Valaris Ltd annual report, FY2013

Ensco plc 2013 Form 10-K Summary

Filing identity: The supplied filing is for Ensco plc, not Valaris Ltd. It covers the fiscal year ended December 31, 2013; quarterly data includes the fourth quarter.

Business context and reporting period

Ensco provides offshore contract drilling services on a day-rate basis through its Floaters and Jackups segments, operating internationally. At year-end it reported 74 owned rigs, including six under construction, and approximately $10.7 billion of contract backlog.

Financial performance and liquidity

Metric20132012
Revenue$4.920 billion$4.301 billion
Operating income$1.759 billion$1.565 billion
Operating margin35.7%36.4%
Net income attributable to Ensco$1.418 billion$1.170 billion
Diluted EPS$6.07$5.04
Cash from continuing operations$1.980 billion$2.200 billion
Capital expenditures$1.779 billion$1.802 billion
Cash and short-term investments at year-end$215.6 million$537.1 million
Total debt$4.766 billion$4.846 billion
Working capital / current ratio$487.9 million / 1.5$734.2 million / 1.7

Operating cash flow less capital expenditures was approximately $201 million. Debt was 27.1% of total capitalization, down from 29.0%. The company had no commercial-paper or revolving-credit borrowings outstanding at year-end; its revolving facility was $2.0 billion. Cash dividends paid totaled $525.6 million, and dividends declared and paid per share were $2.25 for the year.

Fourth quarter: Revenue was $1.256 billion, operating income $448.0 million, net income attributable to Ensco $361.4 million, and diluted EPS $1.54. In fourth-quarter 2012, the corresponding figures were $1.086 billion, $382.1 million, $219.5 million, and $0.94.

Changes versus prior year

  • Revenue rose 14% and operating income rose 12%, primarily from newbuild rig additions and higher average day rates; lower floater utilization and increased personnel costs partly offset gains.
  • Net income attributable to Ensco increased about 21%; diluted EPS rose from $5.04 to $6.07.
  • Total utilization eased to 85% from 88%. Average day rates increased to $223,099 from $193,407; Floater utilization was 80% versus 87%, while Jackup utilization was 88% versus 89%.
  • Operating cash flow declined 10%, and year-end cash and short-term investments fell by $321.5 million. Backlog was $10.744 billion, slightly below $10.848 billion in 2012.

Outlook, commentary, risks and unusual items

  • Management expected healthy demand for high-specification Floaters and robust Jackup demand in 2014, while cautioning that newbuild deliveries could pressure utilization, day rates and contract duration, particularly for older or less capable rigs.
  • Expected 2014 capital expenditures were approximately $1.4 billion for newbuild construction, $570 million for rig enhancements, and $300 million for minor upgrades and improvements. The company intended to continue quarterly dividends, subject to financial condition and capital needs.
  • OGX filed for bankruptcy protection in Brazil. Ensco stopped recognizing revenue for services provided to OGX in the second half of 2013 and fully reserved its OGX receivables, including a $14.6 million provision for doubtful accounts.
  • U.S. Gulf of Mexico hurricane risk is significant: Ensco self-insured windstorm damage to eight jackups there. Insurance policies were due for renewal May 31, 2014.
  • Other key risks include offshore drilling hazards and regulatory changes, cyclical commodity-driven demand, substantial newbuild supply and shipyard execution risk, customer concentration (top five customers represented 45% of revenue; Petrobras 17%), and possible rig or goodwill impairment. Goodwill was $3.274 billion; no impairment was recorded in 2013.
  • Contingencies include unresolved asbestos claims, contested Brazilian environmental assessments of about $250,000, and a Spanish environmental proceeding seeking about $4.0 million. A $9.6 million settlement in principle related to the 2008 ENSCO 74 pipeline claim resulted in a $6.4 million charge recorded in 2013; the insurer was expected to pay the remaining $3.2 million. Pride-related foreign bribery inquiries remained preliminary, with potential exposure unclear.
  • CEO Daniel Rabun announced his retirement in November 2013 and was to remain in his roles pending appointment of a successor. KPMG issued unqualified opinions on the financial statements and internal controls.

Most important facts for investors to verify

  • Confirm the correct issuer and ticker: this document is Ensco plc (NYSE: ESV), not a Valaris Ltd filing.
  • Assess whether projected 2014 capital spending and newbuild commitments can be funded alongside dividends and debt service; scheduled 2014 newbuild payments were approximately $1.061 billion.
  • Track rig utilization and day rates as the substantial global newbuild supply enters the market, and confirm contract commencement and delivery schedules for rigs under construction.
  • Monitor OGX recovery prospects, the outcome of material litigation and regulatory inquiries, and the renewal and scope of insurance coverage—especially Gulf of Mexico jackup windstorm exposure.
  • Review customer concentration, debt maturities (including approximately $1.020 billion due in 2016), tax uncertainties, and the assumptions underlying asset and goodwill valuations.