Valaris Ltd quarterly report, Q1 FY2017

Business context and reporting period

The supplied filing is Ensco plc’s unaudited Form 10-Q for the three months ended March 31, 2017, not a filing under the name Valaris Ltd. Ensco provided offshore contract-drilling services through floater and jackup segments. KPMG performed an interim review, not an audit.

Financial performance and liquidity

Operating cash flow less capital expenditures was negative $178.0 million. The company paid $0.01 per share in dividends. It had no borrowings under its $2.25 billion revolving credit facility and reported covenant compliance.

Material changes versus the prior comparable period

• Revenue fell $342.9 million, primarily from fewer days under contract, lower day rates, and rig terminations and sales. Contract-drilling expense declined 24%, but not enough to offset the revenue contraction.
• Utilization declined to 58% from 65%; average day rates fell to $156,441 from $208,117. Floater utilization was 47% versus 64%, and jackup day rates were $86,390 versus $118,138.
• Operating cash flow decreased 55%. Newbuild construction spending rose, contributing to capital expenditures increasing to $282.6 million.
• Cash and equivalents fell substantially, while short-term investments increased; combined cash and short-term investments declined about $525 million from year-end.

Outlook, management commentary, risks and unusual items

• Management described offshore drilling markets as challenging: rig oversupply and weak pricing persisted despite improved oil prices and increased customer inquiries. Awards were generally short-term and competitive. Management expected operating results to decline in 2017 as contracts expired or renewed at lower rates.
• Backlog was $3.3 billion at March 31, down from $3.6 billion at year-end. Management warned that backlog, revenue and operating cash flow could decline further as contracts expire.
• Management estimated 2017 capital spending of approximately $425 million: $335 million for newbuilds, $60 million for minor upgrades and improvements, and $30 million for enhancements. Remaining fixed-price construction commitments were approximately $851 million, with timing subject to milestones. Delivery of ENSCO DS-10 and $75 million of its final milestone payment was deferred to Q1 2019 or an earlier date elected by Ensco.
• January debt exchanges involved $649.5 million principal of existing notes, settled with $332.0 million of new 8.00% notes due 2024 and $332.5 million cash; the company recorded a $6.2 million pretax loss. April debt repurchases were subsequent events. Ensco said it was below investment grade, which could constrain financing access and raise borrowing costs.
• The Petrobras drilling-services agreement dispute remained unresolved. Ensco had fully reserved earlier related receivables, recognized no DSA revenue for the specified period from Q4 2015 through termination, and could not estimate potential exposure. Arbitration claims and counterclaims were pending. The Brazil investigation could also result in regulatory or other consequences; Ensco said its internal investigation found no evidence of company involvement in wrongdoing.
• Other disclosed matters include a customer lawsuit alleging approximately $40 million in damages, environmental proceedings, and letters of credit and surety bonds totaling $52.5 million. The filing says potential liability for the customer dispute could not be reasonably estimated.
• Adoption of an income-tax accounting update reduced retained earnings by $14.1 million at January 1, 2017. Ensco expected to adopt revenue and lease accounting standards in 2018; it estimated $60–$80 million of lessee right-of-use assets and lease liabilities upon adoption.

Important facts for investors to verify

• Confirm the intended issuer: this source identifies Ensco plc, not Valaris Ltd.
• Track contract awards, expirations, utilization, day rates and backlog for evidence that drilling-market conditions are stabilizing or deteriorating.
• Assess cash generation against the capital-spending plan, construction commitments, debt maturities and available revolving-credit capacity.
• Follow Petrobras-related arbitration and any SEC, DOJ or other governmental developments; the filing does not quantify potential exposure.
• Check subsequent developments in the April debt repurchases, ENSCO 104 termination notice, ENSCO 56 sale and deferred newbuild delivery.