Business context and reporting period
The supplied filing is Ensco plc’s Form 10-Q for the quarter ended September 30, 2012; it is not filed under Valaris Ltd. Ensco reports offshore contract drilling across Deepwater, Midwater and Jackup segments. Comparisons with 2011 are affected by the May 2011 acquisition of Pride International; 2011 includes Pride only after the acquisition date.
Financial performance
Amounts are in U.S. dollars; millions except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1,123.6 | $915.6 | $3,222.0 | $1,841.3 |
| Operating income | $415.1 | $261.5 | $1,151.0 | $488.8 |
| Net income attributable to Ensco | $343.5 | $204.5 | $950.2 | $371.0 |
| Diluted EPS | $1.48 | $0.88 | $4.10 | $2.03 |
| Operating margin | 36.9% | 28.6% | 35.7% | 26.5% |
Q3 revenue increased 23% and operating income 59% year over year, primarily on stronger Deepwater and Jackup utilization and rates. Nine-month reported revenue rose 75%; management attributed $832.3 million of the increase to the Pride acquisition and reported 44% revenue growth excluding that impact. Q3 diluted EPS was $1.48. Cash dividends per share were $0.375 in Q3 and $1.125 for the nine-month period.
Cash, debt and liquidity
- Nine-month operating cash flow was $1,587.6, versus $402.0 in 2011. Capital expenditures were $1,583.8, including $1,208.6 for newbuild construction; free cash flow after capex was approximately $3.8.
- Cash was $159.8 at September 30, down from $430.7 at year-end 2011. Working capital was $495.7; the current ratio was 1.5.
- Total debt was $4,870.4; debt to total capital was 29.4%, compared with 31.7% at year-end 2011. No amounts were outstanding under the revolving credit facilities or commercial paper program at quarter-end. Available revolving facilities totaled $1.9 billion and the commercial paper program had a $1.0 billion limit.
- Remaining fixed-price construction commitments were $2,764.1, with estimated payments of $913.4 in 2013 and $939.9 in 2014. Management expected full-year 2012 capex of approximately $1.3 billion for newbuilds, $331 million for enhancements and $210 million for other upgrades.
Material changes, outlook and management commentary
- Deepwater utilization rose to 90% from 74% in Q3 2011; average day rate was $402,489 versus $391,129. Jackup utilization was 83% versus 77%, and average day rate was $108,588 versus $99,775. Midwater utilization fell to 74% from 89%, with average day rate down to $221,420 from $239,379.
- Management described deepwater markets as strong, with high utilization and day rates above $600,000 reported for certain deepwater tenders. Jackup demand was expected to grow through 2013. Midwater utilization and rates were expected to remain under pressure in the near to intermediate term.
- Management cited more than $9 billion of contract backlog, strong operating cash flow, credit availability and the commercial paper program as support for funding construction and liquidity needs. It anticipated cash flows would be substantially directed to newbuilds and debt service through 2014; the filing does not provide a specific earnings or revenue forecast.
- Ensco added newbuilds and entered contracts for two additional ultra-deepwater drillships, scheduled for delivery in the second half of 2014. Several rigs under construction were uncontracted, creating execution and utilization exposure.
- Unusual items included $52.8 of warranty/other claim settlements recognized as reductions to contract drilling expense for the nine months, including $30.6 in Q3; a $7.8 pretax loss on the September sale of its barge rig; and discrete tax benefits that contributed to lower effective tax rates. The 2012 effective tax rate was 11.1% for nine months, or 12.1% excluding discrete items.
Risks and contingencies
- Offshore drilling is exposed to utilization and day-rate cycles, newbuild supply, rig downtime, construction delays and cost, severe weather, regulatory restrictions, and geopolitical disruption. Management noted uncertainty about whether markets could absorb upcoming Jackup newbuild deliveries.
- Petrobras accounted for 24% of Q3 revenue and 25% of nine-month revenue, a significant customer concentration.
- ENSCO 74 litigation included claims exceeding $26 million and a separate $10 million tanker claim; trial was scheduled for March 2013. Management did not expect a material financial effect but could not assure the outcome. Asbestos claims involving approximately 100 plaintiffs had no estimable exposure range.
- Brazilian authorities sought approximately $3.1 million in environmental fines, for which the company recorded a liability. A separate Spanish environmental proceeding sought approximately $4.0 million; the company cited customer guarantees and expected indemnification, but could not predict the outcome.
- Following Pride’s FCPA settlements, Ensco remained subject to DOJ deferred-prosecution obligations and preliminary governmental inquiries in certain countries; potential consequences were not estimable.
- Foreign currency derivatives covered an aggregate $334.4 million of exposures; a hypothetical adverse 10% currency move implied approximately $18.2 million of unrealized losses, partly offset by expected underlying transactions. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Most important facts to verify
- Confirm the intended issuer: this source is Ensco plc, not Valaris Ltd.
- Assess underlying growth separately from Pride acquisition effects and the $52.8 million of claim settlements that reduced drilling expense.
- Verify contract backlog quality, Petrobras exposure, and the status and funding of $2.764 billion in remaining construction commitments, particularly uncontracted rigs.
- Monitor cash generation against capex, debt service, and dividends, as cash declined to $159.8 million despite higher operating cash flow.
- Follow deepwater market conditions, midwater weakness, newbuild supply, and unresolved legal, environmental and FCPA matters.