- Ensco is bucking the bearish thesis on oil drillers.
- Current performance is holding up, and the future is promising thanks to portfolio upgrading and large revenue backlog.
- In the meantime, investors receive a 6% dividend yield and cheap valuation.
Over the past year, oil drillers like Ensco (NYSE:ESV) have been punished by the market. Investors seem to fear the near-term outlook for offshore oil drilling, noting lagging industry demand from oil companies and a global supply glut. This has the potential to weigh on day-rates and utilization, and certain drillers are indeed suffering.
However, the fears that have caused Ensco's stock price to perform so poorly over the past year haven't come to pass. While analysts and investors continue to predict the coming storms, Ensco keeps on putting up solid numbers that indicate it's a strong business.
The end result appears to be a cheap stock with a compelling dividend yield, in an industry with a sound long-term future.
Fleet upgrading strategy will boost results going forward
Excluding a large impairment charge for four floaters that are now up for sale, Ensco reported $1.58 per share in earnings from continuing operations last quarter. This represented 6% growth year over year. Revenue also grew 6% last quarter, to $1.2 billion.
Going forward, management is optimistic. The charge taken on its four older rigs is a necessary part of its portfolio upgrading strategy, which will help firm future results. Once Ensco sells its five older rigs, the average age of its floaters will be just nine years.
In addition, management expects current-quarter revenues to grow 2% from last quarter.
Africa presents a big opportunity for future growth
Ensco also has $11 billion worth of revenue backlog, excluding bonus opportunities. This includes a near-record backlog for its jackup fleet. In addition, Ensco recently signed a 5-year contract with Total (NYSE:TOT) in Angola for one of its ultra-deep water drill ships, the ENSCO DS-8. This alone added $1.2 billion to the company's backlog.
Elsewhere in Africa, Ensco sees the potential for several opportunities. It currently has three open deep water tenders for multi-year contracts in West Africa. Moreover, several operators have exploration programs planned in East Africa and South Africa that Ensco management anticipates will result in significant development programs for the future.
Separately, the ENSCO 72 jackup was recently exercised for a one-year term in the North Sea for $170,000 per day. Because of this, Ensco now has no rig availability in the North Sea for the remainder of the year.
All in all, these are very positive signs that the future of Ensco's business isn't nearly as dire as some investors might think.
Ensco's future is brighter than some other drillers
There's reason to be pessimistic about some of them. For example, Diamond Offshore (NYSE:DO) reported an 8% decline in revenue in the most recent quarter. Worse, its operating income declined by 49%, due to significantly higher drilling expenses.
Diamond Offshore is one of the drillers that is, in fact, seeing a real and concerning deterioration across some key metrics. Diamond Offshore's utilization of its floaters has declined significantly over the past year. For example, utilization of its ultra-deep water, deep water, and mid-water floaters stood at 51%, 51%, and 68%, respectively, at the end of the last quarter. By comparison, these numbers were 92%, 99%, and 65%, at the end of the same quarter last year.
Meanwhile, Ensco's total utilization of floaters and jackups dipped only two percentage points last quarter to 85%, from 87% in the second quarter of 2013. In addition, average day-rates of floaters and jackups both increased significantly from the year before.
Ensco: Cheap forward valuation and high dividend yield
Not only is Ensco holding up from a fundamentals viewpoint, its declining share price offers a cheap stock and a compelling dividend yield. Ensco trades for just 8 times forward earnings. In addition, Ensco provides a 6% dividend yield.
The long-term future of oil drilling is very attractive. Oil prices are still supportive, and demand for energy isn't about to decline any time soon. That's particularly true when it comes to the emerging markets. To that end, Ensco sees several attractive opportunities in Africa going forward.
Ensco still expects revenue growth this quarter, and has a large revenue backlog to help secure future opportunities.