Business context and reporting period
The supplied filing is Ensco plc’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018; it is not identified in the filing text as Valaris Ltd. Ensco provides offshore contract drilling services through floater and jackup fleets. At quarter-end it reported 56 operating rigs and three rigs under construction.
Financial performance and liquidity
- Third quarter: Revenue was $430.9 million, down 6% from $460.2 million. Operating loss was $41.9 million versus operating income of $35.8 million; net loss attributable to Ensco was $145.0 million, or $0.33 per share, versus a $25.4 million loss, or $0.08 per share.
- Nine months: Revenue was $1.306 billion, down 6%. Operating loss was $125.8 million versus operating income of $121.4 million; net loss attributable to Ensco was $436.1 million, or $1.01 per share, versus a $96.6 million loss, or $0.32 per share.
- Margins and costs: Third-quarter operating margin was approximately negative 9.7%, compared with positive 7.8% a year earlier. Contract drilling expense rose 14% in the quarter and 17% year to date, mainly reflecting Atwood rigs and newly operating rigs. Average day rates fell year over year for both floaters and jackups.
- Cash flow and investment: Continuing-operations operating cash flow was negative $82.2 million for the nine months, versus positive $219.6 million in 2017. Capital expenditures were $378.7 million, including $309.4 million for new rig construction. Cash and equivalents were $196.0 million, short-term investments $434.0 million, and working capital $846.7 million at September 30.
- Debt: Long-term debt was $5.003 billion, approximately 37.6% of total capitalization. Ensco had no revolver borrowings and reported $2.0 billion of available capacity; it was in material compliance with facility covenants. Cash plus short-term investments totaled $630.0 million.
- Backlog and dividends: Backlog was $2.1 billion, down from $2.8 billion at December 31, 2017. Quarterly dividend was $0.01 per share; the credit facility limits dividends to that amount absent an amendment or waiver.
Material changes versus prior comparable periods
- Revenue fell 6% in both the quarter and year-to-date period. Lower day rates and rig sales weighed on results; Atwood fleet additions and new rig operations partly offset the declines.
- Operating results deteriorated sharply as contract drilling and depreciation costs increased while floater day rates declined. Third-quarter floater utilization was unchanged at 46%; jackup utilization improved to 66% from 60%.
- Interest expense increased following 2018 debt transactions. Ensco issued $1.0 billion of 7.75% notes due 2026 and repurchased or redeemed $721.8 million principal amount of earlier-maturing notes, recognizing a $19.0 million pretax extinguishment loss. Debt to total capitalization rose from 35.2% at year-end 2017 to 37.6%.
- Operating cash flow swung from positive $219.6 million to negative $82.2 million for the nine months, which management attributed principally to weaker margins and higher cash interest expense.
Outlook, commentary, risks, and unusual items
- Management described the market recovery as gradual and uneven. Jackup demand and floater tendering had improved, but excess rig supply and intense bidding continued to pressure day rates. Management expected near-term operating results and cash flows to decline as above-market contracts expire and are replaced with lower-rate work.
- Management expected 2018 capital expenditures of approximately $475 million: $370 million for newbuilds, $50 million for enhancements, and $55 million for minor upgrades. ENSCO 123 was scheduled for first-quarter 2019 delivery; ENSCO DS-13 and DS-14 for September 2019 and June 2020. Remaining construction commitments were $549.3 million.
- On October 7, 2018, Ensco agreed to an all-stock combination with Rowan, with Rowan shareholders to receive 2.215 Ensco shares per Rowan share. Estimated consideration was approximately $2.3 billion based on the cited share price; closing was expected in the first half of 2019, subject to approvals and other conditions. The filing identifies execution, regulatory, integration, employee-retention, financing, and potential transaction-cost risks.
- Ensco said cash, short-term investments, backlog, and the revolver were expected to fund liquidity needs, but noted possible future debt or equity financing. Its non-investment-grade ratings, covenant restrictions, declining backlog, and negative operating cash flow are relevant liquidity risks.
- The SEC and DOJ closed their inquiries into the Petrobras drilling-services matter without recommending enforcement action or pursuing the inquiry. Ensco and Petrobras settled related claims without payment by either side. A separate arbitration found Samsung Heavy Industries liable for at least $10 million or provable damages; the damages hearing was scheduled for first-quarter 2019, and recovery remained uncertain. Other disclosed matters include Brazilian environmental assessments and a Spanish proceeding; management did not expect these to have a material adverse effect, but outcomes were uncertain.
- Quarterly income included discrete tax effects and foreign-exchange losses; the nine-month discontinued-operations loss included a $7.5 million discrete tax expense related to the ENSCO 7500 sale. Interim financial information received a limited review by KPMG, not an audit.
Important facts for investors to verify
- Confirm the issuer and entity covered: the supplied text names Ensco plc, although the request metadata names Valaris Ltd.
- Track Rowan transaction approvals, timing, share consideration, potential costs, and integration plans.
- Monitor operating cash flow, cash and investment balances, backlog, contract awards, utilization, and achieved day rates against management’s near-term decline expectations.
- Review debt maturities, revolver availability and covenant terms, credit ratings, and funding of the $549.3 million remaining rig-construction commitments.
- Follow the Samsung arbitration damages outcome, remaining Brazil-related proceedings, tax exposures, and the effects of any future rig sales or impairment assessments.