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

May. 8.14 | About: Ensco PLC (ESV)

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.

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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
1 Ensco DS-1 1999 6/10 1/16 358 Middle East and Africa
2 Ensco DS-2 1999 6/10 2Q15 438 Middle East and Africa
3

Ensco DS-3

Pride "O. Ascencion"

2010 10/12 Avail.06/16 520 North & South America
4

Ensco DS-4

Pride "O.D Clarion"

2010 10/12 Avail.07/16 565 North & South America
5

Ensco DS-5

Pride "O.D Mandocino"

2011 10/12 Avail.07/16 438 North & South America
6 Ensco DS-6 2011 10/12 2/18 535 Middle East and Africa
7 Ensco DS-7 2013 10/12 11/16 635 Middle East and Africa
8 Ensco DS-8 2014 10/12

under

construction contracted

3Q15-3Q20 655 Africa Angola
9 Ensco DS-9 2014 10/12 under

construction contracted

3Q15-3Q18 655 GOM
10 Ensco DS-10 2015 10/12 under

construction

3Q15 Asia Pacific Rim
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2 - Semi-submersibles.

# Name

Year

Built

Water

Depth

Max

K feet

Contract

End

Day rate

K $

Location
1 Ensco 8500 2008 8.5/10 9/15 318 North & South America
2 Ensco 8501 2008 8.5/10

8/14

14 days Inspection Q3-14

535 North & South America
3 Ensco 8502 2010 8.5/10

11/14

532 North & South America
4 Ensco 8503 2010 8.5/10

8/14

+2 wells option

375 North & South America
5 Ensco 8504 2011 8.5/10 5/15 562 Asia Pacific Rim
6 Ensco 8505 2012 8.5/10 2Q15 495 North & South America
7 Ensco 8506 2012 8.5/10 7/15 548 North & South America
8 Ensco 7500 2000 8 7/14 0 Brazil
9

Ensco 6000

Pride South America

2010 3.4/4

Mobilized

Shipyard Spain-Stacking

- Brazil
10

Ensco 6001 Pride Carlos Walter

2000 5.7 6/18 375 Brazil
11 Ensco 6002 Pride Brazil 2001 5.7 6/18 375 Brazil
12 Ensco 6003 Pride Rio de Janeiro 2004 5.7 1/17 322 Brazil
13 Ensco 6004 Pride Portland 2004 5.7 10/16 322 Brazil
14 Ensco 5000 Pride Mexico 1973 2.3/2.65 Stacked - Middle East and Africa
15 Ensco 5001 Pride South Pacific 1974 5/6.5 2/15 288 Middle East and Africa
16 Ensco 5002 Pride Sea Explorer 1975 1 Stacked - Asia Pacific Rim
17 Ensco 5004 Pride Venezuela 1982 1.5

5/14/7/14 idle

7/14-12/16

-

310

Europe and Mediterranean
18 Ensco 5005 Pride South Atlantic 1982/1997 1.5/1.7 Shipyard - Asia Pacific Rim
19

Ensco 5006 Pride North America

1998/1999 7.5

Mobilized

2Q15

-

490

Asia Pacific Rim
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3 - Jackups.

# Name

Year

Built

Water Depth Max

K feet

Contract

End

Day rate Location
1 Ensco 141 2016 Capable 400' Under Construction 2Q16 Middle East and Africa
2 Ensco 140 2016 Capable 400' Under Construction 2Q16 Middle East and Africa
3 Ensco 123 201* Ultra-Premium Harsh Environment Water Depth Max: 400' Under Construction 2Q16 Europe and Mediterranean
4 Ensco 122 2014 Ultra-Premium Harsh Environment Water Depth Max: 400' Under Construction 4Q16 Asia Pacific Rim
5 Ensco 121 2013 Ultra-Premium Harsh Environment Water Depth Max: 400' 5/16 232 Europe and Mediterranean
6 Ensco 120 2013 Special Capabilities: High Specification, HPHT Capable Water Depth Max: 400' 11/15 232 Europe and Mediterranean
7 Ensco 110 2015 Special Capabilities: High Specification, HPHT Capable Water Depth Max: 400' Under Construction 1Q15 Asia Pacific Rim
8 Ensco 109 2008 Special Capabilities: High Specification, HPHT Capable Water Depth Max: 400'

