Ensco plc Form 10-Q Summary
Period: Quarter and nine months ended September 30, 2010. The filing is by Ensco plc, not Valaris Ltd; the supplied filing identifies Ensco as the registrant.
Business context and reporting period
Ensco provides offshore contract drilling through Deepwater, Asia Pacific, Europe and Africa, and North and South America segments. It was expanding its ultra-deepwater fleet while upgrading its jackup fleet. Interim financial statements are unaudited and were reviewed by KPMG; KPMG reported no material modifications were required.
Key financial metrics
| USD millions, except per-share data | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Revenue | 428.3 | 408.9 | 1,288.3 | 1,391.1 |
| Operating income | 158.0 | 171.0 | 483.4 | 678.4 |
| Income from continuing operations | 134.0 | 145.0 | 417.9 | 554.9 |
| Net income attributable to Ensco | 130.5 | 149.7 | 446.6 | 570.7 |
| Diluted EPS | $0.91 | $1.05 | $3.13 | $4.01 |
- Operating margin was approximately 36.9% in Q3 2010 versus 41.8% a year earlier; for the first nine months it was 37.5% versus 48.8%.
- Q3 revenue increased 5%, but operating income fell 8%. Nine-month revenue declined 7% and operating income declined 29%. Nine-month 2010 net income included a $34.9 million net gain on disposals; discontinued operations also included the rig-sale gains.
- Q3 2010 diluted EPS was $0.91, including a $0.01 loss from discontinued operations. Nine-month diluted EPS was $3.13, including $0.24 from discontinued operations.
- Continuing-operations operating cash flow was $521.4 million for 9M 2010, down 42% from $897.8 million. Capital expenditures were $737.5 million, versus $681.1 million; operating cash flow less capital expenditures was negative $216.1 million. Cash and cash equivalents decreased to $905.2 million from $1,141.4 million at year-end 2009.
- At September 30, current assets were $1,525.9 million and current liabilities $477.9 million; working capital was $1,048.0 million and the current ratio 3.2. Total debt, including current maturities, was approximately $265.8 million. Long-term debt to total capital was 4.1%.
- Ensco had a $700 million unsecured revolving credit facility, with no borrowings outstanding. The facility matures in May 2014 and requires a debt-to-total-capitalization ratio of no more than 50%.
- Cash dividends were $0.35 per share in Q3 and $0.725 per share for 9M 2010. Auction-rate securities were carried at $45.0 million, versus $50.3 million par value.
Material changes versus the prior comparable period
- Deepwater growth, led by ENSCO 8501, helped lift Q3 revenue; however, lower jackup day rates weighed on operating income. For 9M, lower utilization and day rates in Europe and Africa, and weaker Asia Pacific day rates, drove much of the decline.
- Q3 total fleet utilization improved to 79% from 64%, while average day rates declined to $127,545 from $158,947. For 9M, utilization rose to 78% from 74%, but average day rates fell to $132,444 from $167,113.
- General and administrative expense rose 51% in Q3 and 52% for 9M, attributed primarily to share-based compensation, London headquarters costs, and reorganization-related professional fees.
- Operating cash flow fell substantially, mainly reflecting lower cash receipts from drilling services. Capital spending increased, and dividends paid rose to $103.6 million from $10.7 million in 9M 2009.
- Ensco sold ENSCO 50 and 51 for an aggregate $94.7 million and ENSCO 57 for $47.1 million, recognizing aggregate pre-tax gains of $51.8 million. It agreed to sell ENSCO 60 for $26 million and acquired the operating jackup ENSCO 109 for $186 million.
Outlook, risks and unusual items
- Management expected 2010 capital expenditures of approximately $610 million for ENSCO 8500 Series construction, $186 million for ENSCO 109, $40 million for rig enhancements, and $100 million for minor upgrades and improvements. Remaining ENSCO 8500 Series construction obligations were $728.8 million; management expected to fund them with cash and future operating cash flow.
- Management described near-term market conditions as uncertain. The U.S. Gulf of Mexico deepwater moratorium was lifted October 12, 2010, but new safety rules, inspections, permit delays, and related regulation could delay or reduce drilling activity. U.S. Gulf of Mexico operations generated 25% of Q3 and 23% of 9M 2010 revenue.
- A customer disputed whether the ENSCO 8502 contract had commenced and asserted force majeure. Ensco maintained the contract term began August 13, 2010, but deferred $27.2 million of revenue because collection was not reasonably assured. Resolution could affect revenue and cash flow.
- Deepwater rig supply was increasing; management warned of potential pressure on utilization and day rates. Jackup markets also faced oversupply and weak rates, although tender activity showed some improvement for 2011 work.
- ENSCO 69 possession was returned by Petrosucre in August 2010. Ensco recognized $9.3 million in Q3 and $21.7 million in 9M under a settlement agreement, but did not recognize further amounts considered uncollectible. A $55 million insurance recovery claim remained in arbitration, with no receivable recorded.
- Other notable items include a $12.2 million ENSCO I impairment; ENSCO 74 wreckage-removal estimates and related insurance recoveries; and pending ENSCO 29 wreck-removal and asbestos litigation. The filing states the ultimate outcomes of these matters remain uncertain.
- In the Nigeria FCPA matter, the SEC said it did not intend to recommend enforcement action; a Department of Justice determination remained pending. The company could not predict any resulting liability or sanctions.
- Management stated it believed existing cash and expected operating cash flow would support operations and construction obligations, while noting that Macondo-related effects could reduce future operating cash flow. No precise earnings or revenue guidance was provided.
Most important facts for investors to verify
- Whether the ENSCO 8502 contract dispute was resolved, and whether deferred revenue was ultimately collected and recognized.
- The timing and cost effects of Gulf of Mexico permitting, inspections, and new safety requirements, including the effect on contracted rigs and future utilization.
- Actual versus projected capital expenditures, construction commitments, and cash generation as ENSCO 8500 Series rigs were completed.
- Day rates, utilization, and contract coverage across deepwater and jackup fleets, particularly in the Gulf of Mexico and oversupplied jackup markets.
- Developments in ENSCO 69 insurance arbitration, the DOJ FCPA determination, ENSCO 74 and ENSCO 29 claims, and other contingencies.
- Valuation and liquidity of auction-rate securities and whether the company’s cash balance and credit capacity remained sufficient under weaker operating conditions.