Ensco's Capital Preservation Impressive Amid Price Volatility
On Mar 29, 2016, we issued an updated research report on leading offshore contract drilling services provider, Ensco plc ESV.
Having transformed from a Gulf of Mexico (GoM) company to a relatively pure international play, Ensco is well positioned to improve its earnings and revenues in the near future. The company is also poised to benefit from a recovery in oil-directed drilling. However, the market looks weak in the near term and a large number of rigs are expected to go idle in 2016. Nevertheless, Ensco's efforts should eventually be accretive to its income.
Ensco has a contracted revenue backlog (excluding bonus opportunities) of $5.8 billion, which provides it with excellent cash flow visibility. With the completion of the construction phase of its eight additional rigs in 2015, along with the recently ordered two 140 series jackups, Ensco is expected to experience significant growth. Moreover, the company has decided to scrap 12 of its cold stacked rigs that include eight jack ups and four floaters.
Ensco cut its dividend to 1 cent per share from 15 cents due to the prolonged weakness in offshore market. This will lead to $130 million in annual savings. It will also help in capital preservation given the continued market uncertainty. Ensco’s impressive balance sheet and sufficient liquidity help it address any operational or corporate need. At the end of the fourth quarter, Ensco had $240.4 million in cash and cash equivalents. Long-term debt (including current maturities) was $5,895.1 million with debt-to-capitalization ratio of 41%. Therefore, we believe that Ensco’s manageable debt position will give it a competitive edge in the future.
However, as crude remains bearish and revolves below the $30 per barrel level, the top energy companies have resorted to spending cuts (particularly on the costly upstream projects) owing to lower profit margins. This, in turn, means less work for drilling contractors like Ensco.
The company is expected to have increased downtime in 2016. This will affect its utilization rates in the coming quarters and thus, lower revenues. Challenges associated with contracting rigs for extensions in Brazil are other headwinds.
Ensco's business depends on oil and gas exploration and production (E&P) activity. Hence, any change in oil and gas prices could put pressure on E&P spending and create lower demand for its service offerings.
Stocks to Consider
Currently, Ensco carries a Zacks Rank #3 (Hold). Some better-ranked players from the energy sector are SolarEdge Technologies, Inc. SEDG, Statoil ASA STO and Enviva Partners, LP EVA. Each of these stocks sports a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
STATOIL ASA-ADR (STO): Free Stock Analysis Report
ENSCO PLC (ESV): Free Stock Analysis Report
SOLAREDGE TECH (SEDG): Free Stock Analysis Report
ENVIVA PARTNERS (EVA): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