Mobilized

9/14

-

172

Asia Pacific Rim
9 Ensco 108 2007 High Specification, HPHT Capable Water Depth Max: 400' 4/17 158 Asia Pacific Rim
10 Ensco 107 2006 High Specification, HPHT Capable Water Depth Max: 400' 2/15 235 Asia Pacific Rim
11 Ensco 106 2005 High Specification, HPHT Capable Water Depth Max: 400' 10/14 158 Asia Pacific Rim
12 Ensco 105 2002/2010 High Specification, HPHT Capable Water Depth Max: 400' 12/14 162 Asia Pacific Rim
13 Ensco 104 2002/2011 High Specification, HPHT Capable Water Depth Max: 400' 5/14 172 Asia Pacific Rim
14 Ensco 102 2002 Heavy Duty, HPHT Capable Water Depth Max: 400' 6/16 212 Europe and Mediterranean
15 Ensco 101 2000 Heavy Duty, HPHT Capable Water Depth Max: 400' 12/15 218 Europe and Mediterranean
16 Ensco 100 1987/2009 Heavy Duty, HPHT Capable Water Depth Max: 400' 3Q18 165 Europe and Mediterranean
17 Ensco 99 1985/2005 Special Capabilities: 30,000' Drilling Depth Rated Water Depth Max: 250' 7/14 125 North & South America
18 Ensco 98 1977/2009 Water Depth Max: 250' 8/15 92 North & South America
19 Ensco 97 1980/2005 Water Depth Max: 250' 11/14 62 Middle East and Africa
20 Ensco 96 1982/2011 Water Depth Max: 250' 11/14 62 Middle East and Africa
21 Ensco 94 1981/2008 Water Depth Max: 250' 6/16 110 Middle East and Africa
22 Ensco 93 1982/2009 Water Depth Max: 250' 6/15 92 North & South America
23 Ensco 92 1982/1996 Water Depth Max: 225' 8/15 155 Europe and Mediterranean
24 Ensco 91 1980/2012 Water Depth Max: 270' 8/14 68 Middle East and Africa
25 Ensco 90 1982/2002 Water Depth Max: 250' 6/14 128 North & South America
26 Ensco 89 1982/2009 Water Depth Max: 250' 11/15 92 North & South America
27 Ensco 88 1982/2004 Water Depth Max: 250' 11/16 110 Middle East and Africa
28 Ensco 87 1982/2006 Water Depth Max: 350' 1/15 148 North & South America
29 Ensco 86 1981/2006 Water Depth Max: 250' 6/14 125 North & South America
30 Ensco 85 - - Sold $64m/April 24 - -
31 Ensco 84 1981/2013 Water Depth Max: 250' 11/14 62 Middle East and Africa
32 Ensco 83 1979/2009 Water Depth Max: 250' 10/16 92 North & South America
33 Ensco 82 1979/2003 Water Depth Max: 300' 9/14 142 North & South America
34 Ensco 81 1979/2003 Water Depth Max: 350' 1/15 145 North & South America
35 Ensco 80 1978/2011 Water Depth Max: 225' Shipyard - Europe and Mediterranean
36 Ensco 76 2000 Special Capabilities: HPHT Capable Water Depth Max: 350' 7/14 120 Middle East and Africa
37 Ensco 75 1999 Water Depth Max: 400' Maintenance - North & South America
38 Ensco 72 1981/2012 Water Depth Max: 225' 7/14 142 Europe and Mediterranean
39 Ensco 71 1982/2012 Water Depth Max: 225' 5/15 142 Europe and Mediterranean
40 Ensco 70 1981/1996 Water Depth Max: 250' Shipyard - Europe and Mediterranean
41 Ensco 68 1976/2004 Water Depth Max: 400' 1/15 145 North & South America
42 Ensco 67 1976/2005 Water Depth Max: 400' 3/16 135 Asia Pacific Rim
43 Ensco 58 1981 Water Depth Max: 250' 1/15 65 Middle East and Africa
44 Ensco 56 1982/2006 Water Depth Max: 300' 7/15 115 Asia Pacific Rim
45 Ensco 54 1982/2004 Water Depth Max: 300' 10/17 145 Middle East and Africa
46 Ensco 53 1982/2008 Water Depth Max: 300' 2/16 110 Asia Pacific Rim
47 Ensco 52 1983/2013 Water Depth Max: 300' 9/14 85 Asia Pacific Rim
Click to enlarge

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:

  Drillships Semi-submersibles Jackups
Under-construction 3 0 5
Maintenance/shipyard/mobilized/idle 0 4 3
Stacked rig 0 2 0
Total rigs including under-construction 10 19 46
Age average in year 5 15 7.5
Average day rate k $ 499 505 135
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* 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.

Disclosure: The author is long RIG, SDRL, ESV. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.