Filing summary
Issuer and period: The supplied filing is Ensco plc’s unaudited Form 10-Q for the quarter ended March 31, 2015—not a Valaris Ltd filing. The filing describes Ensco as an offshore contract drilling company. Its interim financial statements received a limited review, not an audit.
Key financial results
| Metric | Q1 2015 | Q1 2014 or comparison |
|---|---|---|
| Revenue | $1,163.9 million | $1,066.7 million; up 9% |
| Operating income | $478.4 million | $377.3 million; up 27% |
| Operating margin | 41.1% | 35.4% |
| Net income attributable to Ensco | $324.7 million | $292.5 million |
| Diluted EPS | $1.38 | $1.25 |
| Cash from continuing operations | $467.7 million | $432.9 million |
| Capital expenditures | $397.1 million | $272.6 million |
| Cash and cash equivalents | $887.8 million | $664.8 million at Dec. 31, 2014 |
| Short-term investments | $745.3 million | $757.3 million at Dec. 31, 2014 |
| Total debt | $6,130.8 million | $5,920.4 million at Dec. 31, 2014 |
| Debt to total capital | 41.9% | 41.9% at Dec. 31, 2014 |
| Working capital / current ratio | $1,920.2 million / 2.7 | $1,830.2 million / 2.7 at Dec. 31, 2014 |
| Quarterly dividend per share | $0.15 | $0.75 |
Operating cash flow less capital expenditures was approximately $70.6 million, versus $160.3 million in Q1 2014. The increase in revenue chiefly reflected higher floater utilization and newly contracted jackups; lower floater day rates partly offset those gains. Cost-control measures contributed to lower contract drilling and general and administrative expenses. Interest expense and other expense increased, including a $26.6 million pretax loss on extinguishment of debt. The effective tax rate rose to 19.1% from 14.2%.
Business conditions, outlook and significant items
- Management described offshore drilling markets as depressed amid lower oil prices, reduced customer spending, new rig supply, delayed drilling programs, contract renegotiations and terminations. It expected limited contracting opportunities and continued pressure on utilization and day rates into 2016.
- Ensco received notice that the customer planned to terminate the ENSCO DS-4 contract, with an estimated effective date in July 2015; the contract provides for a lump-sum cancellation fee, but the filing does not state its amount. The company also agreed to reduced rates on certain jackup contracts.
- The company reported a contractual backlog of $8.4 billion and said operating cash flow, cash and short-term investments, and available borrowing capacity were expected to support investment, debt service and dividends. Backlog is not a guarantee of future revenue.
- Management estimated 2015 capital expenditures of approximately $1.6 billion for newbuild construction, $250 million for rig enhancements and $250 million for minor upgrades and improvements. Newbuild commitments totaled $2.45 billion, with $1.14 billion of remaining scheduled payments in 2015 and $371 million in 2016.
- In March, Ensco issued $1.1 billion of senior notes, primarily to fund repayment of its 2016 notes. It had repurchased or tendered $854.6 million of those notes by quarter-end and redeemed the remaining $145.4 million in April. It also redeemed approximately $51 million of MARAD obligations in April and intended to redeem the remaining $14.3 million in July. It expected about $7 million of additional debt-extinguishment losses in Q2.
- The $2.25 billion revolving credit facility had no borrowings outstanding at quarter-end; its leverage covenant ceiling was amended from 50% to 60%. Cash and short-term investments together totaled $1.63 billion at March 31.
- Ensco cold-stacked two floaters and four jackups during Q1, bringing cold-stacked rigs to 13; seven older rigs were classified as held for sale. It reported 70 rigs, including rigs under construction and held for sale.
Risks and contingencies
- Key business risks include prolonged low oil prices and reduced offshore spending, oversupply of newbuild rigs, contract cancellations or rate concessions, rig downtime, construction delays, and political, regulatory, environmental and insurance exposures.
- Contingencies include the ENSCO 74 loss and related litigation, ENSCO 29 wreck-removal demands, asbestos claims, environmental proceedings, and continuing inquiries relating to Pride’s prior FCPA matters. Management said it could not predict some outcomes or estimate potential exposure for certain claims.
- Letters of credit and surety bonds totaled $260.2 million. The filing states these are not normally called and that no collateral deposits were required at quarter-end.
Important facts for investors to verify
- Confirm the issuer identity: the provided document is Ensco plc’s 2015 10-Q, despite the request identifying Valaris Ltd.
- Review subsequent disclosures on the DS-4 termination, cancellation fee, and resulting rig utilization and revenue.
- Track whether projected 2015 capital spending and remaining newbuild payments were met, delayed, or revised as market conditions changed.
- Verify completion and costs of the 2016 notes and MARAD redemptions, and monitor debt, covenant headroom and liquidity.
- Assess backlog conversion, contract renewals and day rates against management’s stated weak-market outlook; review developments in material litigation and investigations.