Ensco plc (not Valaris Ltd) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. The supplied filing is for Ensco plc; it does not identify Valaris Ltd as the registrant. Financial statements are unaudited and received a limited review, not an audit.
Business context and results
Ensco provides offshore contract drilling through Deepwater, Midwater and Jackup segments. The comparison with Q1 2011 is substantially affected by the May 2011 acquisition of Pride International: Q1 2012 includes Pride operations for the full quarter, while the prior-year period does not. Management separately reports that, excluding merger impact, revenue rose 56% and operating income rose 159%.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $1,026.4 million | $361.5 million |
| Operating income | $328.6 million | $80.3 million |
| Operating margin | 32.0% | 22.2% |
| Net income | $267.4 million | $65.5 million |
| Net income attributable to Ensco | $265.4 million | $64.6 million |
| Diluted EPS | $1.15 | $0.45 |
| Operating cash flow | $547.3 million | $125.2 million |
| Capital expenditures | $764.1 million | $131.0 million |
Q1 2012 operating cash flow less capital expenditures was negative $216.8 million. Capital spending included $611.2 million for newbuild construction. The company paid $86.8 million in dividends, or $0.375 per share, versus $50.2 million and $0.350 per share in Q1 2011. The reported effective tax rate was 11.6%, including discrete tax items; excluding those items it was 12.1%, compared with 14.9% in the prior-year quarter.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $208.9 million at March 31, down from $430.7 million at December 31, 2011. Working capital was $58.0 million, compared with $323.0 million; the current ratio was 1.0 versus 1.2.
- Total debt was $5.110 billion, up from $5.050 billion at year-end; debt to total capital was 31.6%, compared with 31.7%. Debt included $200 million of commercial paper and $4.863 billion of long-term debt. No amounts were drawn on the $1.45 billion five-year or $450 million 364-day revolving facilities at quarter-end.
- Management expects to meet near-term and longer-term liquidity needs through operating cash flow and, as needed, commercial paper, credit facilities or other financing. It expects cash flow to be directed primarily to newbuild construction through 2014 and debt service.
Changes, outlook and management commentary
- Revenue and operating income increased substantially, reflecting the Pride acquisition as well as higher utilization and day rates in Deepwater and Jackup and additions to the Deepwater fleet. Total utilization was 87%, versus 72%; average day rate was $181,319, versus $118,447. Both comparisons include the acquisition.
- At quarter-end, contract backlog was $10.4 billion. A five-year BP contract for ENSCO DS-6 added $72.8 million to the remainder of 2012 backlog and $939.7 million to backlog thereafter.
- Management described deepwater demand as robust in several regions and expected the segment to perform better over the long term; it also noted more than 90 deepwater newbuilds under construction worldwide. Midwater demand had softened in West Africa, with near-term utilization and day rates expected to remain under pressure in some markets. Jackup demand and availability were improving, but management cautioned that newbuild deliveries could be difficult for markets to absorb.
- For 2012, management expected approximately $1.3 billion of newbuild spending, $380 million of rig enhancements and $250 million of minor upgrades and improvements. These are estimates, not guaranteed results. In April 2012, Ensco agreed to build the ENSCO DS-8 for approximately $645 million, scheduled for delivery in the second half of 2014 and uncontracted at the time of filing. It also reported three harsh-environment jackups under construction at estimated aggregate cost of approximately $720 million.
- Subsequent to quarter-end, the 364-day credit facility was extended to May 9, 2013, and amendments to both credit facilities revised certain guarantor and borrower covenant provisions. A newbuild agreement for DS-8 was also entered into after quarter-end.
Risks, contingencies and unusual items
- Customer and geographic concentration: Petrobras represented 25% and Total 11% of Q1 revenue. Brazil represented 26%, Angola 13% and the U.S. Gulf of Mexico 25%.
- Key operating and market risks include rig downtime or damage, permitting and regulatory changes, newbuild supply, contract delays or disputes, political instability, severe weather, insurance limitations, and fluctuations in oil and gas activity. Foreign exchange exposure is hedged in part; a hypothetical 10% adverse currency move was estimated to produce approximately $18.3 million of net unrealized losses before considering offsets from expected hedged transactions.
- Ensco remained subject to litigation and investigations, including asbestos claims and environmental proceedings in Brazil and Spain. A $2 million liability was recorded for the Brazil assessments. For the Spain matter, the company expected customer indemnification but could not predict the outcome.
- For the 2008 loss of ENSCO 74, Ensco recorded a $19 million liability and matching insurance receivable for agreed removal of remaining legs. Related pipeline and tanker claims remained unresolved; a trial was scheduled for November 2012, and insurance coverage and the number of occurrences were disputed.
- Ensco had assumed Pride’s obligations under a DOJ deferred prosecution agreement related to the Pride FCPA matter. Further government or customer actions, penalties or business restrictions remained possible, and the company could not estimate their effects.
- Management reported no material change in previously disclosed risk factors and no material change in internal control over financial reporting during the quarter. The filing identifies property-and-equipment valuation, impairment and income taxes as critical accounting areas; goodwill was $3.263 billion at quarter-end.
Important facts for investors to verify
- Confirm the issuer: this is an Ensco plc filing, not a Valaris Ltd filing.
- Assess underlying performance separately from Pride acquisition effects and review utilization, day rates and segment contribution on a comparable basis.
- Compare expected 2012 capital expenditures and construction commitments with operating cash flow, liquidity and debt maturities; evaluate the funding required for uncontracted newbuilds.
- Track backlog conversion, contract commencements and customer concentration, particularly Petrobras exposure.
- Review developments in ENSCO 74 claims, FCPA-related obligations and environmental matters, including potential insurance or indemnity recoveries.