Ensco plc has reported a loss of $5.07 per diluted share in the second quarter 2014 compared to earnings of $1.55 per diluted share in the second quarter 2013.
The loss from discontinued operations for second quarter 2014, which includes a $546 million pre-tax loss on impairment for four floaters that are now held for sale, was $2.38 per share compared to a gain of $0.07 per share in second quarter 2013.
The loss from continuing operations in second quarter 2014 was $2.69 per share, compared to earnings from continuing operations of $1.48 per share in second quarter 2013. Excluding a loss on impairment for four floaters in continuing operations totaling $992 million, or $4.27 per share, second quarter earnings from continuing operations were $1.58 per share, compared to $1.48 per share in second quarter 2013.
Chief Executive Officer and President Carl Trowell said: “Our focus on operational excellence and safety has yielded very good results with 95% operational utilization for the quarter and a total recordable incident rate year to date that is even better than our record safety performance in 2013. We ended the quarter with near-record revenue backlog for our jack-up fleet given positive contracting across several regions, however, market conditions for floating rigs have become more challenging. We believe the fundamental drivers of long-term demand for newer, more technologically-advanced floaters are still favorable and our recent contracts for ENSCO DS-8 and ENSCO DS-9 are great examples. Regardless of what the market brings, Ensco’s strategy of offering differentiated rig designs and drilling services, coupled with our strong financial position, give us a competitive advantage.”
Trowell continued, “Our capital projects team successfully managed the delivery of ENSCO 122 ahead of schedule and ENSCO 121 has commenced its initial contract for Wintershall in the North Sea. Given our positive outlook for key shallow water markets where Ensco has the number one position, we ordered two ENSCO 140 Series jackups. These rigs have enhanced operational capabilities as well as our patented Canti-Leverage AdvantageSM technology that will translate into significant logistical efficiencies and cost savings for customers.”
“Fleet high-grading during the quarter also included our decision to sell five floaters with an average age of 32 years,” added Trowell. “This decision followed an in-depth review of our fleet given more challenging floater market conditions, particularly for older midwater rigs. These actions will allow us to more quickly reduce expenses and focus on our go-forward fleet of floaters that has an average age of just nine years. As part of our fleet review, we recorded a $1.5 billion non-cash impairment charge during the quarter for eight floaters.”
Second Quarter Results
“The loss of $5.07 per diluted share in second quarter 2014 reflects write-downs to the carrying values of eight floaters following a comprehensive review of our fleet in light of more challenging market conditions,” said EVP and Chief Financial Officer Jay Swent.
“When you exclude the impact of our decision to sell five rigs, the impairment charges and the gain on sale of ENSCO 85, earnings per share were $1.35 in the second quarter 2014.”
Swent continued, “Since the $1.5 billion impairment charge is a non-cash item, it did not reduce cash flows from operating activities that totaled nearly $1 billion for the first six months of 2014.”
Excluding a loss on impairment for four floaters in continuing operations totaling $992 million, or $4.27 per share, second quarter earnings from continuing operations were $1.58 per share, compared to $1.48 per share in second quarter 2013.
Revenues grew 6% to $1.203 billion in second quarter 2014, up from $1.130 billion a year ago, due to the addition of ENSCO DS-7, ENSCO 120 and ENSCO 121 to the active fleet. The average day rate for the fleet increased 7% to $242,000.
Reported utilization, which includes the impact of uncontracted rigs and planned downtime, declined to 85% from 87% in second quarter 2013. The decline was due 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 95% in second quarter 2014, up from 94% a year ago.
Contract drilling expense increased 9% to $576 million, compared to $527 million a year ago. This increase was due mostly to adding three new rigs to the active fleet, as well as a previously anticipated increase in unit labor costs.
Second quarter 2014 results included a loss on impairment of $992 million, or $4.27 per share, related to four floaters remaining in continuing operations: ENSCO DS-1, ENSCO DS-2, ENSCO 5004 and ENSCO 5005.
Depreciation expense was $139 million compared to $132 million in second quarter 2013. The $7 million increase was mostly due to adding three rigs to the active fleet, partially offset by a $3 million, or $0.01 per share, reduction in depreciation expense related to lower carrying values for four assets impaired during second quarter 2014.
General and administrative expense was $36 million in second quarter 2014, unchanged from a year ago. Interest expense in second quarter 2014 was $36 million, net of $19 million of interest that was capitalized, compared to interest expense of $44 million in second quarter 2013, net of $13 million of interest that was capitalized.
Excluding the loss on impairment in continuing operations, the effective tax rate was 11.4% compared to 12.2% a year ago.
Floater revenues grew 1% to $721 million in second quarter 2014 from $717 million a year ago, primarily due to ENSCO DS-7 starting its initial contract. The average day rate increased 11% to $479,000 from $430,000 in second quarter 2013.
Reported utilization declined to 77% from 87% a year ago, mostly due to shipyard upgrades and surveys. ENSCO 5004 and ENSCO 5006, which operated during second quarter 2013, were undergoing major shipyard upgrades in preparation for multi-year contracts starting later this year. ENSCO 8503 was contracted for a partial quarter in second quarter 2014 compared to a full quarter a year ago. Adjusted for uncontracted rigs and planned downtime, operational utilization improved to 93% from 92% last year.
Floater contract drilling expense was $330 million in second quarter 2014, up 9% from $303 million in the second quarter 2013, primarily due to the start of drilling operations for ENSCO DS-7 in fourth quarter 2013. As noted above, second quarter 2014 floater results included a loss on impairment of $992 million.
Jack-up revenues grew 19% to $466 million, up from $393 million a year ago. The increase was mostly due to a $12,000 increase in the average day rate to $134,000. A full quarter of operations for ENSCO 120 and a partial quarter of operations for ENSCO 121 also contributed to this increase.
Reported utilization was 89%, compared to 87% in second quarter 2013, as the number of planned days for shipyard upgrades or inspections declined year to year. Adjusted for uncontracted rigs and planned downtime, operational utilization in second quarter 2014 was 99%, unchanged from a year ago.
Contract drilling expense increased 12% to $234 million, mostly due to the start of drilling operations for ENSCO 120 during first quarter 2014 and ENSCO 121 during the second quarter 2014. A previously anticipated increase in labor costs also contributed to this increase. The jack-up segment had no loss on impairment.
Other is composed of managed drilling rig operations. The expiration of a managed drilling contract during the third quarter 2013 caused revenues and contract drilling expense to decline year to year. Revenues decreased to $17 million from $20 million in second quarter 2013. Contract drilling expense declined to $12 million from $16 million a year ago.
Swent added, “We remain committed to our $3.00 per share annualized dividend and continue to have significant financial flexibility with $11 billion of contracted revenue backlog and a leverage ratio under 30% – even as we grow our fleet with seven rigs under construction.”
Swent concluded, “Our decision to sell five additional rigs as part of our high-grading strategy will drive down expenses for these rigs more quickly. While second quarter 2014 results were negatively influenced by a non-cash loss on impairment, this has no impact on our liquidity and we believe we are well positioned to capitalize on future demand in the deepwater and ultra-deepwater markets with our remaining fleet of 24 high-quality floaters in continuing operations.”