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Will Ensco (ESV) Disappoint Q3 Earnings?

Zacks Equity Research

Oil and natural gas driller, Ensco plc (ESV) is expected to report third quarter 2013 earnings on Thursday, Oct 24, before the opening bell. Let’s see how things are shaping up prior to the announcement.

In the last quarter, the company’s earnings of $1.55 per share increased 6.9% from $1.45 per share earned in the year-ago quarter. The improvement came on the back of increased utilization, rising customer demand as well as new rigs joining the fleet. The results also surpassed the Zacks Consensus Estimate of $1.50.

Factors to Consider This Quarter

Ensco Plc – a leading supplier of offshore contract drilling services – is well positioned to improve its earnings and revenues in the foreseeable future. It will also benefit from a recovery in oil-directed drilling, having transformed from a Gulf of Mexico (GoM) company to a relatively pure international play. Ensco has $11 billion of contract revenue backlog (excluding bonus opportunities) that gives it an excellent cash flow visibility.

However, the deepwater rigs are expected to have increased downtime in 2013 that will affect its revenues. Further, the challenges in contracting rigs for extension in Brazil also raise concerns.

In the near term, the increased supply of high-spec rigs is likely to put pressure on utilization for standard jackups in the long run. Again, the company’s execution ability with respect to the jackups under construction will play a big role in deciding its growth. The company currently has 8 additional rigs under construction.

Earnings Whispers?

Our proven model does not conclusively show that Ensco is likely to beat the Zacks Consensus Estimate in the third quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP: The earnings ESP for the stock is -2.40%.

Zacks Rank: Ensco’s Zacks Rank #4 (Sell) when combined with a -2.40% ESP indicates that Ensco is likely to miss the earnings estimate.

We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Other Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:  

Ocean Rig UDW Inc. (ORIG), earnings ESP of +100.00% and a Zacks Rank #1 (Strong Buy).

Legacy Reserves Lp (LGCY), earnings ESP of +15.15% and a Zacks Rank #1 (Strong Buy).

Stone Energy Corp. (SGY), earnings ESP of +6.76% and a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on ESV
Read the Full Research Report on SGY
Read the Full Research Report on LGCY
Read the Full Research Report on ORIG

Zacks Investment Research