Filing summary: Ensco plc, Form 10-Q for quarter ended June 30, 2012
Entity note: The supplied filing is for Ensco plc, not a registrant named Valaris Ltd. It describes Ensco’s 2012 second-quarter results; the filing does not identify Valaris as the reporting company.
Business context and reporting period
Ensco provides offshore contract drilling through Deepwater, Midwater and Jackup segments. The filing covers the three and six months ended June 30, 2012, compared with the same 2011 periods. Comparisons are affected by Ensco’s May 31, 2011 acquisition of Pride International; the prior-year quarter included only a short period of Pride operations. Financial statements are unaudited and received an interim review, not an audit.
Financial and operating highlights
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $1,072.0 million | $564.2 million | $2,098.4 million | $925.7 million |
| Operating income | $407.3 million | $147.0 million | $735.9 million | $227.3 million |
| Net income attributable to Ensco | $341.3 million | $101.9 million | $606.7 million | $166.5 million |
| Diluted EPS | $1.47 | $0.59 | $2.62 | $1.06 |
| Operating margin | 38.0% | 26.1% | 35.1% | 24.6% |
- Management attributed reported growth partly to the Pride acquisition. Excluding the merger impact, Q2 revenue rose 44% and operating income 105%; for the first half, revenue rose 50% and operating income 127% year over year.
- Operating improvement reflected higher Deepwater utilization and day rates, stronger Jackup utilization, and fleet additions. Q2 utilization was 91% in Deepwater, 79% in Midwater and 83% in Jackup; average day rates were approximately $389,761, $227,378 and $105,356, respectively.
- Six-month operating cash flow was $1,010.6 million, versus $175.8 million. Capital expenditures were $1,047.1 million, including $793.2 million for newbuilds; cash dividends paid were $173.8 million.
- Cash and cash equivalents were $226.7 million at June 30, down from $430.7 million at year-end 2011. Working capital was $309.3 million and the current ratio was 1.3.
- Total debt was $4,907.5 million, down from $5,050.1 million at year-end; debt to total capital was 30.1%, versus 31.7%. Net debt, calculated as total debt less cash, was approximately $4.68 billion. No revolving-credit borrowings were outstanding; commercial paper outstanding was $22.0 million.
- Petrobras accounted for 25% of Q2 revenue and TOTAL for 9%, indicating customer concentration.
Material changes, outlook and management commentary
- Ensco contracted with Samsung Heavy Industries for two ultra-deepwater drillships, scheduled for delivery in the second half of 2014. Seven rigs were under construction; stated remaining newbuild commitments totaled $2.78 billion.
- Management estimated 2012 capital expenditures of approximately $1.3 billion for newbuild construction, $380 million for enhancements and $250 million for minor upgrades and improvements. It expected operating cash flow and available credit to support construction and liquidity needs.
- Management cited approximately $10 billion of contract backlog, $1.9 billion of available revolving credit facilities and a $1.0 billion commercial-paper program. It expected cash flows to be principally directed to newbuild construction through 2014 and debt service.
- Management described Deepwater markets as strong, with high utilization and possible day-rate support, while Midwater utilization and rates were expected to remain under pressure. Jackup prospects were improving, but significant newbuild deliveries could challenge market absorption.
- Oil prices generally ranged from $90 to $100 per barrel in Q2. Management expressed confidence in long-term offshore drilling demand but cautioned that global economic and commodity-price uncertainty remained. No specific earnings or revenue guidance was provided.
- Ensco terminated its ADS facility and converted ADSs into Class A ordinary shares in May 2012. Its prior share-repurchase program ended; a new program would require shareholder approval.
Risks, contingencies and unusual items
- Uninsured or underinsured Gulf of Mexico hurricane exposure is material: Ensco retained windstorm property-loss risk for 10 jackup rigs in the region. Insurance and customer indemnities may not cover all operating, pollution, wreck-removal or third-party liabilities.
- The ENSCO 74 wreck-removal arrangement required a $19 million payment to the customer, matched by a recorded insurance receivable. Related tanker and pipeline litigation was scheduled for trial in November 2012; Ensco said outcomes could not be assured.
- Brazilian authorities were seeking approximately $2.5 million in environmental fines, for which Ensco recorded a liability. A separate Spanish environmental proceeding sought approximately $4 million; customer indemnification was expected, but the outcome was uncertain.
- Approximately 100 plaintiffs were involved in asbestos or lung-injury litigation; Ensco said it could not estimate potential exposure. Pride-related FCPA obligations remained subject to a deferred prosecution agreement and inquiries by certain foreign authorities, with potential additional penalties or operational consequences.
- Other key risks include rig downtime and mechanical failure, newbuild delays or cost pressures, shifts in rig supply and demand, regulation and permitting, litigation, currency movements, customer concentration and possible asset or goodwill impairments.
- Q2 tax expense included discrete tax items. The reported effective tax rate was 10.5% for Q2 and 11.0% for the first half; excluding discrete items, rates were 11.3% and 11.7%, respectively.
Important facts for investors to verify
- Confirm the issuer and security being analyzed: this filing is Ensco plc’s, notwithstanding the request metadata naming Valaris Ltd.
- Review reported growth separately from Pride-acquisition effects and assess the sustainability of utilization, day rates and segment-level performance.
- Track newbuild delivery timing, total remaining construction commitments, and actual versus estimated 2012 capital spending.
- Assess liquidity and refinancing capacity against cash balances, debt maturities, commercial-paper usage and the company’s construction obligations.
- Monitor Gulf of Mexico hurricane exposures, insurance renewals and limits, ENSCO 74 litigation, environmental cases, and Pride-related FCPA inquiries.
- Evaluate the sensitivity of results to Petrobras and other major customers, regional concentration, and changes in offshore drilling market conditions.