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Summary

  • The offshore drillers will benefit from the expected rise in the CapEx over the next two-three years.
  • Ensco's fleet is in a good position to benefit from the turnaround in the sector.
  • Ensco's policy to invest in and upgrade its fleet will allow the company to win new contracts at higher rates.

The offshore drilling sector has been under pressure since the start of the year and almost all the participants have lost value. Year-to-date, Ensco (NYSE:ESV), Seadrill (NYSE:SDRL) and Transocean (NYSE:RIG) are down over 10%, 11%, and 13%, respectively. The sector has been under pressure due to the fears about the slowdown in the industry and a possible decline in day rates. However, as we have stated in our previous articles about Seadrill and Transocean, the fears about the decline in day rates are overblown and the long-term fundamentals of the sector are strong.

Ensco owns the world's second largest drilling rig fleet with a portfolio of 75 rigs. Currently, Ensco operates 10 drillships, 46 independent leg jack-ups and 19 semi-submersible rigs. Moreover, the company is aggressively expanding its asset base and has around 8 rigs under construction with a current backlog of $10.7 billion. The image below represents the current backlog of the business and the periods in which these revenues are expected to be realized.

(click to enlarge)

Source: SEC Filings

Fleet Overview

Despite the decreasing trend in the offshore drilling industry, Ensco has remained focused on its long-established strategy of upgrading and expanding the size of its fleet. Over the last three years, the company has invested around $3 billion in the construction of new rigs. Moreover, the company is selling old unproductive assets worth $64 million, in order to replace them with new high yielding assets. This will allow the company to achieve better operational yield via higher day rates from the customers. The image below shows the improved day rates over the last three years.

(click to enlarge)

Source: SEC Filings

Currently, there are 8 rigs under construction, out of which, the company has secured contracts for two rigs (ENSCO DS-9 and ENSCO 122). Furthermore, floaters segment also improved during the last year with the addition of ENSCO DS-7 which commenced a long term contract in Angola, with a day rate of $648,000 over the term. Increased day rates and contract extensions at higher rates are the prime reasons for the impressive results of the company. Moreover, in the Gulf of Mexico, multiple jack-up rigs were contracted for longer terms and higher day rates than the expiring contracts.

Harsh environment rigs also go at considerably high day rates. The company delivered two such jack-up rigs, ENSCO 120 and ENSCO 121 that commenced operations in the first quarter of the current year, with a day rate of approx. $230,000 under a long term contract in the North Sea. The increased demand in the industry also let the company to enter into agreement with KFELS to construct premium jack-up rigs (ENSCO 110 and ENSCO 123) which will be operational by 2015 and 2016, respectively. Further, the company was able to win contracts for the newly constructed ultra-deepwater rigs with day rates of around $230,000 and working capability at 400 ft. of water.

Ensco also ordered two high-specification jack-ups last month which are planned to operate in the Middle East. The rigs are expected to be delivered by mid-2016 to Lampell Shipyard in the U.A.E. The two rigs, ENSCO 140 and ENSCO 141, will be using the latest technological design; however, they are built on the same standardized rig design which is the core aspect of Ensco's fleet. Ensco uses the same rig design for all of the rigs ordered, which saves a huge amount of company resources in terms of employee trainings and rigs maintenance. It also allows the company to repair any damaged rig back into operation quickly due to its standardized manufacturing design. Moreover, both newly ordered rigs have the operating capability up to 400 ft. of water.

Conclusion

Despite the fears about the decreased capital expenditure from the oil and gas companies, the trend in day rates has been encouraging. The companies operating in the industry have been able to renew contracts with a relative ease. We believe the fundamentals of the offshore drilling sector are strong and the CapEx from the oil and gas companies will come back to normal levels over the next two years. As a result, the activity and the day rates will remain high for offshore drillers. Ensco has a strong fleet and it is one of the biggest players in the sector - it should benefit considerably from the increased CapEx by the oil and gas companies in the medium-long term.

Source: Is Ensco A Good Investment?