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ESV > SEC Filings for ESV > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for ENSCO PLC

Form 10-Q for ENSCO PLC


1-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited consolidated financial statements as of June 30, 2014 and for the three-month and six-month periods ended June 30, 2014 and 2013 included elsewhere herein and with our annual report on Form 10-K for the year ended December 31, 2013. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" in Item 1A of our annual report. See "Forward-Looking Statements."

EXECUTIVE SUMMARY

Ensco owns the world's second largest offshore drilling rig fleet amongst competitive rigs. We operate one of the newest ultra-deepwater fleets in the industry, and our premium jackup fleet is the largest of any offshore drilling company. We currently own and operate an offshore drilling rig fleet of 75 rigs, including seven rigs under construction, spanning most of the strategic markets around the globe. Our fleet includes ten drillships, thirteen dynamically positioned semisubmersible rigs, six moored semisubmersible rigs and 46 jackup rigs.

Brent crude oil prices averaged approximately $110 per barrel during the second quarter of 2014, and we believe current prices support operator drilling programs in the floater and jackup markets. Despite the attractive commodity prices, a reduction in capital spending by operators, combined with increasing rig supply, negatively impacted floater day rates and utilization during the second quarter of 2014.

We remain focused on our long-established strategy of high-grading and expanding the size of our fleet where we identify long-term growth opportunities. In response to customer demand for our differentiated rig technology and contract drilling services in the Middle East, we entered into an agreement with Lamprell to construct two premium jackup rigs (ENSCO 140 and ENSCO 141) during the second quarter of 2014. These rigs are scheduled for delivery during the second quarter and third quarter of 2016, respectively. In July 2014, we accepted delivery of ENSCO 122, an ultra-premium harsh environment rig that is expected to be placed into service later this year. Currently, we have seven rigs under construction, including three ultra-deepwater drillships, three premium jackup rigs and one ultra-premium harsh environment jackup rig. In addition to ENSCO 122, our next two deliveries, ENSCO DS-8 and ENSCO DS-9, are contracted. Five of our older, less capable floater rigs are currently being marketed for sale as part of our fleet high-grading strategy.

A significant portion of our projected cash flow will continue to be invested in the expansion and enhancement of our fleet of drilling rigs. We also intend to continue paying quarterly dividends for the foreseeable future. However, our Board of Directors may change the timing and payment amount depending on several factors including our profitability, liquidity, financial condition, reinvestment opportunities and capital requirements. We believe our strong balance sheet, $10.7 billion of contract backlog and $2.0 billion of borrowing capacity under our commercial paper program and revolving credit facility as of June 30, 2014 will provide flexibility to make additional investments in our fleet and sustain an adequate level of liquidity during the remainder of 2014 and beyond.

BUSINESS ENVIRONMENT

Floaters

The global contracting environment grew increasingly competitive during the second quarter of 2014, particularly for older, less capable floaters. A reduction in capital spending by operators, as well as increasing supply from newbuild floaters, has negatively impacted utilization and day rates. Operators have taken advantage of these lower rates by contracting premium and high-specification rigs. Drilling contractors are currently challenged to contract older, less capable floaters, although retirements of these rigs could alleviate some of this pressure. We anticipate that the floater environment will remain competitive; however, we do expect additional contracting opportunities to be available in several regions, particularly for premium rigs.


Rig supply in the U.S. Gulf of Mexico is expected to increase during the remainder of 2014 as multiple newbuild rigs mobilize to the region. Although the majority of these rigs are contracted, utilization and day rates for existing floaters in the region may be negatively impacted, causing some of these rigs to mobilize to other regions. We expect tendering activity to remain relatively low in the near term, though ongoing exploration activity could lead to incremental opportunities over time. In Mexico, ongoing energy reform could create opportunities in the region going forward.

We believe there will be incremental demand in Brazil as customers come to the market for rigs to drill their new exploration acreage awarded in licensing rounds held during 2013. Petrobras has an open market inquiry, and we expect incremental opportunities during the remainder of 2014 and 2015 related to pre-salt development in the region.

In West Africa, customer demand remains strong. Currently, there are multiple open tenders for rigs with multi-year terms. Incremental opportunities are expected in Angola, Ghana, and Nigeria. Several operators have exploration programs planned in East Africa and South Africa, and the new discoveries in East Africa could result in significant development programs over time.

