We maintained our long-term Neutral recommendation on
) on Mar 20. The reiteration was backed by its strength in the
offshore markets accompanied with its manageable newbuild program
as well as impressive execution. However, headwinds like a change
in the exploration and production spending pattern and commodity
price fluctuation remain the causes of concern.
Why the Neutral Stance?
Ensco − a leading supplier of offshore contract drilling services
to the oil and gas industry − remains well positioned to improve
its earnings and revenues in the foreseeable future, as well as
benefit from a recovery in oil-directed drilling. On Feb 20,
Ensco reported impressive fourth quarter 2012 results on the back
of increased utilization, rising customer demand as well as new
rigs joining the fleet.
Ensco continues to register robust demand for floaters in the
Gulf of Mexico and international regions. Ensco DS-2 will likely
be re-contracted by the present operator in Angola at a higher
rate, while Ensco 8502 (available Jun 2013) and Ensco 8503 (Jan
2014) continue to attract customers. Again, the arrival of the
next newbuild drillship (the DS-8) is expected in the third
quarter of 2013. Management expects to recommit the deepwater
rigs ENSCO 6001 and 6002 to Brazilian energy company Petrobras
beyond their mid-2013 contract-end dates.
Again, Ensco will likely gain from meaningful day rate
improvement, particularly for its jackup fleet, over the coming
months. The company has substantial leverage to jackup day rates,
which have relatively shorter contracts and particularly
convincing supply and demand fundamentals. Hence, the day rate
momentum in the jackup business is expected to be a strong
catalyst for Ensco in the future.
With $10 billion of contract revenue backlog (excluding bonus
opportunities), the company exhibits an excellent cash flow
visibility. Moreover, with the completion of the construction
phase of its 6 additional rigs − scheduled to be delivered by the
end of 2014 − Ensco is expected to achieve significant growth.
Simultaneously, its impressive balance sheet provides flexibility
to pay dividends and develop the fleet.
On the flip side, Ensco's business remains closely linked with
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.
Ensco's financial and operational performances face a number of
headwinds, including changes in the exploration and production
spending pattern, commodity price fluctuation, geopolitical risk,
regional spending trends, competition, the emergence of new
technology and economic fluctuations.
Other Stocks to Consider
Ensco retains a Zacks Rank #3 (short-term Hold rating). Other
stocks worth considering in the oil and gas drilling industry are
Helmerich & Payne, Inc.
Patterson-UTI Energy Inc.
). Tesco and Helmerich stocks carry a Zacks Rank #1 (Strong Buy),
while Patterson-UTI Energy carries a Zacks Rank #2 (Buy).
ENSCO PLC (ESV): Free Stock Analysis Report
HELMERICH&PAYNE (HP): Free Stock Analysis
PATTERSON-UTI (PTEN): Free Stock Analysis
TESCO CORP (TESO): Free Stock Analysis Report
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