Note: More details to come; changes are highlighted. Except where highlighted, no other sections of this report have been updated.
Reason for Report: Flash Update: 1Q18 Earnings Update
Prev. Ed.: Feb 26, 2018; Flash Update: 4Q17 Earnings Update
Flash News Update [Earnings Update to Follow]
On Feb 26, 2018, Ensco plc reported first-quarter 2018 loss of 32 cents a share (excluding one-time items), which was wider than the Zacks Consensus Estimate of a loss of 25 cents. Moreover, the figure compared unfavorably with loss of 4 cents posted in the year-earlier quarter.
Total revenues were $417 million, down from $471 million reported in the year-ago quarter. The revenue figure also missed the Zacks Consensus Estimate of $433 million.
The weak first quarter results stemmed from fall in utilization, lower average day rates and increased operating expenses, partially offset by revenues from the Atwood rigs.
Segmental Performance
Floaters: Revenues in the segment totaled $259 million, down 9.1% from the year-ago quarter’s $285 million. This was caused by a decline in reported utilization from 47% in the prior-year period to 44% in the first quarter. Average day rates fell to $263,000 in the quarter from $337,000 in the year-ago period. The negatives were partially offset by revenues of $21 million from the acquired Atwood rigs. Floater contract drilling expenses flared up nearly 26.7% to $185 million from $146 million witnessed in first-quarter 2017.
Operating loss in the segment was $1.4 million against the prior-year quarter’s operating income of $65.6 million. The downfall was primarily caused by 26% year-over-year increase in contract drilling expenses.
Jackups: Revenues at this segment declined 16.9% to $143 million from $172 million in the year-ago quarter. A fall in reported utilization, from 64% in the year-ago quarter to 61% in the January-March period, and a decline in the average day rate to $74,000 from $86,000, resulted in the decline. This was, however, partially offset by $5 million in revenues from the acquired Atwood rigs. Contract drilling expenses went up 6.7% year over year to $127 million in the first quarter, primarily due to the insertion of five legacy Atwood jackups.
Operating loss in the segment was $20 million against the prior-year quarter’s operating income of $21.1 million, due to 7% year-over-year rise in jackup rig’s contract drilling expenses.
Other: In the first quarter of 2018, revenues of $15 million were reported by the company, in line with the year-ago quarter. Contract drilling expenses of $13 million in the segment remained flat year over year. These traits led to operating income of $1.4 million, similar to the year-ago period.
Costs and Expenses
Depreciation expenses came in at $115.2 million compared with $109.2 million in first-quarter 2017. The uptick primarily resulted from the addition of Atwood rigs to the company’s fleet. General and administrative expenses increased to $27.9 million from $26 million in the year-ago quarter. Total operating expenses rose 13.3% year over year to $468.3 million.
Balance Sheet
At the end of the first quarter, Ensco had $465.4 million in cash and cash equivalents. Long-term debt was $4,987.3 million, with debt-to-capitalization ratio of 36.7% compared with 35.2% in the year-ago quarter.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON ESV.
Portfolio Manager Executive Summary[Note: only highlighted material has been changed]
ENSCO plc. (ESV) is a petroleum offshore drilling company, which owns and operates a modern fleet of offshore drilling rigs serving the petroleum industry on a global basis. The company’s fleet is strategically located in the most prolific domestic and international oil and gas markets and operates through four major business segments: North and South America, Europe and Africa, Asia and Pacific Rim, and Deepwater.
Of the 15 firms in the Digest group covering the stock, nine firms gave neutral ratings,threefirms provided negative ratings and threefirmsrendered a positive rating. The firms provided the lowest target price of $4.00 (20.1% downside from the current price) and a highest target price of $10.00 (99.6% upside from the current price), with the average being $6.53.
The following is a summarized opinion of the diverse brokerage firms’ viewpoints:
Neutral or equivalent (60.0%; 9/15 firms):The company remains highly exposed to the fourth and fifth generation floater market, which is facing a sharp decline in rig demand and utilization.Moreover, the firms believe that there is an oversupply of jackups in the Middle East. With the exception of high-specification requirements, the firms expect the jackup market in the region to remain challenged in the near term. Increased regulatory and safety scrutiny, coupled with supply chain bottlenecks for critical equipment, has led to an increase in downtime. However, the firms believe that the company is managing these challenges quite efficiently.
Further, Ensco-Atwood merger is anticipated to bring annual pre-tax expense synergies of around $65 million for full-year 2019 and beyond. Cost synergies for 2018 are estimated to be over $45 million. Based on the expected annual savings, the combination is likely to be accretive on a discounted cash flow basis.
Positive or equivalent(20.0%; 3/15 firms):The firms with a positive outlook believe that the company offers a high-quality jackup fleet, well diversified assets, strong operating metrics, a solid financial position, and a growing deepwater fleet.
Moreover, the company’s merger with Atwood for about $839 million in an all-stock transaction is expected to bring together two leading offshore drillers with long-established histories of operational, safety and technical expertise. Both companies own premium assets that cover the world’s most prolific offshore drilling basins.