Supply and demand in the North Sea market are balanced. We expect additional drilling opportunities in the Mediterranean market, with formal tender programs likely during the remainder 2014 and into 2015. In Asia Pacific, we anticipate incremental requirements in Australia, Indonesia, Myanmar, South Korea and Vietnam.

The worldwide supply of floaters continues to increase as a result of newbuild construction programs. Currently, there are 84 newbuild drillships and semisubmersible rigs reported to be under construction, of which approximately 38 are without contracts. We estimate that fourteen rigs will be delivered before the end of 2014, the majority of which are uncontracted. Utilization and day rates will likely continue to be negatively impacted, particularly for less capable floaters.

Jackups

Demand for jackups remains strong, generally supporting current day rates and contract terms. However, newbuild deliveries have begun to put some downward pressure on new contracting activity in certain regions. Utilization and day rates may come under additional pressure as more newbuild rigs enter the market; however, retirements of older jackups could partially offset new supply as the majority of the global jackup fleet is more than 30 years old.
Demand is steady in the U.S. Gulf of Mexico. We expect the jackup market to remain largely in balance; however, recent contract terms have declined in duration, which has put pressure on day rates and utilization. In Mexico, we believe there will be incremental demand as the national oil company of Mexico, Petróleos Mexicanos ("PEMEX"), continues to expand its rig fleet.

The Middle East market is expected to remain strong, and we believe there will be incremental demand from operators in the region as well as opportunities to extend existing contracts. In West Africa, there are currently open tenders for incremental rigs for multi-year terms, though recent contracting activity has resulted in some downward pressure on day rates.

We expect the North Sea market to remain balanced. Significant contracted backlog exists for 2014, and operators are issuing tenders to secure rigs for work in 2015 and beyond.

The Asia Pacific market remains balanced, though recent contracting activity indicates an increasingly competitive environment. We expect further pressure on utilization and day rates as multiple uncontracted newbuild rigs are expected to become available during the remainder of 2014 and into 2015. Drilling contractors may seek opportunities to move rigs out of the region. Incremental requirements are expected in Australia, China, Malaysia, Thailand and Vietnam, which could help absorb the incremental newbuilds added to the Asia Pacific fleet.


Worldwide jackup supply continues to increase as a result of newbuild construction programs. Currently, there are approximately 132 newbuild jackup rigs reported to be under construction, approximately half of which are being built by companies that have not historically operated offshore drilling rigs. Approximately sixteen rigs are scheduled for delivery during the remainder of 2014, the majority of which are not contracted. While customer demand remains positive, utilization and day rates in certain regions may come under additional pressure in the near term, depending upon the rate at which older jackups are retired.

RESULTS OF OPERATIONS

The following table summarizes our condensed consolidated results of operations
for the three-month and six-month periods ended June 30, 2014 and 2013 (in
millions):
                                                Three Months Ended           Six Months Ended
                                                     June 30,                    June 30,
                                                2014          2013          2014          2013
Revenues                                    $  1,203.0     $ 1,130.3     $ 2,332.9     $ 2,170.6
Operating expenses
Contract drilling (exclusive of
depreciation)                                    576.0         527.2       1,128.6       1,007.0
Loss on impairment                               991.5             -         991.5             -
Depreciation                                     139.4         132.0         278.6         259.9
General and administrative                        36.2          36.4          74.3          74.2
Operating (loss) income                         (540.1 )       434.7        (140.1 )       829.5
Other expense, net                               (30.8 )       (39.8 )       (59.9 )       (69.6 )
Provision for income taxes                        48.0          48.5         100.9          99.3
(Loss) income from continuing operations        (618.9 )       346.4        (300.9 )       660.6
(Loss) income from discontinued operations,
net                                             (550.7 )        16.2        (572.0 )        21.9
Net (loss) income                             (1,169.6 )       362.6        (872.9 )       682.5
Net income attributable to noncontrolling
interests                                         (3.1 )        (1.7 )        (7.3 )        (4.5 )
Net (loss) income attributable to Ensco     $ (1,172.7 )   $   360.9     $  (880.2 )   $   678.0

