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Ensco's Robust Backlog Holds Promise, Oil Price Woes Remain - Analyst Blog

On May 14, 2015, we issued an updated research report on Ensco plcESV .

Having transformed from a Gulf of Mexico (GoM) company to a relatively pure international play, Ensco should be well positioned to improve its earnings and revenue in the foreseeable future, as well as benefit from a recovery in oil-directed drilling. However, the markets look weak in the near-term and a large number of rigs will go idle in the first half of 2015. Nevertheless, Ensco's efforts should eventually be accretive to the company's earnings.

The last few years saw an upgrade of several Ensco rigs. The upgrade project of ENSCO DS-1 is complete, while ENSCO 5005, ENSCO 5006, ENSCO DS-2, ENSCO 6001 and ENSCO 6002, are undergoing modernization. Almost 55% of the jackups completed upgrades in 2012-2013, however, in 2014-2015 fewer jackup upgrades are expected. This is a positive for the company that will improve utilization and boost operating margins.

Ensco has a contracted revenue backlog (excluding bonus opportunities) of $11 billion, which provides it with an excellent cash flow visibility. With the completion of the construction of its eight additional rigs - scheduled to be delivered by the end of 2015 - and the recently ordered two 140 series jackups, Ensco is expected to experience significant growth.

Ensco's impressive balance sheet and sufficient liquidity help it address any operational or corporate need. At the end of the first quarter of 2015, Ensco had $887.8 million in cash and cash equivalents. Long-term debt (including current maturities) was $5,919.3 million, while debt-to-capitalization ratio came in at 31.0%. With a current dividend yield of 2.24%, we believe Ensco remains well positioned to comfortably increase its dividend in the future amid a manageable debt position.

However, Ensco is expected to have increased downtime in 2015, mainly on account of its five 8500 series rigs rolling off contract in the first half of 2015. This will affect its utilization rates in the coming quarters and thus, lower revenues. Further, the challenges rising from contracting rigs for extensions in Brazil are a concern.

As crude continues to display bearish trends and revolves around the $50-a-barrel level, the top energy companies have resorted to spending cuts (particularly on the costly upstream projects) on the back of lower profit margins. This, in turn, means less work for drilling contractors like Ensco.

Moreover, 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 determining its growth.

Ensco currently holds a Zacks Rank #3 (Hold).

Stocks to Consider

Some other players from the same space include Transmontaigne Partners L.P. TLP , CNOOC Ltd. CEO and Pembina Pipeline Corporation PBA . All these stocks sport a Zacks Rank #1 (Strong Buy).

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TRANSMONTN PTNR (TLP): Free Stock Analysis Report

CNOOC LTD ADR (CEO): Free Stock Analysis Report

ENSCO PLC (ESV): Free Stock Analysis Report

PEMBINA PIPELN (PBA): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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