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Summary

  • Ensco Plc. is a top-tier offshore driller with a strong fleet of 79 rigs. Q1 2014 earnings show strength and future growth.
  • A complete analysis of the fleet is necessary to evaluate how well-adapted the company is to face the challenges ahead.
  • The company has a healthy backlog of $11 billion, a strong presence worldwide, secured dividend approaching 6% and a robust dominance in the jackups sector. It is a buy.

Ensco Plc. (NYSE:ESV)

The company offers offshore contract drilling services to both domestic and international oil companies. ESV has a large offshore drilling rig fleet (75 rigs). Its fleet portfolio includes 10 drillships, 46 independent leg jackups and 19 semi-submersible rigs. It is aggressively investing in its fleet to compete in this highly selective offshore market. In total, ESV has 8 rigs in construction.

Consequently, its newly-built ultra-deepwater rigs have started work on a multi-year contract with previous customers. It received two new ultra-premium, harsh environment ENSCO 120 series jackups. Both ENSCO 120 series jackups were contracted in advance for a multi-year program.

All these positive investments in its business take its backlog to $10.7 billion.

From the Q1 2014 conference call on April 29, 2014:

Starting with highlights from the first quarter. We achieved 96% operational utilization, a major improvement from 90% last year and our best performance over the last 8 quarters. Our contracted jackups rigs led the way with 99% operational utilization for the first quarter. Our 8500 Series rigs also had 99% operational utilization, highlighting the many benefits of our standardization strategy.

ESV posted impressive record revenue and earnings in 2013, and increased its dividends twice by 33% and 50% to now $3/share. Its strong balance sheet and borrowing capability (both its commercial paper program and revolving credit facility) will provide more flexibility for the company to make additional investments to get a competitive fleet.

Ensco Plc. was founded in 1975, and is headquartered in London, the United Kingdom.

(click to enlarge)

ESV data by YCharts

Complete fleet analysis: Drillships, Semi-submersibles and Jackups.

Fleet status filing April 16, 2014.

1 - Drillships.

#Name

Year

Built

Water Depth Max

K feet

Contract

End

Day rate

K $

Location
1Ensco DS-119996/101/16358Middle East and Africa
2Ensco DS-219996/102Q15438Middle East and Africa
3

Ensco DS-3

Pride "O. Ascencion"

201010/12Avail.06/16520North & South America
4

Ensco DS-4

Pride "O.D Clarion"

201010/12Avail.07/16565North & South America
5

Ensco DS-5

Pride "O.D Mandocino"

201110/12Avail.07/16438North & South America
6Ensco DS-6201110/122/18535Middle East and Africa
7Ensco DS-7201310/1211/16635Middle East and Africa
8Ensco DS-8201410/12

under

construction contracted

3Q15-3Q20 655Africa Angola
9Ensco DS-9201410/12under

construction contracted

3Q15-3Q18 655GOM
10Ensco DS-10201510/12under

construction

3Q15Asia Pacific Rim

2 - Semi-submersibles.

#Name

Year

Built

Water

Depth

Max

K feet

Contract

End

Day rate

K $

Location
1Ensco 850020088.5/109/15318North & South America
2Ensco 850120088.5/10

8/14

14 days Inspection Q3-14

535North & South America
3Ensco 850220108.5/10

11/14

532North & South America
4Ensco 850320108.5/10

8/14

+2 wells option

375North & South America
5Ensco 850420118.5/105/15562Asia Pacific Rim
6Ensco 850520128.5/102Q15495North & South America
7Ensco 850620128.5/107/15548North & South America
8Ensco 7500200087/140Brazil
9

Ensco 6000

Pride South America

20103.4/4

Mobilized

Shipyard Spain-Stacking

-Brazil
10

Ensco 6001 Pride Carlos Walter

20005.76/18375Brazil
11Ensco 6002 Pride Brazil20015.76/18375Brazil
12Ensco 6003 Pride Rio de Janeiro20045.71/17322Brazil
13Ensco 6004 Pride Portland20045.710/16322Brazil
14Ensco 5000 Pride Mexico19732.3/2.65Stacked-Middle East and Africa
15Ensco 5001 Pride South Pacific19745/6.52/15288Middle East and Africa
16Ensco 5002 Pride Sea Explorer19751Stacked-Asia Pacific Rim
17Ensco 5004 Pride Venezuela19821.5

5/14/7/14 idle

7/14-12/16

-

310

Europe and Mediterranean
18Ensco 5005 Pride South Atlantic1982/19971.5/1.7Shipyard-Asia Pacific Rim
19

Ensco 5006 Pride North America

1998/19997.5

Mobilized

2Q15

-

490

Asia Pacific Rim

3 - Jackups.