Revenues increased $72.7 million, or 6%, and contract drilling expense increased $48.8 million, or 9%, for the three-month period ended June 30, 2014 as compared to the prior year quarter. For the six-month period ended June 30, 2014, revenues increased $162.3 million, or 7%, and contract drilling expense increased $121.6 million, or 12%, as compared to the prior year period. The increase in revenues for the three-month and six-month periods ended June 30, 2014 was primarily due to the addition of newbuild rigs to both our Floaters and Jackups segments and an increase in average day rates, partially offset by a decline in utilization. The increase in contract drilling expense for the three-month and six-month periods ended June 30, 2014 was due to the aforementioned additions to our fleet, as well as higher personnel and repair and maintenance costs. The decline in operating income for the three-month and six-month periods ended June 30, 2014 was attributable to the loss on impairment recognized on older, less capable rigs in our Floaters segment. See below for additional information on our results by segment.

A significant number of our drilling contracts are of a long-term nature. Accordingly, an increase or decline in demand for contract drilling services generally affects our operating results and cash flows gradually over future quarters as long-term contracts expire and new contracts and/or options are priced at current market rates.


Rig Counts, Utilization and Average Day Rates

The following table summarizes our offshore drilling rigs by reportable segment
and rigs under construction as of June 30, 2014 and 2013:
                         2014   2013
Floaters(1)               26     25
Jackups(1)(2)             41     42
Under construction(1)(3)  8      8
Total                     75     75

(1) During the second half of 2013, we accepted delivery of one ultra-deepwater drillship (ENSCO DS-7) and two ultra-premium harsh environment jackup rigs (ENSCO 120 and ENSCO 121). ENSCO DS-7 commenced a long-term contract during the fourth quarter of 2013, ENSCO 120 commenced drilling operations under a long-term contract during the first quarter of 2014 and ENSCO 121 commenced drilling operations under a long-term contract during the second quarter of 2014.

In July 2014, we accepted delivery of the ENSCO 122, which is committed under a long-term drilling contract.

The five floaters classified as "held for sale" as of June 30, 2014 are included in the table above.

(2) We sold jackup rigs ENSCO 69 and Pride Wisconsin during the first quarter of 2014 and ENSCO 85 during the second quarter of 2014.

(3) During the fourth quarter of 2013, we entered into an agreement with Keppel FELS Limited ("KFELS") to construct one ultra-premium harsh environment jackup rig (ENSCO 123). This rig is scheduled for delivery during the second quarter of 2016 and is currently uncontracted.

During the second quarter of 2014, we entered into an agreement with Lamprell plc to construct two premium jackup rigs (ENSCO 140 and ENSCO 141), which are scheduled for delivery during the second quarter and third quarter of 2016, respectively. Both of these rigs remain uncontracted.
The following table summarizes our rig utilization and average day rates by reportable segment for the three-month and six-month periods ended June 30, 2014 and 2013:

                        Three Months Ended           Six Months Ended
                             June 30,                    June 30,
                        2014          2013          2014          2013
Rig Utilization(1)
Floaters                    77 %          87 %          76 %          85 %
Jackups                     89 %          87 %          88 %          90 %
Total                       85 %          87 %          84 %          88 %
Average Day Rates(2)
Floaters             $ 479,176     $ 430,281     $ 472,584     $ 420,325
Jackups                134,456       121,631       132,732       119,148
Total                $ 241,756     $ 225,991     $ 239,997     $ 216,670

(1) Rig utilization is derived by dividing the number of days under contract by the number of days in the period. Days under contract equals the total number of days that rigs have earned and recognized day rate revenue, including days associated with compensated downtime and mobilizations. When revenue is earned but is


deferred and amortized over a future period, for example when a rig earns revenue while mobilizing to commence a new contract or while being upgraded in a shipyard, the related days are excluded from days under contract.

For newly-constructed or acquired rigs, the number of days in the period begins upon commencement of drilling operations for rigs with a contract or when the rig becomes available for drilling operations for rigs without a contract.

(2) Average day rates are derived by dividing contract drilling revenues, adjusted to exclude certain types of non-recurring reimbursable revenues, lump sum revenues and revenues attributable to amortization of drilling contract intangibles, by the aggregate number of contract days, adjusted to exclude contract days associated with certain mobilizations, demobilizations, shipyard contracts and standby contracts.

Detailed explanations of our operating results, including discussions of revenues, contract drilling expense and depreciation expense by segment, are provided below.

