Ensco (NYSE: ESV) has recently published its fleet status report, and this report was the opposite of the recent Noble Corp.'s (NYSE: NE) report. Noble Corp. had no news to share, while Ensco announced multiple developments.
Fellow contributor Fun Trading listed all the changes in his recent article, so there's no reason to do the same work. Instead, I would like to focus on key points, compare Ensco's and Noble Corp.'s reports and try to answer the question whether the report is good news for Ensco.
First of all, let me highlight that Ensco sold 6 rigs at scrap value. These rigs were Ensco 91, Ensco DS-1, Ensco DS-2, Ensco 58, Ensco 6003 and Ensco 6004.
Finally, the process of turning stacked rigs into scrap has begun. In Ensco's case, this is likely just the beginning. Just like Transocean (NYSE: RIG), the company has a big fleet of stacked rigs. Ultimately, many of these rigs won't find any work and their return to work will be uneconomical in the coming years due to restart costs and low day rates.
I fully expect that Ensco will continue to right-size its fleet - this process is inevitable. Latest developments in the offshore drilling markets, which continue to show scarcity of contracts and rock-bottom day rates, signal that companies that will accept this reality fast enough will win over those dreaming about faster recovery. Cold stacking costs are significantly lower than warm stacking costs, but they are costs that, in most cases, don't lead to future profits.
Let's now turn to contracts. After losing contracts for Ensco 6003 and Ensco 6004, which were sent to scrap, Ensco suffered the early termination of Ensco 8503. Ensco 8505 was terminated as well. I'd like to highlight that Ensco 8505 was supposed to work up to January 2018.
Despite my overall bearish view on the industry, I'm a bit surprised that terminations continue. Previously, I thought that we've sailed through the wave of terminations in the first half of this year and that producers had enough time to decide whether they need their rigs working or not.
It turned out that a $45 - $50 oil was not a level that guaranteed relative calmness for offshore drillers. Right now, the oil chart and the news around the black gold suggest that it may test $40 this summer if current trend continues. In this scenario, more terminations might follow.
On the positive front, the report was not without new contracts. Ensco 8506 is now contracted from September 2016 to January 2017 at an undisclosed rate. Ensco 5006 got a 15-month contract extension at a $355,000 day rate - a very good rate in the current market environment.
Ensco 68, Ensco 75 and Ensco 87 have been awarded small contracts - a trend that may amplify in the future if oil stays below $50 per barrel. There were also a number of minor changes that don't impact the big picture. I highlighted those developments that, in my view, a material to the evaluation of Ensco's perspectives and perspectives of the offshore drilling industry in general.
All in all, the report was neutral to Ensco and will not provide upside for the company's shares. Ensco is a laggard this year, and the low short float in Ensco's shares don't make it the stock of choice in case of oil price upside. Nowadays, offshore drillers' shares move more on short covering rather than actual buying.
From a fundamental point of view, terminations are a worrying sign. Oil is still below the threshold needed for stabilization of the offshore drilling market. Where this threshold lies is a big question of course, and investors have various views on this topic.
I believe that $55 - $60 oil will be enough to improve the contract situation given the day rate decline. Oil is currently far away from this level, and pressure may mount on shares of all offshore drillers, including Ensco.
Returning to the topic raised at the beginning of this article - whether Ensco's report is better than Noble Corp.'s - I'm more positive on Ensco because the company managed to find some work for its rigs while Noble Corp. had nothing to report. Contract terminations clearly don't depend on offshore drillers, so it's hardly Ensco's fault that several rigs were terminated.
My view of the current situation implies additional pressure on Ensco's shares as oil prices decline and the contract situation remains very tense. I don't see any near-term upside catalysts for Ensco.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may trade any of the abovementioned stocks.