Ensco: Offshore Driller Set To Survive Low Oil Prices

| About: Ensco PLC (ESV)

Summary

Ensco is an offshore drilling company providing services to oil producers, and the company's contract revenues have declined during low oil prices.

However, the company is in a strong position compared to its competitors, as there are no debt due until 2019, while its net income from operations is very impressive.

The company will have no problem surviving the current oil prices. If you are looking for exposure in offshore, purchase Ensco shares.

Company Basics

Ensco PLC (NYSE:ESV) is an offshore drilling services company offering contracts to upstream oil producers. Similar to most of its competitors, Ensco has seen its contract revenues decline since 2014. However, the company's current liquidity and financial situation is very strong and will definitely survive until the oil market recovers. The author recommends purchasing the shares for exposure to offshore drilling.

Company Key Facts

Share price: $10.17 per share

Current debt: $0 million. No debt due until July 2019.

Long term debt: $4.7 billion

Cash on hand: $1.8 billion

Company's Contract Situation and Projected Income

An offshore drillers' future revenues are directly tied to the number of contracts the companies have and their day rates. If there are numerous expiring contracts for a company, it can expected that the company's revenue will decrease significantly.

Ensco's contract situation is much better than its competitors as the company has a large number of contracts locked in the for the long term. See below for a summary or read the fleet status report.

Number of contracts
Cold Stacked and Available Rigs 27
Contract Terminating in 2017 12
Under Long Term Contract 21

With approximately 66% of active contracts locked up for the long term, investors can also expect the company's contract to stay relatively steady and not shrink as much.

Therefore, the current $550 MM of contract revenue generated by the company is definitely unsustainable. Here are the calculations for the projected forward net income for the next four quarters.

$550 million in contract revenues * 0.65 = $357.5 million in projected contract revenue for the coming quarters

The net income will be approximately the contract revenue subtract 54 million in interest expenses, ending up with $360 million in contract revenue for the coming quarters, equivalent to about no (zero) operating income.

Ensco's Liquidity

Ensco is in an incredibly strong position compared to its offshore drilling competitors. For starters, the company has no current debt or any debt due for another 24 months. The company's total current liabilities, 590 million, is dwarfed in size by its cash pile of nearly $1.7 billion. See below for a comparison of Ensco's liquidity situation with its competitors, Transocean (NYSE:RIG) and Seadrill (NYSE:SDRL).

Cash Current Liabilities Projected Net Income*
Ensco $1.76B $0.6B 0MM**
Seadrill $1.04B $2.1B (100)MM
Transocean $2.2B $2.2B (20)MM

*A chart comparing Ensco plc to its competitors.

Company Debt

As discussed prior, Ensco have no current debt and only $600 million in current liabilities, which is a tremendous advantage compared to its competitors. However, Ensco does have $4.75 billion in long term debt due in 2019 and beyond. The company is expected to repurchase some of the debt, as it has done in the second quarter.

Refer below for a liabilities comparison with its competitors, and notice how great of a competitive advantage Ensco has.

Total Current Liabilities Long term debt
Ensco $0.6B $4.75B
Transocean $2.2B $7.13B
Seadrill $3.23B $9.46B

A chart comparing Ensco plc to its competitors.

Risks and Position Sizing

Many companies in the offshore industry is facing the risk of bankruptcy, and Ensco, although stronger than its competitors, is no different. If oil demand sharply drops due to a global recession, it is very likely that the price of oil may not reach $60 for more than three years. If this situation does materialize, Ensco will have considerably more expiring contracts in addition to mounting debt due in 2019 to 2022.

Given that purchasing the company is somewhat speculative, the author recommends investors initiate a small position first and add to the position as the company's situation improves.

Conclusion

In closing, Ensco is an offshore company with very little debt on its books. The company is very well capitalized at $2.4 billion in total current assets, as opposed to only $0.6 billion in current liabilities. With such a large amount of cash on hand, the company is certain to survive into the next oil bull market. Look to purchase the company at the current valuation.

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.

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Tagged: , , , Oil & Gas Drilling & Exploration, United Kingdom
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