#Name

Year

Built

Water Depth Max

K feet

Contract

End

Day rateLocation
1Ensco 1412016Capable 400'Under Construction2Q16Middle East and Africa
2Ensco 1402016Capable 400'Under Construction2Q16Middle East and Africa
3Ensco 123201*Ultra-Premium Harsh Environment Water Depth Max: 400'Under Construction2Q16Europe and Mediterranean
4Ensco 1222014Ultra-Premium Harsh Environment Water Depth Max: 400'Under Construction4Q16Asia Pacific Rim
5Ensco 1212013Ultra-Premium Harsh Environment Water Depth Max: 400'5/16232Europe and Mediterranean
6Ensco 1202013Special Capabilities: High Specification, HPHT Capable Water Depth Max: 400'11/15232Europe and Mediterranean
7Ensco 1102015Special Capabilities: High Specification, HPHT Capable Water Depth Max: 400'Under Construction1Q15Asia Pacific Rim
8Ensco 1092008Special Capabilities: High Specification, HPHT Capable Water Depth Max: 400'

Mobilized

9/14

-

172

Asia Pacific Rim
9Ensco 1082007High Specification, HPHT Capable Water Depth Max: 400'4/17158Asia Pacific Rim
10Ensco 1072006High Specification, HPHT Capable Water Depth Max: 400'2/15235Asia Pacific Rim
11Ensco 1062005High Specification, HPHT Capable Water Depth Max: 400'10/14158Asia Pacific Rim
12Ensco 1052002/2010High Specification, HPHT Capable Water Depth Max: 400'12/14162Asia Pacific Rim
13Ensco 1042002/2011High Specification, HPHT Capable Water Depth Max: 400'5/14172Asia Pacific Rim
14Ensco 1022002Heavy Duty, HPHT Capable Water Depth Max: 400'6/16212Europe and Mediterranean
15Ensco 1012000Heavy Duty, HPHT Capable Water Depth Max: 400'12/15218Europe and Mediterranean
16Ensco 1001987/2009Heavy Duty, HPHT Capable Water Depth Max: 400'3Q18165Europe and Mediterranean
17Ensco 991985/2005Special Capabilities: 30,000' Drilling Depth Rated Water Depth Max: 250'7/14125North & South America
18Ensco 981977/2009Water Depth Max: 250'8/1592North & South America
19Ensco 971980/2005Water Depth Max: 250'11/1462Middle East and Africa
20Ensco 961982/2011Water Depth Max: 250'11/1462Middle East and Africa
21Ensco 941981/2008Water Depth Max: 250'6/16110Middle East and Africa
22Ensco 931982/2009Water Depth Max: 250'6/1592North & South America
23Ensco 921982/1996Water Depth Max: 225'8/15155Europe and Mediterranean
24Ensco 911980/2012Water Depth Max: 270'8/1468Middle East and Africa
25Ensco 901982/2002Water Depth Max: 250'6/14128North & South America
26Ensco 891982/2009Water Depth Max: 250'11/1592North & South America
27Ensco 881982/2004Water Depth Max: 250'11/16110Middle East and Africa
28Ensco 871982/2006Water Depth Max: 350'1/15148North & South America
29Ensco 861981/2006Water Depth Max: 250'6/14125North & South America
30Ensco 85--Sold $64m/April 24--
31Ensco 841981/2013Water Depth Max: 250'11/1462Middle East and Africa
32Ensco 831979/2009Water Depth Max: 250'10/1692North & South America
33Ensco 821979/2003Water Depth Max: 300'9/14142North & South America
34Ensco 811979/2003Water Depth Max: 350'1/15145North & South America
35Ensco 801978/2011Water Depth Max: 225'Shipyard-Europe and Mediterranean
36Ensco 762000Special Capabilities: HPHT Capable Water Depth Max: 350'7/14120Middle East and Africa
37Ensco 751999Water Depth Max: 400'Maintenance-North & South America
38Ensco 721981/2012Water Depth Max: 225'7/14142Europe and Mediterranean
39Ensco 711982/2012Water Depth Max: 225'5/15142Europe and Mediterranean
40Ensco 701981/1996Water Depth Max: 250'Shipyard-Europe and Mediterranean
41Ensco 681976/2004Water Depth Max: 400'1/15145North & South America
42Ensco 671976/2005Water Depth Max: 400'3/16135Asia Pacific Rim
43Ensco 581981Water Depth Max: 250'1/1565Middle East and Africa
44Ensco 561982/2006Water Depth Max: 300'7/15115Asia Pacific Rim
45Ensco 541982/2004Water Depth Max: 300'10/17145Middle East and Africa
46Ensco 531982/2008Water Depth Max: 300'2/16110Asia Pacific Rim
47Ensco 521983/2013Water Depth Max: 300'9/1485Asia Pacific Rim

Fleet analysis snapshot.