Operating Income

Our business consists of three operating segments: (1) Floaters, which includes our drillships and semisubmersible rigs, (2) Jackups and (3) Other, which currently consists of management services on rigs owned by third-parties. Our two reportable segments, Floaters and Jackups, provide one service, contract drilling.
Segment information is presented below (in millions). General and administrative expense and depreciation expense incurred by our corporate office are not allocated to our operating segments for purposes of measuring segment operating income and were included in "Reconciling Items." Prior year information has been reclassified to conform to the current year presentation.

Three Months Ended June 30, 2014
                                                                   Operating
                    Floaters        Jackups         Other        Segments Total     Reconciling Items     Consolidated Total
Revenues          $    720.6     $     465.9     $     16.5     $    1,203.0       $               -     $         1,203.0
Operating
expenses
Contract drilling
(exclusive of
depreciation)          330.3           234.0           11.7            576.0                       -                 576.0
Loss on
Impairment             991.5               -              -            991.5                       -                 991.5
Depreciation            93.2            44.1              -            137.3                     2.1                 139.4
General and
administrative             -               -              -                -                    36.2                  36.2
Operating (loss)
income            $   (694.4 )   $     187.8     $      4.8     $     (501.8 )     $           (38.3 )   $          (540.1 )

Three Months Ended June 30, 2013
                                                                   Operating
                    Floaters         Jackups         Other       Segments Total    Reconciling Items      Consolidated Total
Revenues          $     716.9     $     393.1     $     20.3     $    1,130.3     $               -     $            1,130.3
Operating
expenses
Contract drilling
(exclusive of
depreciation)           302.6           208.6           16.0            527.2                     -                    527.2
Depreciation             91.7            38.7              -            130.4                   1.6                    132.0
General and
administrative              -               -              -                -                  36.4                     36.4
Operating income
(loss)            $     322.6     $     145.8     $      4.3     $      472.7     $           (38.0 )   $              434.7


Six Months Ended June 30, 2014
                                                                   Operating
                    Floaters        Jackups         Other        Segments Total     Reconciling Items     Consolidated Total
Revenues          $  1,410.8     $     889.0     $     33.1     $    2,332.9       $               -     $         2,332.9
Operating
expenses
Contract drilling
(exclusive of
depreciation)          656.4           449.2           23.0          1,128.6                       -               1,128.6
Loss on
Impairment             991.5               -              -            991.5                       -                 991.5
Depreciation           189.6            85.0              -            274.6                     4.0                 278.6
General and
administrative             -               -              -                -                    74.3                  74.3
Operating (loss)
income            $   (426.7 )   $     354.8     $     10.1     $      (61.8 )     $           (78.3 )   $          (140.1 )

Six Months Ended June 30, 2013
                                                                  Operating
                    Floaters        Jackups         Other       Segments Total    Reconciling Items      Consolidated Total
Revenues          $  1,342.2     $     787.9     $     40.5     $    2,170.6     $               -     $            2,170.6
Operating
expenses
Contract drilling
(exclusive of
depreciation)          573.2           402.1           31.7          1,007.0                     -                  1,007.0
Depreciation           179.4            77.3              -            256.7                   3.2                    259.9
General and
administrative             -               -              -                -                  74.2                     74.2
Operating income
(loss)            $    589.6     $     308.5     $      8.8     $      906.9     $           (77.4 )   $              829.5

Floaters

Floater revenues for the three-month period ended June 30, 2014 increased slightly compared to the prior year quarter. ENSCO DS-7 commenced its initial drilling contract during the fourth quarter of 2013 and average day rates improved across our Floater fleet. Floater utilization declined primarily due to ENSCO 5004 and ENSCO 5006 which were in the shipyard for capital enhancement projects during 2014.

Floater contract drilling expense for the three-month period ended June 30, 2014 increased by $27.7 million, or 9%, as compared to the prior year quarter, primarily due to the addition of DS-7 to our Floater fleet. Higher personnel and repair and maintenance costs also contributed to the increase in contract drilling expense. These increases were partially offset by lower contract drilling expense for ENSCO 5004 and ENSCO 5006.

We recognized a loss on impairment of $991.5 million during the three-month period ended June 30, 2014 related to four older, less capable floaters due to adverse change in the current and anticipated market for these rigs. No impairments were recorded during the prior year quarter.

