Valaris Ltd quarterly report, Q1 FY2010

Business context and reporting period

This is Ensco plc’s unaudited Form 10-Q for the three months ended March 31, 2010, filed April 22, 2010. The company provides offshore contract drilling through four segments: Deepwater, Asia Pacific, Europe and Africa, and North and South America. The request identifies Valaris Ltd, but the filing is for Ensco plc; confirm the intended issuer. The interim financial statements received a limited review, not an audit.

Key financial metrics

Amounts are in U.S. dollars; millions except per-share data and day rates.

• Net income included $31.7 million from discontinued operations, including a $29.2 million after-tax disposal gain. Continuing-operations income attributable to Ensco was $158.1 million.
• At March 31, cash and cash equivalents were $1,229.4 million; working capital was $1,364.2 million and the current ratio was 5.1.
• Total debt was $274.4 million, including $17.2 million of current maturities and $257.2 million of long-term debt. Debt to total capital was 4.3%. No borrowings were outstanding under the $350 million revolving credit facility.
• Quarterly dividends were $0.025 per share. Continuing-operations operating cash flow did not cover capital expenditures during the quarter.

Material changes versus the prior comparable period

• Revenue fell $50.5 million, or 10%, and operating income fell $95.1 million, or 33%. Management attributed the declines chiefly to lower utilization and day rates in Asia Pacific and Europe and Africa, partly offset by new deepwater rig contributions.
• Overall utilization declined to 78% from 82%; average day rates declined to $139,138 from $167,863. Europe and Africa utilization fell to 68% from 99%, while Asia Pacific fell to 74% from 83%.
• Deepwater revenue was $130.4 million versus none in the prior-year quarter, reflecting ENSCO 8500 and 8501 contracts and the timing of ENSCO 7500 mobilization revenue. Deepwater utilization was 99% and the average day rate was $411,090.
• General and administrative expense increased $8.6 million to $20.6 million, primarily from share-based compensation, redomestication-related professional fees and costs for the London headquarters.
• Cash flow from continuing operations declined 56%, primarily due to lower receipts from drilling services, higher tax payments and higher contract drilling expense payments. Cash increased to $1,229.4 million from $1,141.4 million, helped by $90 million of sale proceeds and $26.7 million of cash flow from discontinued operations.

Outlook, risks and unusual items

• Management expected 2010 capital expenditures of approximately $635 million for ENSCO 8500 Series construction, $30 million for rig enhancements and $100 million for minor upgrades. Remaining construction obligations were $1,004.6 million; management expected to fund these from cash and future operating cash flow.
• ENSCO 8502 was delivered in January and was expected to begin a two-year contract in the third quarter of 2010. ENSCO 8503 was committed under a long-term contract; the other three rigs under construction were uncontracted.
• Management described jackup markets as weak, with newbuild supply and excess rig availability likely to pressure utilization and day rates, particularly in Asia Pacific and Europe and Africa. Deepwater tender activity showed signs of improvement, and management expected strong utilization for ultra-deepwater rigs. The filing cautioned that 2009 operating levels might not be sustained in 2010.
• The $350 million revolving facility was due to expire in June 2010; the company was discussing a replacement with banks. It also reported investment-grade ratings of Baa1 and BBB+.
• ENSCO 50 and 51 were sold in March for aggregate proceeds of $94.7 million, generating a $33.9 million pretax gain. ENSCO 69 remained under Petrosucre’s control in Venezuela; the company recorded no insurance receivable because recovery was not considered probable, and it was pursuing a $55 million insurance claim in litigation.
• Other significant exposures include an unresolved FCPA investigation involving Nigeria, ENSCO 74 wreck-removal obligations and related third-party claims, ENSCO 29 wreck-removal insurance litigation, asbestos claims, and auction rate securities with a $55.4 million carrying value and limited market liquidity. The company said the FCPA outcome and potential sanctions could not be estimated.
• Forward-looking statements are subject to substantial risks, including drilling demand and commodity-market changes, new rig supply, contract cancellations or delays, operational hazards, insurance availability, litigation, taxation and the benefits of the 2009 redomestication. Management reported no material changes to previously disclosed risk factors.

Important facts for investors to verify

• Confirm issuer identity: this source is an Ensco plc filing, not a filing under the name Valaris Ltd.
• Assess the extent to which reported net income and EPS depend on discontinued operations and the ENSCO 50/51 disposal gain.
• Track utilization, day rates, contract backlog and contract commencement timing, especially for jackups and uncontracted ENSCO 8500 Series rigs.
• Verify replacement financing for the revolving facility and funding of construction commitments against future cash flow and liquidity.
• Monitor outcomes and potential cash effects of the ENSCO 69 insurance dispute, FCPA matter, ENSCO 74 and ENSCO 29 claims, and auction rate securities valuation and liquidity.