Ensco plc — Form 10-K for the year ended December 31, 2012
Entity note: The supplied filing is for Ensco plc, not Valaris Ltd. It reports fiscal 2012 results and includes unaudited fourth-quarter data.
Business context and reporting period
Ensco provides offshore contract drilling services on a day-rate basis. At year-end, its fleet included 74 rigs, including rigs under construction, across floaters, jackups and third-party rig management. Operations spanned about 20 countries; 70% of 2012 revenue came from outside the U.S. The 2011 comparison includes Pride International only from its May 31, 2011 acquisition date, limiting comparability.
Financial results and key metrics
| Metric (US$ millions, except per-share data and ratios) | 2012 | 2011 |
|---|---|---|
| Revenue | 4,300.7 | 2,797.7 |
| Operating income | 1,565.2 | 781.1 |
| Net income attributable to Ensco | 1,169.7 | 600.4 |
| Diluted EPS | $5.04 | $3.08 |
| Cash from continuing operations | 2,200.2 | 731.8 |
| Capital expenditures on continuing operations | 1,802.2 | 729.0 |
| Cash and cash equivalents at year-end | 487.1 | 430.7 |
| Total debt | 4,845.9 | 5,050.1 |
| Working capital | 734.2 | 348.7 |
| Debt to total capitalization | 29.0% | 31.7% |
| Cash dividends per share | $1.50 | $1.40 |
Operating margin was approximately 36.4% in 2012 versus 27.9% in 2011; net margin was approximately 27.2% versus 21.5%. Operating cash flow less reported capital expenditures was approximately $398 million. These year-over-year changes reflect both the Pride acquisition and improved rig activity.
For fourth-quarter 2012, revenue was $1,085.5 million, operating income $382.1 million, net income attributable to Ensco $219.5 million and diluted EPS $0.94. Fourth-quarter results included a $117.1 million income-tax provision.
Contract backlog was $10.85 billion at December 31, 2012, versus $9.67 billion a year earlier. Approximately $4.09 billion was scheduled for 2013 realization. Utilization improved to 88% overall from 80%; average day rates were $193,407 versus $160,717. Floaters utilization was 87% and jackups 89%.
Material changes versus the prior comparable period
- Revenue increased about 54% and operating income doubled, but the acquisition materially expanded the fleet and results. Excluding the Merger’s stated impact, management reported 2012 revenue growth of 38% and operating-income growth of 81% versus 2011.
- Management attributed improvement to newbuild additions, higher utilization and stronger day rates, particularly for jackups. The U.S. Gulf of Mexico permitting process improved significantly during 2012.
- Operating cash flow rose substantially; capital spending also increased to $1.80 billion, including $1.30 billion for newbuilds. Total debt declined from $5.05 billion, and year-end commercial paper borrowings were zero.
- Ensco sold three jackups, one moored semisubmersible and its last barge rig during 2012. The company combined its prior deepwater and midwater reporting into one Floaters category.
Outlook, risks, contingencies and unusual items
- Management expected demand for floaters and jackups to strengthen in 2013, citing global project demand and a tight marketed jackup fleet. These are forward-looking expectations, not guarantees.
- Expected 2013 capital expenditures were approximately $1.2 billion for newbuild construction, $350 million for rig enhancements and $275 million for upgrades and improvements. Six rigs were under construction; two had secured contracts at year-end.
- Management cited $1.9 billion of available revolving credit facilities and a $1.0 billion commercial paper program, alongside backlog and operating cash flow, as sources to fund liquidity and construction commitments. The 364-day facility was due to expire in May 2013 unless extended or converted as permitted by its terms.
- Material risks include cyclical oil-and-gas spending, newbuild rig oversupply, contract cancellations or renegotiations, construction delays and cost overruns, regulatory changes, geopolitical exposure, customer concentration and skilled-labor availability. The five largest customers generated 48% of revenue; Petrobras alone accounted for 24%.
- Ensco retained windstorm risk for its 10 U.S. Gulf of Mexico jackups because it did not purchase jackup windstorm property insurance. It also identified potential uninsured or underinsured exposure from offshore accidents, pollution and wreck removal.
- Unusual items included $63.3 million of settlements for warranty and other claims recorded as a reduction of drilling expense, and $51.2 million of tax expense from restructuring acquired-company subsidiaries. Discontinued operations produced a $45.5 million net loss, including asset-disposal losses.
- Contingencies include unresolved Pride-related governmental inquiries following closure of the U.S. DOJ deferred prosecution agreement; asbestos claims with no estimable exposure range; Brazilian environmental assessments of about $2 million, for which a liability was recorded; a Spanish environmental proceeding seeking about $4 million; and remaining ENSCO 74 loss-related claims. The company did not expect these matters to materially affect results, but outcomes are uncertain.
- The board’s stated intention was to continue quarterly dividends, while retaining discretion to change the amount or timing. The 2012 quarterly dividend was $0.375 per share.
Most important facts for investors to verify
- Confirm the issuer identity and filing period: this document is Ensco plc’s FY2012 10-K, not a Valaris Ltd filing.
- Separate acquisition-driven growth from organic operating improvement; compare 2012 results with pro forma or segment data where appropriate.
- Track 2013 rig deliveries, contract commencements, utilization and realized day rates, especially for uncontracted newbuilds.
- Assess funding needs against construction commitments, scheduled debt service, facility availability and the May 2013 364-day facility maturity.
- Review customer concentration and Petrobras exposure, plus the company’s retained U.S. Gulf jackup hurricane risk and material legal and environmental contingencies.
- Check whether the forecast capital program, backlog conversion and dividend plans were achieved; the filing’s outlook is subject to market, execution and regulatory risks.