Business context and reporting period
The supplied filing is Ensco plc’s Form 10-Q for the quarter ended March 31, 2013, not a filing under the name Valaris Ltd. Ensco operated offshore drilling rigs through Floaters and Jackups segments; the filing describes a fleet expansion and upgrade program. The interim financial statements are unaudited and were reviewed by KPMG, which reported no material modifications needed.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Revenue | $1,149.9 million | $1,020.6 million |
| Operating income | $402.3 million | $344.2 million |
| Net income attributable to Ensco | $317.1 million | $265.4 million |
| Diluted EPS | $1.36 | $1.15 |
| Operating cash flow, continuing operations | $342.1 million | $555.6 million |
| Capital expenditures | $168.3 million | $764.1 million |
| Cash and cash equivalents | $561.8 million | $487.1 million at Dec. 31, 2012 |
| Total debt | $4,830.8 million | $4,845.9 million at Dec. 31, 2012 |
| Working capital / current ratio | $939.5 million / 2.1 | $734.2 million / 1.7 at Dec. 31, 2012 |
Revenue rose 13% and operating income 17% year over year. Operating margin was approximately 35.0%, versus 33.7% in Q1 2012. The increase reflected new floater capacity and higher jackup day rates, partly offset by lower utilization. Operating cash flow declined 38%; cash increased by $74.7 million during the quarter. The dividend was $0.50 per share, compared with $0.375 a year earlier. Debt-to-total-capital was 28.6%, down from 29.0% at year-end.
Material changes and operating developments
- Floaters revenue increased 12% and Jackups revenue increased 14%. Average day rates were $379,801 for Floaters and $117,268 for Jackups, compared with $349,942 and $99,618, respectively, in Q1 2012. Overall utilization decreased to 86% from 89%.
- Q1 cash flow was lower mainly due to increased contract-drilling and G&A payments, higher taxes, and prior-year cash receipts from trading-security sales and customer-reimbursed upgrade work.
- Ensco sold the Pride Pennsylvania jackup for net proceeds of $15.5 million and recorded a $1.1 million disposal loss.
- At quarter-end, reported contract backlog was $12.0 billion. The company had six rigs under construction in the period-end rig table and announced ENSCO 110 in April, scheduled for delivery in Q1 2015.
Outlook, risks and contingencies
Management expected cash and operating cash flow to support newbuild construction and dividends, with borrowing capacity available if needed. It forecast approximately $1.2 billion of 2013 newbuild spending, $320 million on rig enhancements and $250 million on minor upgrades. Remaining listed construction commitments totaled $2.46 billion. Management cited strong floater demand and tightening jackup markets, while noting a growing worldwide newbuild supply. The $2.00 annual dividend was stated as part of the capital-return plan; a proposed share-repurchase authorization of up to $2 billion required shareholder approval.
- The $450 million 364-day credit facility was due to expire in May 2013, and Ensco intended to let it expire. It reported negotiations to refinance and potentially increase its $1.45 billion five-year facility; no borrowings were outstanding under either facility or its commercial-paper program at March 31.
- Risks include offshore operating and weather-related downtime, rig construction delays and cost/engineering issues, newbuild competition, customer contract disputes or cancellations, regulatory changes, political instability, insurance limits, foreign-exchange exposure and possible asset or goodwill impairment.
- ENSCO 74 litigation included remaining tanker and pipeline claims; two claims were scheduled for trial in September 2013. The company had not concluded that liability was probable for certain claims and said the outcome could not be assured. It also disclosed asbestos claims with exposure not reasonably estimable, Brazilian environmental assessments of approximately $2.4 million (accrued), and a Spanish proceeding seeking approximately $4.0 million, for which customer indemnification was expected.
- Government inquiries related to Pride’s prior FCPA matters could result in additional penalties or business restrictions; the company could not predict the outcome. Q1 tax expense included a $4.9 million liability for unrecognized tax benefits; the reported effective tax rate was 13.9% (12.2% excluding specified discrete items).
- A vendor notice concerning connector-bolt inspection and replacement and shipyard time for ENSCO 5005 contributed to floater downtime. Foreign-currency derivatives had a net liability of $3.3 million at quarter-end; management estimated a hypothetical 10% adverse currency move would produce $23.5 million of unrealized losses, partly offset by derivative gains.
Most important facts for investors to verify
- Confirm the requested issuer: this source is Ensco plc’s 2013 filing, not a filing identified as Valaris Ltd.
- Track whether backlog converts to revenue and cash flow, particularly for uncontracted newbuilds and rigs awaiting delivery or contract commencement.
- Assess whether planned capital spending, construction commitments and the dividend remain supportable if operating cash flow stays below the prior-year level.
- Check the status and terms of credit-facility refinancing after the 364-day facility’s May 2013 expiry.
- Monitor utilization, day rates and the effect of newbuild supply on both operating performance and potential asset impairments.
- Follow resolution of ENSCO 74, environmental, asbestos and Pride-related legal or regulatory matters, as outcomes and exposure may change.