Ensco: Earnings decline due to lower fleet utilization

Ensco plc reported that diluted earnings per share were $1.25 in first quarter 2014 compared to $1.36 in first quarter 2013. Adjusted for $13 million, $0.06 per share, of certain discrete tax items, first quarter 2014 diluted earnings per share were $1.31.

Chairman, President and Chief Executive Officer Dan Rabun said, “While earnings per share declined year to year due to lower utilization as certain rigs rolled off contract and planned upgrade projects and surveys increased, we expect to grow earnings per share in future quarters as fleet-wide utilization improves. Major shipyard projects for certain floaters will be completed later this year and our marketing teams are focused on contracting our available rig time. Future earnings will also benefit from the delivery of eight newbuild rigs, which will help to offset recent market pressure that has led to lower floater utilization and market day rates.”

Rabun also stated, “First quarter 2014 uptime performance improved significantly with 96% operational utilization across our fleet. In addition, we achieved record first quarter safety performance with a total recordable incident rate of 0.37. This high level of performance is what drives Ensco’s #1 ranking in total customer satisfaction, which we achieved for the fourth year in a row. Fleet high-grading also contributes to customer satisfaction, and in March of this year ENSCO 120 commenced drilling operations under its initial contract. Two more ENSCO 120 Series jack-ups will commence their initial contracts later this year and a fourth will be delivered in 2016. All four jack-ups will include our patented Canti-Leverage AdvantageSM technology, which provides significant drilling efficiencies for our customers. Recently, we also placed an order for two ENSCO 140 Series jack-ups that include enhanced design features, including our proprietary cantilever technology.”

First Quarter Results

Revenues grew 3% to $1.187 billion in first quarter 2014, up from $1.150 billion a year ago, due to an increase in the average day rate that more than offset a decline in reported utilization. The average day rate for the fleet increased 14% to $239,000, mostly from the addition of ENSCO DS-7 to the active fleet and a full quarter of operations for ENSCO DS-6, plus higher day rates for several floaters and an increase in the jack-up segment average day rate.

Reported utilization, which includes the impact of uncontracted rigs and planned downtime, declined to 78% from 86% in first quarter 2013. The decline was due mostly to year-over-year increases in shipyard upgrade projects and uncontracted rigs. Adjusted for uncontracted rigs and planned downtime such as rig upgrades and surveys, operational utilization increased to 96% in first quarter 2014, up from 90% a year ago due to significant improvement in the Floaters segment.

Contract drilling expense was $604 million compared to $561 million a year ago. First quarter 2014 contract drilling expense benefited from a $24 million pre-tax gain on the sale of the ENSCO 69 and Wisconsin jack-up rigs. Adjusted for this gain, first quarter 2014 contract drilling expense increased $67 million, or 12%. This increase was primarily due to adding new floaters to the active fleet, as well as a previously anticipated increase in unit labor costs and higher repair and maintenance costs.

Depreciation expense was $160 million compared to $149 million in first quarter 2013. The $11 million increase was mostly due to a growing active fleet. General and administrative expense was $38 million in first quarter 2014, unchanged from a year ago.

Interest expense in first quarter 2014 was $35 million, net of $21 million of interest that was capitalized, compared to interest expense of $39 million in first quarter 2013, net of $18 million of interest that was capitalized.

The effective tax rate was 16.5% compared to 13.9% a year ago. Adjusted for approximately $13 million of certain discrete tax items noted above and $5 million of tax expense related to the sale of two jack-up rigs, the first quarter 2014 effective tax rate was 12.6%.

Segment Highlights

Floaters

Floater revenues grew 3% to $741 million in first quarter 2014 from $719 million a year ago, primarily due to ENSCO DS-7 commencing its initial contract and ENSCO DS-6 operating for a full quarter during first quarter 2014 versus a partial quarter during first quarter 2013. The average day rate increased 18% to $447,000 from $380,000 in first quarter 2013.

Reported utilization declined to 68% from 83% a year ago, mostly due to more shipyard upgrades and surveys, as well as rigs rolling off contract. ENSCO 5004 and ENSCO 5006, which operated during first quarter 2013, will be completing major shipyard upgrades in preparation for multi-year contracts commencing later this year. Adjusted for uncontracted rigs and planned downtime, operational utilization improved to 94% from 85% a year ago. First quarter 2013 utilization was influenced by downtime related to a vendor notice regarding inspection and replacement of connector bolts.

Floater contract drilling expense was $396 million in first quarter 2014, up 15% from $345 million in first quarter 2013. The increase was mostly due to the commencement of drilling operations for ENSCO DS-7 in fourth quarter 2013 and a full versus partial quarter of operations for ENSCO DS-6 year to year. The previously anticipated increase in unit labor cost and higher repair and maintenance expense also contributed to the increase.

Jack-ups

Jack-up revenues grew 5% to $430 million, up from $411 million a year ago. The increase was mostly due to a $14,000 increase in the average day rate to $131,000 driven by strong customer demand around the world.

Reported utilization was 84%, compared to 88% a year ago, as 10 jack-ups had planned downtime for shipyard upgrades or inspections during first quarter 2014 versus seven jack-ups in first quarter 2013. Adjusted for uncontracted rigs and planned downtime, operational utilization in first quarter 2014 was 99%, unchanged from a year ago.

Contract drilling expense decreased 1% to $197 million, mostly due to the sale of ENSCO 69 and the Wisconsin as noted above. Adjusted for these jack-up sales, contract drilling expense increased 11% mostly due to a previously anticipated increase in unit labor costs and repair and maintenance costs related to more shipyard projects as noted above.

Other

Other is composed of managed drilling rig operations. The expiration of a managed drilling contract during third quarter 2013 caused revenues and contract drilling expense to decline year to year. Revenues decreased to $17 million from $20 million in first quarter 2013. Contract drilling expense declined to $11 million from $16 million a year ago.

Strong Financial Position – 31 March 2014

Ensco maintained a strong financial position:

– $10 billion of contracted revenue backlog excluding bonus opportunities

– Long-term debt-to-capital ratio of 27%

– Fully available $2 billion revolving credit facility

– $123 million of cash and cash equivalents

EVP and Chief Financial Officer Jay Swent commented, “Methodical high-grading of the fleet continues to be key to Ensco’s strategy. ENSCO 120 recently commenced its initial contract in the North Sea and ENSCO 121 is scheduled to commence its initial two-year contract in May. With our recent order of two ENSCO 140 Series jack-ups, we now have eight rigs under construction that will also support the future growth of our company. Year to date, we have sold three of our less capable jack-ups, bringing our total to 14 rigs divested since the beginning of 2010.”

Swent added, “Despite recent floater market day rate declines, we are committed to our $3.00 per share annualized dividend and we maintain our positive long-term market outlook given industry fundamentals, including favorable commodity prices.”

[mappress]

Press Release, April 29, 2014