Ensco - A Complete Review Of Q4 2016 Results

| About: Ensco PLC (ESV)
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Summary

Ensco released its fourth-quarter results on February 27, 2017. Revenues were $504.6 million in fourth-quarter 2016.

Ensco owns a very versatile fleet with a large jack-up segment, which represents a third of its actual revenues. This is the underlying strength of the company.

I own ESV as a long-term investment, and I recommend to hold with a potential accumulation at $8 which is a strong support.

Picture: The Semi-submersible Ensco 6003

Ensco PLC (NYSE:ESV)

This article is an update of my preceding article on ESV published on October 29, 2016, about the Q3'16 results.

Please click here to look at my preceding article about the complete February 23, 2017 FSR. It will give you a better understanding of the situation.

To access the investor presentation 4Q'16, click here.

[I] Balance Sheet snapshot.

Fourth-quarter 2016 results snapshot - 8 consecutive quarters.

Q4 2016 Q3 2016 Q2 2016

Q1 2016

Q4 2015 Q3 2015 Q2 2015 Q1 2015

Contract drilling revenue

in $ billion

504.6 548.2 909.6 814.0 828.3 1,012.2 1,059.0 1,163.9

Contract drilling expense

in $ million

289.0 298.1 350.2 363.7 415.2 433.5 502.6 518.3

Net Income

in $ million

38.2 87.3 592.6 175.3 (2,472.3) 293.8 262.7 324.7

G&A

in $ million

24.7 25.3 27.4 23.4 30.2 28.4 29.7 30.1

Cash flow from operations

in $ million

309.3 115.4 419.6 233.1 441.3 402.7 386.2 467.7

Cash on hand

in $ million

2,602.3 1,767.4 1,803.3 1,379.0 1,301.3 240.4 648.3 887.8

Long-term debt

Total debt

Net debt

in $ Billion

4.9426

5.2745

2.6863

4.7026 4.906 5.0

5.8951

5.9033 5.9113 5.9193

Non-cash impairment

in $ million

0 2 0 0 2,744.0 18 0 0

Backlog

in $ billion

3.6 3.8 4.1 5.2 5.1 6.6 7.4 8.4

Earnings per share

in $/share

0.13 0.28 2.04 0.74 (10.64) 1.24 1.15 1.38
Average day rate in $ 176,709 183,537 194,754 208,117 216,372 232,008 237,263 243,902
Utilization 51% 53% 61% 65% 63% 62% 76% 86%
Long-term debt to capital 24.6% 27% 28% 33% 42% 32% 32% 31%

Shares outstanding (diluted)

in million

300.6 298.6 284.6 301.3 232.5 232.5 232.2 231.9

Dividend

$/share/Q

0.01 0.01 0.01 0.01 0.01 0.15 0.15 0.15

Pro Format Financial Position - 31 December 2016

Following the January 2017 completion of the Company's debt exchange for $650 million aggregate principal amount of senior notes that were repurchased for $333 million of cash consideration and $332 million aggregate principal amount of new senior notes, the Company's pro forma balance sheet as of 31 December 2016 reflected:

  • $4.5 billion of liquidity
    • $2.26 billion of cash and short-term investments
    • $2.25 billion available revolving credit facility
  • No debt maturities until second quarter 2019 and $1.15 billion of debt maturing before 2024
  • $4.9 billion of long-term debt - down from $5.9 billion at 31 December 2015
  • $8.2 billion of Ensco shareholder's equity
  • 25% net debt-to-capital ratio (net of $2.3 billion of cash and short-term investments)

TAB 1 - Rig revenues and drilling expenses per segment.

Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014
Floaters Revenues 302.8 319.3 636.4 512.6 490.3 646.4 634.3 695.0 663.0
Drilling expense 151.4 153.7 208.6 211.3 239.2 242.4 277.7 293.5 514.0
Jackups Revenues 186.5 213.8 251.3 277.9 307.4 325.8 384.1 428.3 454.5
Drilling expense 126.8 133.2 122.3 134.5 149.3 160.0 192.7 191.5 186.3
Managed drilling rigs Revenues 15.3 15.1 21.9 23.5 30.6 40.0 40.6 40.6 42.3
Cost 10.8 11.2 19.3 17.9 26.7 31.1 32.2 n/a 34.3

TAB 2 - Rig utilization and average day rate per segment.

Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014
Floaters Utilization 44% 48% 57% 64% 57% 59% 76% 86% 89% 89%
Average day rate $ 358,405 353,187 359,575 364,771 397,146 421,903 417,463 425,278 428,734
Jackups Utilization 54% 55% 63% 66% 66% 64% 77% 87% 88% 88%
Average day rate $ 101,252 109,379 111,791 118,138 125,785 133,619 139,797 144,139 147,052

Backlog details and repartition between floaters and Jack-ups:

Commentary:

Ensco released its fourth-quarter results on February 27, 2017. Revenues were $504.6 million in fourth-quarter 2016, compared to $548.2 million, down another 8% quarter over quarter.

M. Trowell, CEO, said:

We also took several actions to further improve our capital structure and liquidity. Recently, we completed two transactions - an $850 million convertible senior notes offering in December and a debt exchange of $650 million of our nearest-term maturities for cash and new 2024 senior notes in January - that raised $476 million of net proceeds. As a consequence of these transactions and other capital management actions taken during 2016, we have lowered our net debt by $1.9 billion and increased liquidity by $1.0 billion since the end of 2015. Additionally, we have reduced our debt maturities over the next seven years to $1.15 billion from $2.90 billion a year ago, providing us with enhanced capital management flexibility.

It was another weak quarter, and it clearly evidences that the whole offshore drilling industry is desperately struggling with a terrible downturn that started in November 2014 and seems never ending.

Ensco should not be singled out, and in fact, the 2016 results are demonstrating that the company is in control of its debt - essential for the survival - and its operating costs, which are the only elements that the company can really influence.

This is paramount to allow the company a chance of survival against this unprecedented bear cycle that may eventually end in H2 2018, with a potential day rate "slight increase" beginning a year later. At least, it is what a few CEOs in this industry are telling us without much conviction, I must add.

On November 2016, OPEC and non-OPEC decided to cut production by nearly 1.8 MBOPD, and oil prices rallied to $55 per barrel. However, the situation is not clear, and the US Shale, together with Libya, Nigeria and Iran, are threatening this fragile nascent optimism. The result is that the oil rally has stalled, and we are trading in a tight range between $53 to $58 per barrel. Unfortunately, it is not enough for the oil majors to commit more exploration for CapEx to jump start the tendering activity, even if progress in cost per barrel has been made to make exploration attractive. Many in this sector are saying that $65 per barrel is needed and nothing less.

Conclusion:

Ensco Plc., is still struggling and no bottom yet. It is perfectly evident looking at the above numbers. Revenues are going down fast, contract backlog as well, and business outlook is grim.

However, Ensco owns a very versatile fleet with a large jack-up segment, which represents a third of its actual revenues. This is the underlying strength of companies such as Ensco, Noble (NYSE:NE) and Rowan (NYSE:RDC). The recovery will eventually materialize one day, and the shallow segment - Jack-ups - is the sector most likely to recover first for obvious reasons.

Technically, ESV is showing a new descending triangle pattern that has started mid-January. The descending triangle is a bearish formation that usually forms during a downtrend as a continuation pattern.

I recommend to wait for $9 to eventually add cautiously a little, but a descending triangle always ends with a breakout, which is often on the downside (70%+).

If the blue line in the chart above is breached, we may eventually retest the $8 support before any reversal, which is a better entry in my opinion.

Of course, if oil rallies and trades well above $60-$65 per barrel - which is not likely - then I may change my opinion.

I own ESV as a long-term investment, and I have previously recommended to take some profit off the table at $11. It seems now too late and I recommend to hold and wait for a re-test of a support I see around $8.

Important note: Do not forget to follow on ESV and other offshore drillers. Thank you for your support.

Disclosure: I am/we are long ESV.

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.