Depreciation expense was comparable to the prior year quarter. The increase in depreciation due to the addition of DS-7 to the fleet was largely offset by lower depreciation expense as a result of the aforementioned impairments, which were recorded as of May 31, 2014.

Floater revenues for the six-month period ended June 30, 2014 increased by $68.6 million, or 5%, as compared to the prior year period. The increase in revenues was primarily due to commencement of ENSCO 8506 and ENSCO DS-6 drilling operations during the first quarter of 2013 and commencement of the ENSCO DS-7 drilling contract during the fourth quarter of 2013. To a lesser extent, the increase in revenues was attributable to an increase in average day rates for various rigs in our Floater fleet. These increases were partially offset by a decline in utilization attributable to multiple rigs in our Floater fleet. ENSCO 5004 and ENSCO 5006 were in the shipyard for capital enhancement projects during 2014, and ENSCO 8503 incurred several months of uncontracted downtime between January 2014


and April 2014. Utilization in the prior year period was negatively impacted by downtime prompted by a vendor notice regarding inspection and replacement of connector bolts on various rigs.

Floater contract drilling expense for the six-month period ended June 30, 2014 increased by $83.2 million, or 15%, as compared to the prior year period, primarily due to the aforementioned additions to our Floater fleet. To a lesser extent, higher personnel and repair and maintenance costs also contributed to the increase in contract drilling expense. These increases were partially offset by lower contract drilling expense for the ENSCO 5004 and ENSCO 5006.

We recognized a loss on impairment of $991.5 million during the six-month period ended June 30, 2014 related to four older, less capable floaters due to the adverse change in the current and anticipated market for these assets. No impairments were recorded during the prior year period.

Depreciation expense increased by $10.2 million, or 6%, primarily due to the aforementioned additions to our Floater fleet, and was partially offset by a lower depreciation charge as a result of the aforementioned impairments.

Jackups

Jackup revenues for the three-month period ended June 30, 2014 increased by $72.8 million, or 19%, as compared to the prior year quarter. The increase in revenues was primarily due to an increase in average day rates across our Jackup fleet and the commencement of the ENSCO 120 and ENSCO 121 drilling contracts during the first quarter and second quarter of 2014, respectively.
Jackup contract drilling expense for the three-month period ended June 30, 2014 increased $25.4 million, or 12%, as compared to the respective prior year quarter, primarily due to the aforementioned additions to our Jackup fleet and an increase in personnel and repair and maintenance costs. Depreciation expense increased by $5.4 million, or 14%, primarily due to the additions to our fleet.

Jackup revenues for the six-month period ended June 30, 2014 increased by $101.1 million, or 13%, as compared to the respective prior year period. The increase in revenues was primarily due to an increase in average day rates across our Jackup fleet and the commencement of the ENSCO 120 and ENSCO 121 drilling contracts during the first quarter and second quarter of 2014, respectively. These increases were partially offset by a decline in utilization attributable to an increase in planned shipyard activity for certain rigs in the Jackup fleet.

Jackup contract drilling expense for the six-month period ended June 30, 2014 increased $47.1 million, or 12%, as compared to the prior year period, primarily due to the aforementioned additions to our Jackup fleet and an increase in personnel and repair and maintenance costs. Depreciation expense increased by $7.7 million, or 10%, primarily due to the additions to our fleet.


Other Income (Expense)

The following table summarizes other income (expense) for the three-month and
six-month periods ended June 30, 2014 and 2013 (in millions):
                          Three Months Ended         Six Months Ended
                               June 30,                  June 30,
                           2014         2013         2014        2013
Interest income        $     3.5      $   4.7     $    7.1     $   8.0
Interest expense, net:
Interest expense           (55.7 )      (57.4 )     (111.6 )    (114.2 )
Capitalized interest        19.3         13.2         40.6        30.8
                           (36.4 )      (44.2 )      (71.0 )     (83.4 )
Other, net                   2.1          (.3 )        4.0         5.8
                       $   (30.8 )    $ (39.8 )   $  (59.9 )   $ (69.6 )

Interest income for the three-month and six-month periods ended June 30, 2014 declined as compared to the respective prior year periods primarily due to declining outstanding principal amounts due from customers for reimbursement of . . .

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