Rejuvenation of the fleet is an essential financial strategy for any offshore driller that wants to keep a competitive edge in this highly selective market. I wrote recently about Diamond Drilling (NYSE:DO) and the headwinds that the company was facing, with its aging midwaters and jackups with an average of 36-year-old and 30-year-old respectively. Revenue and earnings are satisfactory right now, showing a healthy balance sheet; however, an aging fleet will hamper competitiveness; thus, future earnings will be affected adversely.

Ensco Plc. is taking an aggressive approach in this area, and it is a definitive advantage for value investors. Since the beginning of 2014, Ensco Plc. has sold three old jackups, Ensco 69, Wisconsin and recently, Ensco 85 that was sold for $64 million above its book value of $54 million. Ensco Plc. has a total of eight rigs under construction right now, with five premium jackups and three ultra-deepwater drillships. Capex for new build rigs is $1.2 billion for 2014, $1.2 billion for 2015 and $0.4 billion for 2016. Daniel W. Rabun, CEO, said it very well at the conference call:

We also continue to make good progress in the divestment of our older assets in an orderly and disciplined manner rather than using a spin-off or other transformational transaction to continue to high-grade our fleet. Since the beginning of this year, we have sold 3 additional rigs, bringing our total to 14 rigs since 2009.

This is what I call a proactive strategy that will give a strong support for future growth and will enable the company to maintain its high-level dividends for years to come.

This is what we want to hear from a value investor's perspective. With an up-to-the-challenge fleet and secured high-level dividends, around 6% now.

What is the fleet competitiveness based on?

The ultra-deep sector and the jackup sector seems doing very well now, despite a somewhat temporary softness, which may not last as long as previously anticipated. The demand is here from Angola to GOM; new fields are in demand of offshore rigs. Even India, Brazil and Europe seem following the trend. The reason is that crude oil is still above $100 and reserves are actually dwindling worldwide. Big oil companies are doing very well in this environment and are forced to invest in the deep-water strategic sector that will provide the reserves that they need. A competitive offshore drilling company should have a young and adapted fleet that offers the best technique and efficiency.

Then, we should look at the average age of the fleet for ESV:

 DrillshipsSemi-submersiblesJackups
Under-construction305
Maintenance/shipyard/mobilized/idle043
Stacked rig020
Total rigs including under-construction101946
Age average in year5157.5
Average day rate k $499505135

* Rig age is taken from the last update.

* Average day rate is an indication only. There are a lot of disparities within the three rig categories.

We can see now that ESV has an impressive young fleet, which in turn guarantees a good day rate overall.

Conclusion and recommendation.

A global analysis of the fleet is an important exercise that should always be a priority for a value investor who wants to invest long term. Offshore drilling is a relatively simple business model.

Few important criteria must be looked at thoroughly. First, we must look at the nature of the fleet, its age, day rate and its adaptability to the actual and future rig demand. Second, it is important to look at what return on investment the company is providing now and for the next few years ahead. Third, the company's ability to provide a good and secure dividend.

1 - If we look at the fleet, we see that ESV is a strong player in jackups worldwide and managed to have a young fleet well-diversified, with the new Ensco 120 series about to commence operations in the North Sea. The drillships and semi-submersibles are not left behind with the 8500 series.

2 - The company released the Q1 2014 earnings:

ESV had earnings of $1.31 a share (excluding one-time items). Floaters' average day rates aided the results this quarter. However, the earnings decreased 3.7% from $1.36 in the year-earlier quarter, owing to reduced rig utilization, along with increased contract drilling expenses.

Total revenue grew 3.2% to $1,187 million, compared from $1,149.9 million generated in the same quarter in 2013. For example, revenue at the Jackup fleet jumped to $429.9 million from $410.5 million in Q1 2013.

3 - Dividends are $3 a share now, or about 6%. Here is what James W. Swent, CEO, said at the conference call:

In summary, we continue to have a very strong financial position that fully supports our dividend commitment of $3 per share annually. By virtue of doubling the dividend last year, we now have one of the highest dividend yields in the S&P 500. We believe that our dividend yields, combined with the potential for growth from 8 new-build rigs and our strong balance sheet, makes Ensco a compelling investment.

Ensco Plc. is doing an excellent job on all three counts, and should belong to your value portfolio.

Source: Ensco Plc.: Complete Fleet Analysis Is Showing Another Strong Value Offshore Driller