0 million in 2017; 2018 included a $19.0 million pre-tax loss on debt extinguishment and foreign-currency losses. Income tax expense remained $89.6 million despite the pre-tax loss.
Q4 revenue was $399.0 million and net loss attributable to Ensco was $203.6 million, or $0.47 per share. Q4 operating loss was $110.1 million and included the $40.3 million impairment.
At year-end, cash and cash equivalents were $275.1 million, short-term investments were $329.0 million, working capital was $781.2 million and the current ratio was 2.5. The company reported $2.0 billion of undrawn Credit Facility capacity and no facility borrowings. Debt was 38.2% of total capitalization; the facility covenant limit was 60%. Interest expense, net of capitalized interest, was $282.7 million for 2018.
Changes versus prior comparable period
- Revenue declined $137.6 million, mainly from lower average day rates and asset sales, partly offset by higher utilization and Atwood rigs joining the fleet.
- Average day rates fell to $248,395 for floaters from $327,736 and to $77,086 for jackups from $84,913. Utilization improved slightly: floaters 46% versus 45%, jackups 63% versus 60%, and total 56% versus 55%.
- Operating cash flow moved from positive $259.4 million to negative $55.7 million, which management attributed primarily to lower margins and higher cash interest expense.
- Net loss more than doubled. The prior year included a $140.2 million Atwood bargain-purchase gain; 2018 included the impairment and higher net other expense.
- Backlog declined to $2.182 billion from $2.821 billion. Floater backlog fell $636.8 million; jackup backlog increased $58.0 million.
Outlook, risks, contingencies and unusual items
Management expected near-term conditions to remain challenging. It cited signs of gradual offshore demand recovery, particularly in jackups, but said oversupply and competitive bidding continued to pressure day rates. As above-market contracts expired and were replaced with lower-rate work, management expected operating results to decline near term and operating cash flow to remain negative. The filing does not provide quantified earnings or revenue guidance.
Management estimated 2019 capital expenditures of approximately $230 million: $160 million for newbuild construction, $20 million for rig enhancements and $50 million for minor upgrades and improvements. Backlog revenue expected in 2019 was $1.276 billion, subject to contract performance, timing, downtime, termination and renegotiation risks.
Ensco had agreed to acquire Rowan in an all-stock transaction. The exchange ratio was amended to 2.750 Ensco shares per Rowan share; the estimated consideration was approximately $1.5 billion based on Ensco’s February 22, 2019 share price. Both shareholder groups approved the transaction on February 21, 2019; closing was expected in the first half of 2019, subject to remaining conditions, including regulatory approvals. Ensco also intended a one-for-four reverse split upon closing. The filing discusses possible integration costs, execution risks, regulatory remedies and potential credit-rating effects.
Significant risks include volatile oil prices, persistent rig oversupply and newbuild deliveries, contract cancellations or renegotiations, customer concentration, impairment risk, substantial debt and non-investment-grade credit ratings. Ensco retained windstorm risk for four jackups and five floaters in the U.S. Gulf of Mexico because it did not purchase windstorm insurance for those rigs. Its insurance program was due for substantial renewal on May 31, 2019.
Legal matters included the settled Petrobras dispute concerning ENSCO DS-5, with no settlement payment by either party; a separate arbitration against shipbuilder SHI, where liability had been found in Ensco’s favor but the ultimate damages recovery remained uncertain; and environmental proceedings in Brazil and Spain. The filing did not expect the environmental matters to have a material adverse effect, but stated their outcomes were uncertain. It disclosed a $180,000 accrued liability for the Brazilian matters. The SEC and DOJ had closed their inquiry into the Petrobras drilling-services agreement without recommending enforcement action against Ensco.
Ensco maintained its $0.01 quarterly dividend, but stated it could reduce or suspend future payments. A $1.0 billion 7.75% note issuance in January 2018 funded, in part, repurchases and redemption of shorter-dated notes; remaining principal maturities before 2024 included $122.9 million due in 2020 and $113.5 million due in 2021. The filing also disclosed $257.9 million of remaining rig-construction commitments and $3.405 billion of scheduled interest payments over the stated debt terms.
Most important facts for investors to verify
- Confirm the intended issuer: the supplied document is Ensco plc’s 2018 10-K, not a Valaris Ltd. filing.
- Assess the pace and terms of new contract awards, particularly day rates as higher-rate contracts expire, and whether reported backlog converts to revenue.
- Track operating cash flow, liquidity, debt service and compliance with credit-facility covenants; management expected near-term operating cash flow to remain negative.
- Verify Rowan transaction closing conditions, final consideration, integration costs, potential financing or ratings impacts, and the planned reverse split.
- Review newbuild delivery schedules, remaining capital commitments and whether uncontracted rigs secure economic work.
- Monitor impairment assumptions, Gulf of Mexico hurricane exposure and insurance renewal terms, as well as unresolved litigation, environmental assessments and tax exposures.