The firms believe that ENSCO will continue to manage its cost structure in a prudent manner in spite of the industry downturn. They consider the company to be well positioned with enough liquidity and moderate debt load.
Negative or equivalent (20.0%; 3/15 firms):The firms with a bearish outlook believe that fleet utilization and day rates will continue to decline throughout 2017. Decline in the utilization levels of the floater markets is likely to continue without any significant pick up till 2018.
Due to ENSCO’s older fleet encounter dayrate pressure,the move to upgrade these assets will result in increased costs. This is because customers demand the most advanced assets. Further, the company’s rigs under construction face problems of rising costs, shipyard/equipment provider constraints and lack of competent personnel.Moreover, the volatile oil price scenario creates uncertainty in the rig market.
February15, 2018
Overview [Note: only highlighted material has been changed]
ENSCO plc. based in Dallas, TX, is a global offshore oil and gas drilling contractor – a service which is essential to oil companies for their worldwide exploration and development activities. ENSCO’s fleet is strategically located in the most prolific domestic and international oil and gas markets and the company has one of the largest premium jackup fleet in the world. The renewal program strengthened ENSCO’s position at the higher-end of the premium jackup market. As of Dec 31, 2016, the company has an offshore drilling fleet of 64 rigs consisting of 10 drillships, 13 semisubmersible rigs, three moored semisubmersible rigs and 42 jackup rigs – including four rigs under construction.
The company operates on a calendar-year basis. The company’s website is
Brokerage firms identified the following factors for evaluating the investment merits of Ensco:
Key Positive Arguments / Key Negative ArgumentsFundamentals
- The company is successfully implementing cost-reduction strategies
- The company’s transformation into the premier offshore driller as management executes well in a changing regulatory environment and through its integration with PDE.
- Potential for further international rig mobilization and continued share buybacks.
- Incorporating the accretive and expansive acquisition of PDE, the firms believe that ENSCO will achieve a premium valuation due to larger operational scale and higher mix of premium deepwater assets.
- ENSCO’s focus on deepwater semi-submersibles.
- The company is well positioned in growing offshore markets, such as the Middle East and India.
- The high grading of the company’s fleet in the early stages of the jackup market recovery should prove beneficial as the market becomes bifurcated.
- Incremental opportunities will develop in West Africa, Brazil, India, the Asia Pacific, and the Mediterranean.
- Rising operating costs, especially wages.
- Competition with major drilling companies in its geographical areas of operations.
- Increase in the supply of offshore drilling rigs could lead to oversupply and consequently to a decline in utilization and dayrates.
- Unfavorable weather.
- Global oil /natural gas supply/demand imbalances.
- Volatile commodity prices.
- Bifurcation between older and premium assets.
- Considering ENSCO’s exposure to both deep and shallow water GoM, the continued strain on permit issuances could negatively impact ENSCO’s operations.
February 15, 2018
Long-Term Growth[Note: only highlighted material has been changed]
ENSCO is a global offshore oil and gas drilling contractor, a service which is essential to oil companies in their worldwide exploration and development efforts. The company intends to grow deepwater exposure organically or through acquisitions. With the expected addition of all new deepwater rigs to its fleet over the next few years, ENSCO anticipates the deepwater segment to contribute approximately one-third of the total revenue, once all the new rigs are delivered and become operational.
According to the firms, ENSCO is a geographically diverse offshore driller with more than 80% of its jackup fleet located in international markets. This market diversification insulates the company from region-specific weakness and provides a stable international earnings base. All the jackups are of premium class and many of the company's rig fleet work under term contracts. Although the company maintains geographical diversity, has quality rigs, continues to invest in deepwater assets, and operates under term contracts, the firms believe that investment in ENSCO is subject to uncertain macroeconomic environment with a possibly extended downturn resulting in lower global energy demand and reduced drilling activity.
Management believes that ENSCO is well positioned to withstand the numeruous challenges that all global businesses are facing. The company believes that a strong balance sheet is especially critical in a cyclical industry such as ‘drilling services’. Management believes that ENSCO’s financial position allows it to manage the current capital market situation and take advantage of any opportunity that may arise as a result of the existing and future market conditions.
February 15, 2018
Target Price/Valuation[Note: only highlighted material has been changed]
Provided below is the summary of valuation and ratings as compiled by Zacks Digest:
Rating DistributionPositive / 20.0%↓
Neutral / 60.0%↑
Negative / 20.0%
Average Target Price / $6.53↑
Digest High / $10.00
Digest Low / $4.00
No. of Firms with Target Price/Total / 14/15
General risks to the target price include rig damages that could keep the rigs from working, slowing exploration and development spending from oil and natural gas producers, lack of adequate contracts, lower-than-expected rates and utilization, reduced drilling activity, lower commodity prices, changes in OPEC policies, and building two new semisubmersibles as well as significant new floater construction, which could change the favorable supply/demand balance into a less favorable position.
