Business context and reporting period
The filing is Ensco plc’s unaudited Form 10-Q for the quarter ended March 31, 2018, comparing results with the three months ended March 31, 2017. The registrant named in the filing is Ensco plc; this differs from the requested company name, Valaris Ltd. Ensco provided offshore contract drilling services through floater and jackup operations. Its Atwood acquisition closed in October 2017. KPMG reviewed the interim financial statements; this was not an audit.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $417.0 million | $471.1 million; down 11% |
| Operating income (loss) | $(51.3) million; operating margin approximately (12.3)% | $57.8 million; margin approximately 12.3% |
| Net loss attributable to Ensco | $(140.1) million; $(0.32) per diluted share | $(25.7) million; $(0.09) per diluted share |
| Operating cash flow | $39.5 million | $104.6 million; down 62% |
| Capital expenditures | $269.3 million | $282.6 million |
| Cash and short-term investments | $864.4 million | $885.4 million at December 31, 2017 |
| Total debt | $4,987.3 million; 36.7% of total capitalization | $4,750.7 million; 35.2% at December 31, 2017 |
| Working capital / current ratio | $1,005.4 million / 2.8 | $853.5 million / 2.1 at December 31, 2017 |
| Backlog | $2.7 billion | $2.8 billion at December 31, 2017 |
Cash and cash equivalents at quarter-end were $465.4 million. Cash increased $20.0 million during the quarter. Operating cash flow less capital expenditures was approximately $(229.8) million, calculated from the reported figures.
Material changes versus prior comparable period
- Revenue fell $54.1 million, primarily from fewer contracted rig days and lower average day rates, partly offset by Atwood rigs added to the fleet.
- Contract drilling expense rose $47.1 million, or 17%, mainly from the acquired rigs and merger integration costs. Depreciation increased 5% and general and administrative expense increased 7%.
- Rig utilization declined to 54% from 58%; average day rates declined to $132,486 from $156,441. Floater utilization/day rate was 44%/$262,661 versus 47%/$336,636; jackup figures were 61%/$73,529 versus 64%/$86,390.
- Other expense increased $13.0 million, reflecting higher interest expense, foreign-exchange losses and an $18.8 million debt-extinguishment loss, partly offset by a $16.6 million Atwood purchase-accounting adjustment that increased the bargain-purchase gain.
Outlook, management commentary, risks and unusual items
- Management said offshore drilling conditions remained challenging and expected a gradual, uneven recovery. Despite improved oil prices and more tendering activity, management said additional demand growth and rig-supply reductions were needed for meaningful day-rate increases. It expected results to continue declining into 2018 as higher-rate contracts expired and were replaced at lower rates.
- Management expected 2018 capital expenditures of approximately $475 million: $370 million for newbuilds, $60 million for minor upgrades and improvements, and $45 million for rig enhancements. It expected to fund liquidity needs with cash, investments, operating cash flow and, if necessary, its revolving facility or other financing.
- The $2.0 billion revolving credit facility was undrawn at quarter-end; the company reported covenant compliance. Moody’s had downgraded its senior unsecured rating from B2 to B3, and Ensco no longer had investment-grade status. The facility limits quarterly dividends to $0.01 per share, the amount declared for the quarter.
- In January 2018, Ensco issued $1.0 billion of 7.75% notes due 2026 and used proceeds in part to repurchase or redeem $721.8 million principal amount of nearer-term notes for $771.0 million, excluding accrued interest. Remaining maturities before 2024 included $122.9 million in 2020 and $113.5 million in 2021.
- Quarter-end backlog may decline further as contracts expire. Subsequent to quarter-end, a customer terminated the ENSCO 8504 contract for force majeure; three-year Saudi Aramco jackup contracts were signed for ENSCO 140, 141 and 108. Several rigs classified as held for sale at quarter-end were sold in April.
- Key contingencies include the Petrobras drilling-services dispute and related investigations. Ensco’s liability and potential exposure were not estimable; Petrobras arbitration liability proceedings concluded in March 2018, with a decision pending. Ensco reported a favorable SHI arbitration liability award, with damages dependent partly on the Petrobras outcome. The SEC tolling agreement was extended through June 2018. The filing also describes environmental assessments and other inquiries; management did not expect other ordinary-course matters to have a material adverse effect.
- Other noteworthy items: the Q1 tax provision was $18.4 million despite a pretax loss, reflecting the company’s international tax profile and discrete tax items. Adoption of the new revenue standard did not materially affect revenue recognition. The company noted potential future lease liabilities and right-of-use assets of approximately $60–$80 million under the then-pending lease standard.
Important facts for investors to verify
- Confirm the issuer identity and ticker: the supplied filing is for Ensco plc, not an entity named Valaris Ltd.
- Track utilization, day rates, contract awards and expirations, backlog conversion, and the pace of newbuild deliveries or cancellations.
- Assess liquidity and refinancing capacity alongside the $5.0 billion debt load, below-investment-grade rating, credit-facility covenants and planned capital spending.
- Monitor Atwood integration costs and purchase-accounting estimates, including the unusual bargain-purchase gain and debt-extinguishment loss.
- Follow Petrobras/SHI arbitration outcomes, regulatory investigations, and related potential liabilities or recoveries.