Ensco 3Q Beats on Strong Demand

Zacks

Ensco plc (ESV) reported record adjusted third quarter 2012 profit of $1.53 a share, which surpassed the Zacks Consensus Estimate of $1.30. Moreover, the quarterly earnings increased approximately 66% from 92 cents earned in the year-earlier quarter.

The substantial jump in the quarterly profit was buoyed by vigorous demand for oil rigs as well as new rigs joining the fleet.

Total revenue surged 22.7% to $1,123.6 million from last year's revenue of $915.6 million. Total revenue also beat our expectation of $1,101.0 million.

Most of the increment came from the overall higher utilization and average day rates in deepwater and jackup segments.

Segment Performance

Deepwater: Revenue jumped to $629.2 million in the reported quarter from the year-earlier level of $440.4 million. The outperformance was mainly aided by the start-up of ENSCO 8505 and a full quarter contribution from ENSCO 8504, accompanied with the increase in average day rate and utilization.

Rig utilization in this segment climbed to 90% from 74% in the year-earlier quarter. Dayrate increased to $402,489 from the year-earlier level of $391,129.

Midwater: Revenue came in at $93.8 million in the reported quarter versus $121.3 million in the third quarter of 2011 mainly because of poor utilization as well as weak dayrate. Midwater registered a dayrate of $221,420 (versus $239,379) while rig utilization was 74% (versus 89%).

Jackup: Revenues from the Jackup fleet jumped to $380.9 million in the third quarter from last year's $330.1 million, with its average dayrate climbing 8.8% to $108,588 from $99,775. Overall jackup utilization in this segment increased to 83% from 77% in the year-earlier period.

Costs and Expenses

On the cost front, depreciation expense increased 6.6%, contract drilling expenses climbed 9.5%, while general and administrative expenses declined almost 2% on a year-over-year basis.

Balance Sheet and Capex

At the end of the quarter, Ensco had $159.8 million in cash. Long-term debt (inclusive of current maturities) was $4,870.4 million, with a debt-to-capitalization ratio of 29.4% (compared with 30.0% in the preceding period).

For the first three quarters of 2012, the company spent $1.6 billion in total, out of which 75% was expended in new construction. Ensco remains committed to the enhancement of its fleet. To this end it divested a barge rig in the quarter and a jackup rig in early October.

Outlook

We appreciate Ensco’s financial discipline and organically developed asset base. International deepwater market opportunities are stepping up on new multi-year programs in West Africa, South East Asia, Brazil and the Mediterranean. This should eventually be accretive to the company’s earnings.

We believe Ensco should be well positioned to improve its earnings and revenue in the foreseeable future, as well as benefit from oil-directed drilling. With the completion of the construction phase of its six additional rigs − scheduled to be delivered by the end of 2014 − Ensco is expected to achieve significant growth.

Recently, leading contract drilling company, Noble Corporation’s (NE) third quarter earnings dropped 15.1% from the year-earlier profit level mainly due to extended downtime from rigs in the Gulf of Mexico (GoM) and offshore Brazil.

Ensco has $9 billion of contract revenue backlog excluding bonus opportunities. The company’s solid backlog position provides it with excellent cash flow visibility. Additionally, the company’s impressive balance sheet and sufficient liquidity help it to address operational or corporate needs.

However, we believe that Ensco’s current valuation adequately reflects its growth profile. We would suggest waiting for a better entry point before accumulating shares. Hence, we are maintaining our Neutral recommendation on Ensco shares, reflecting a balanced risk/reward profile.

The company retains a Zacks #3 Rank (short-term Hold rating).

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