Ensco plc Form 10-Q Summary
Entity and period: The supplied filing is for Ensco plc, not Valaris Ltd. It reports the quarter ended June 30, 2013, and the six months then ended. Interim financial statements are unaudited and were reviewed by KPMG, not audited.
Business context and reporting period
Ensco operated an offshore drilling fleet of 75 rigs, including eight under construction, across its Floaters and Jackups reportable segments. Management described strong floater and jackup markets and reported an $11.3 billion contract backlog. Brent crude averaged above $100 per barrel in Q2, which management said supported customer drilling programs.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1,248.1 million | $1,071.1 million | $2,398.0 million | $2,091.7 million |
| Operating income | $452.0 million | $405.3 million | $854.3 million | $749.5 million |
| Operating margin | 36.2% | 37.8% | 35.6% | 35.8% |
| Net income attributable to Ensco | $360.9 million | $341.3 million | $678.0 million | $606.7 million |
| EPS, basic and diluted | $1.55 | $1.47 | $2.91 | $2.62 |
| Cash dividends per share | $0.50 | $0.375 | $1.00 | $0.75 |
- Cash flow: Six-month operating cash flow from continuing operations was $784.2 million, down 23% from $1,016.0 million. Capital expenditures were $598.6 million, compared with $1,047.1 million. Cash flow less capital expenditures was $185.6 million, versus negative $31.1 million in the prior-year period.
- Balance sheet and liquidity: June 30 cash was $489.8 million; working capital was $922.2 million and the current ratio was 2.1. Total debt was $4,806.2 million, down from $4,845.9 million at year-end 2012; debt-to-total-capital was 28.1%, versus 29.0%. Cash less total debt was approximately $4.32 billion of net debt.
- Credit availability: A new $2.0 billion unsecured revolving facility runs to May 2018; there were no borrowings under it or the commercial paper program at June 30. The facility requires debt-to-capital of no more than 50%.
Material changes versus prior comparable periods
- Q2 revenue rose 17% and operating income 12% year over year; six-month revenue rose 15% and operating income 14%. New floater rigs entering service and higher jackup day rates were key contributors.
- Utilization weakened: total utilization was 84% in Q2 versus 90% a year earlier; for the six-month period it was 85% versus 90%. Average day rates increased to $228,017 from $191,663 in Q2 and to $218,919 from $187,105 for six months.
- Operating margin narrowed in Q2, as contract drilling expense and depreciation increased. Management cited newbuild fleet additions, higher personnel costs, shipyard time and equipment-related downtime.
- Interest expense, net, increased to $44.2 million from $30.0 million in Q2 and to $83.4 million from $64.6 million for six months, partly reflecting lower capitalized interest as rigs entered service.
- Operating cash flow declined despite higher earnings, including because of increased cash payments for drilling expenses and taxes and prior-year cash receipts that did not recur.
Outlook, risks, contingencies, and unusual items
- Outlook and investment: Management expected strong demand to support floater utilization and day rates through the remainder of 2013 and anticipated robust jackup demand. It projected 2013 capital expenditures of approximately $1.3 billion for newbuilds, $370 million for enhancements, and $250 million for minor upgrades. Eight rigs were under construction, with total remaining contractual payments estimated at $2.98 billion. Several newbuilds were uncontracted.
- Market risks: More than 100 newbuild floaters and more than 100 newbuild jackups were reported under construction industry-wide. Management expected near-term deliveries to be absorbed without significant market impact, but increased supply could pressure utilization and day rates. Operational downtime, storms, regulatory changes, geopolitical instability, and contract delays were also identified risks.
- Customer exposure: OGX had been downgraded amid liquidity concerns. Ensco reported a $17.7 million net receivable and $47.7 million of remaining firm backlog with OGX; management expected collection but warned deterioration could adversely affect results.
- Legal and environmental matters: Three claims remained in litigation relating to the ENSCO 74 loss, including tanker claims exceeding $5 million and pipeline claims exceeding $26 million; trial was scheduled for September 2013. The company also disclosed asbestos and lung-injury claims with unquantifiable exposure, approximately $300,000 of contested Brazilian spill assessments, and a Spanish environmental proceeding seeking approximately $4.0 million. Management did not expect these matters to materially affect results, but outcomes were uncertain.
- Other notable items: Ensco sold the Pride Pennsylvania for $15.5 million and recorded a $1.1 million disposal loss. The company approved a share repurchase authorization of up to $2.0 billion, although no purchases were made under that public program during the quarter. Q2 comprehensive income included an $8.6 million net other comprehensive loss, primarily related to derivatives.
- Tax and impairment: The six-month effective tax rate was 12.9%; a $4.9 million liability for unrecognized tax benefits was recorded for a prior-year tax position. Goodwill was $3.27 billion; the latest annual impairment test, at December 31, 2012, found no impairment.
Important facts for investors to verify
- Confirm the issuer identity: the filing is Ensco plc, despite the request metadata naming Valaris Ltd.
- Review the $2.98 billion remaining newbuild commitments, projected 2013 capital spending, delivery schedules, and contract status of uncontracted rigs.
- Track utilization, day rates, shipyard and equipment downtime, and whether new industry rig supply changes market conditions.
- Monitor OGX collections and the status of the ENSCO 74, asbestos, and environmental proceedings.
- Reconcile reported operating cash flow with working-capital movements, capital spending, dividends, and debt maturities; assess capacity to fund the fleet program while maintaining distributions.