Recent Events[Note: only highlighted material has been changed]
On Nov 7, 2017, Ensco’s Board of Directors declared a regular quarterly cash dividend of $0.01 per share. The dividend is payable on Dec 15, 2017. The ex-dividend date for this payment is Dec 1, 2017, with a record date of Dec 4, 2017.
On Oct 25, 2017, Ensco reported 3Q17 financial results. The highlights are as follow:
- Total revenue was $460.2 million as against $548.2million in 3Q16.
- Net loss was $16.5 million in 3Q17. The company reported net profit of $63.5 million in 3Q16.
- Diluted loss per share was5 centsin 3Q17. The company reported earnings per share of 21 centsin 3Q16.
Revenue[Note: only highlighted material has been changed]
According to the company,revenuesof $460.2million in 3Q17 declinedfrom $548.2million in 3Q16.
Floaters
The Floaters segment generated revenues of $291.9 million compared with $319.3 million in the prior-year quarter. The downside was caused by lower utilization of several floatersand a decline in the average day rate to $334,218 from $353,187 a year ago.
Reported utilization was 46% compared with 48% last year. However, adjusted for uncontracted rigs and planned downtime, operational utilization was 99.6%, up from 98.9% in the prior-year quarter.
Jackups:Revenues of $153.1 milliondeclined from $213.8 million a year ago. This was due to a decline in average day rates to $88,272 from $109,379 in the prior-year quarter. Fewer rig operating days for several jackups also contributed to the decrease in revenues.
Reported utilization was 60% compared with 55% in third-quarter 2016. Adjusted for uncontracted rigs and planned downtime, operational utilization in the reported quarter was 99.3% compared with 98.9% a year ago.
Other:Revenues increasedmarginally to $15.2 million from $15.1 million in third-quarter 2016. Contract drilling expenses increased to $13.8 million from $11.2 million in the year-ago period.
Outlook
The firms view the company’s move to reposition its fleet and gradually move out of the market volatility in Brazil as a positive.The firms also expect the company to return significant value to its shareholders with a relatively low financial leverage.
However, the outlook continues to weigh on investors as rig availability lowers dayrate expectations for ENSCO’s 8500 series.Moreover, the outlook for future floater demand is unclear with depressed oil prices. The company has increased its downtime slightly and the rates on a number of rigs were adjusted toward the lower end. However, lack of contracting activity remains a concern. The firms believe that orders in the jackup market continue to improve on the back ofthe North Sea, the Middle East and the GoM. The competitive asset market may also push dayrates higher.
Margins[Note: only highlighted material has been changed]
Thecompany’s, operating incomewas $35.8 million in 3Q17 compared with $115.4 million in 3Q16.The decline was mainly due to lower day rates from floaters and jackups, which was partially offset by higher jackup utilization.
Contract drilling expensesdeclined to $285.8 million in 3Q17from $298.1 million in 3Q16. As a percentage of revenues, contract drilling expenses were62.1% in the quarter.
Net loss was $28.2 million as againstNet profit of $87.3 million in 3Q16.
On the cost front, depreciation expenseswere $108.2 million compared with $109.4million in 3Q16. General and administrative expensesincreased to $30.4 million from $25.3million a year ago.
Outlook
ENSCO’s total backlog of $3.2 billion provides the company with excellent cash flow visibility. Additionally, an impressive balance sheet and sufficient liquidity will help it address operational and corporate needs.
Opportunities in the international deepwater markets are growing with new multi-year programs in West Africa and the Mediterranean. Further upside potential is provided by the emerging deepwater markets of East Africa and Southeast Asia.
Though Ensco has cold stacked much of its fleet, the company’s liquidity is expected to remain strong through 2018. Ensco’s older-generation 8500 series floaters face dayrate pressures as customers prefer the latest and updated assets. As a result, the company has to keep upgrading its assets. Moreover, a weak oil price scenario creates uncertainty in the rig market.
Earnings per Share[Note: only highlighted material has been changed]
The adjustedloss per share was 5 centsin 3Q17 as againstearnings per share (EPS)of 21 cents in 3Q16. Higher general and administrative expenses related to transaction costs related to the acquisition of Atwood led to the decline.
Net lossattributable to ENSCOwas $16.5 million in 3Q17 as againstnet income attributable to ENSCO of$63.5 million in 3Q16.
The Zacks Digest average shares outstanding in the quarter were 301.2 million compared with 298.6million in the year-ago quarter.
Outlook
Some firms remain positive about ENSCO due to better cost reduction and operational programs.However, the highly cyclical nature of the offshore market, commodity price fluctuations and persistent weakness in the demand of its services are a few factors which make the firms cautious about related prospects. As such, earnings are expected to remain weak in the upcoming quarters.
February 15, 2018
Analyst / Kaibalya Pravo DeyCopy Editor
Content Ed.
Lead Analyst / Nilanjan Banerjee
QCA / Nilanjan Choudhury
No. of brokers reported/Total brokers
Reason for Update / Flash Update: 1Q18 Earnings Update
Zacks Investment ResearchPage 1