Offshore drillerEnsco (
) bought its way into Brazil's offshore waters last year when it
acquired Pride International for $7 billion.
Houston-based Pride gave London-based Ensco 10 rigs off Brazil
and others off West Africa, which is another major offshore oil
After the merger, Ensco became the second-largest offshore
driller in the world afterTransocean (
). It now boasts 20 drill ships and semisubmersibles and 47
jack-up rigs across six continents.
Last Thursday, shares took a spill, however. They fell almost
5% after a news report said thatPetrobras (
), Brazil's giant oil company, might not renew some midwater rigs
or may even terminate some contracts early.
Ensco's midwater rigs from the Pride acquisition are generally
"older assets," says analyst Todd Scholl of Clarkson Capital
"In a post-Macondo world, Petrobras would like to work with
higher-quality rigs," he said, referring to the 2010 big oil
spill in the Gulf of Mexico.
Its midwater assets aside, Ensco is known for having a young
ultra-deep-water fleet and for premium jack-up rigs. It also has
six rigs under construction.
Ensco wasn't the only company with exposure to Petrobras'
midwater drilling operations to get hit by the speculation, says
analyst Nigel Browne of Macquarie Equities Research. So did
offshore drillersDiamond Offshore (
) and even drilling services firms such asBaker Hughes (BHI)
'Buy Into Noise'
Browne says Ensco's relatively new deep-water assets are
particularly appealing and advised clients to "buy (Ensco shares)
into the noise."
"The only real frontier where there are still large
discoveries or potential discoveries is in the deep-water
frontier," he said in a phone interview.
"Deep water is where the bigger, more complex assets are
currently in demand," Browne said. "So the supply-demand dynamic
right now is very tight in deep water."
The most active deep-water basins, the so-called "Golden
Triangle," are in Brazil, West Africa and the Gulf of Mexico, he
Ensco put out a press release last Thursday stating that all
10 of its rigs under contract to Petrobras have no early
terminations, including one recent contract signed through April
As for two rigs that come up for renewal in mid-2013, Ensco
said it is in "advanced negotiations with a customer for
Analysts doubt Petrobras would cancel other contracts before
Ensco shares have bounced back a bit since the report, but are
still 9% off their high.
"We don't normally respond to a rumor, but we wanted to get
our facts out with regard to our fleet in Brazil," said Sean
O'Neill, Ensco's vice president of investor relations.
Ensco wouldn't say where the two rigs in Brazil would go when
their contracts are up next year, since negotiations are still
"There are lots of expanding markets in addition to Brazil,"
He named the Gulf of Mexico, West Africa and other emerging
markets in South America, Asia and East Africa, among others.
But moving large assets to other regions takes time and money,
says Scholl. Moving expenses could be covered under a new
contract, he adds, but margins would still likely be lower
without the $270,000 a day in day rates while drilling.
Ensco is moving a third midwater rig in Brazil, which is near
the end of its contract, to a shipyard in Singapore for
Browne praises Ensco for pursuing a strategy of fleet
standardization, which creates cost synergies and labor
He calls Ensco "the Southwest Airlines" of drillers in that
both the airline and the driller save money on parts, maintenance
and labor with standardized equipment.
One region Ensco has been growing its presence "pretty
significantly" is in the U.S. Gulf of Mexico, O'Neill says.
It has eight deep-water rigs under contract there, including
one that will start up in January. Another 10 jack-up rigs are
Until the Pride purchase expanded its fleet, Ensco was known
mostly for its jack-up rigs, which operate in less than 400 feet
of water. Jack-ups, which are anchored to the ocean floor and
lift equipment up like a car jack, are the most active type of
Most of Ensco's jack-ups are premium rigs, which command
higher day rates than older versions.
Ensco sells rigs to a "who's who" of oil companies
Besides Petrobras, customers includeTotal (TOT),BP
(BP),Chevron (CVX),ConocoPhillips (COP), Pemex,Statoil (STO) and
Saudi Aramco. Contracts typically last from three to seven
At the end of the third quarter, Ensco had a contracted
backlog of some $9 billion.
Third-quarter revenue grew 23% over the year before to $1.1
billion, driven by a bigger fleet, improved utilization and
higher average day rates in the deep-water and jack-up
Deep-water revenue accounted for $629 million of the total, up
43% from the earlier year. The average deep-water day rate was
$402,000, up from $391,000.
Midwater revenue fell to $94 million from $121 million on
declines in utilization and day rates.
Jack-up revenue rose 15% to $381 million on a $9,000 gain in
the average day rate, to $109,000, and a 6 percentage-point
uptick in utilization, to 83%, on a broad-based pickup in
Earnings in the quarter jumped 76% to $1.53 a share. After
three straight years of declining profits, analysts expect
full-year earnings to grow 75% to $5.36 a share. They see next
year's rising 33%, according to Thomson Reuters.
While demand for rigs is strong, supply is tight and should be
for at least the next few years, Browne says. That bodes well for
industry prospects, assuming oil prices don't drop to a point
where drilling becomes unprofitable.
Ensco believes the break-even point for Brent oil is around
$70 a barrel, though some analysts put it at $80.
Brent is the benchmark used to price most of the world's
internationally traded crude oil.
Brent oil was trading just under $109 per barrel this