Valaris Ltd quarterly report, Q2 FY2009

Business context and reporting period

ENSCO International Incorporated (the issuer named in this filing; not Valaris Ltd) reported unaudited results for the quarter and six months ended June 30, 2009. The company provides offshore contract drilling through Deepwater, Asia Pacific, Europe/Africa, and North and South America segments. KPMG performed an interim review, not an audit.

Financial performance and position

Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.

• Contract drilling expense was $177.8 million in Q2 and $341.5 million for the first half; depreciation was $49.3 million and $96.5 million, respectively.
• Six-month capital expenditures were $471.5 million, including $328.5 million for new rig construction. Cash increased by $92.4 million to $882.0 million over the first half.
• At June 30, cash was $882.0 million, working capital $1,082.4 million, and current ratio 3.4. Long-term debt was $265.7 million plus $17.2 million of current maturities; debt to total capital was 4.9%. The $350 million revolving facility had no borrowings and matured in June 2010.
• Cash dividends were $0.025 per share for Q2, unchanged from the prior year quarter.

Changes versus prior comparable periods

• Q2 revenue fell 16% and operating income fell 22% year over year; first-half revenue fell 13% and operating income fell 17%.
• Lower jackup utilization, especially in Asia Pacific and North and South America, drove the deterioration. Total utilization declined to 72% in Q2 from 95%; Asia Pacific fell to 63% from 91%, and North and South America to 72% from 100%.
• Average day rates increased overall to $171,439 in Q2 from $154,454, with stronger Deepwater and North and South America rates partly offsetting weaker utilization. Deepwater revenue benefited from ENSCO 8500 beginning operations and ENSCO 7500’s higher-rate Australia contract.
• Net income included a $24.9 million loss from discontinued operations in Q2, versus $9.8 million of discontinued-operations income in Q2 2008. The first-half comparison was a $28.6 million loss versus $14.7 million of income.
• Operating cash flow rose 48% for the first half, largely due to lower tax payments and reduced investment in trading securities, partly offset by lower cash receipts from drilling services. Capital spending increased to $471.5 million from $414.7 million.

Outlook, risks, contingencies and unusual items

• Management expected weak global economic conditions and low oil and gas prices to pressure jackup utilization and day rates through the remainder of 2009 and possibly beyond; it warned that 2008 and first-half 2009 operating results might not be sustained. New rig deliveries were expected to add to oversupply.
• Management anticipated continued high utilization of ultra-deepwater rigs for the foreseeable future, while acknowledging that day rates depended on the economic recovery and future commodity prices. ENSCO 8501 was expected to start a 3.5-year Gulf of Mexico contract in October 2009. Five ENSCO 8500 Series rigs remained under construction; two had long-term contracts and three were uncontracted.
• For 2009, projected capital expenditures included approximately $530 million for ENSCO 8500 Series construction, $160 million for rig enhancements, and $100 million for upgrades. The company expected to fund its remaining $1,356 million of rig-construction commitments substantially from cash and future operating cash flow, but reserved the option to raise debt.
• ENSCO 69 was taken over and operated without Ensco’s consent by Petrosucre in Venezuela after payment defaults. Ensco terminated the contract and recorded a disposal loss and bad-debt provisions; it received $11.5 million on July 17 against $47.9 million contractually due at June 30. No insurance recovery was recognized, and recovery of the rig or outstanding entitlements was uncertain.
• Following Hurricane Ike, ENSCO 74 removal costs were estimated at $46 million at the low end of the ranges and recorded with corresponding receivables. Separate tanker and pipeline claims remained unresolved; the company had not concluded that liability was probable. The filing also describes prior ENSCO 74 insurance proceeds and coverage limits.
• ENSCO elected not to buy Gulf of Mexico windstorm property coverage for eight jackup rigs remaining in the area, retaining the risk of their windstorm damage or loss. Deepwater windstorm coverage was limited and subject to a $50 million per-occurrence retention; the company warned uninsured losses could be material.
• The FCPA investigation concerning Nigerian customs and immigration practices was essentially concluded; Ensco expected to discuss a possible resolution with U.S. authorities in the second half of 2009 but could not estimate potential penalties or other remedies. The company was also party to asbestos litigation and other claims.
• Auction rate securities had a $61.6 million carrying value versus $69.7 million par value and remained illiquid, with fair value based on significant unobservable inputs. Management intended to hold them pending redemption or an orderly market. A hypothetical 10% adverse change in key valuation assumptions could produce about $2.1 million of additional unrealized losses.
• Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Confirm the issuer identity: this source is an ENSCO International Incorporated 10-Q for 2009, not a filing under the name Valaris Ltd.
• Track jackup utilization, day rates, contract backlog, and the progress and funding of the five unfinished ENSCO 8500 Series rigs, particularly the three without contracts.
• Review collections, insurance developments, and legal remedies related to ENSCO 69, including the difference between the amount due and the July payment received.
• Monitor ENSCO 74 wreck removal, insurance and indemnity recoveries, and tanker or pipeline claims, as well as exposure from self-insured Gulf of Mexico jackups.
• Follow the FCPA matter for any negotiated disposition, charges, fines, or sanctions, and assess the valuation and liquidity of auction rate securities.