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Ensco: Cut It A Little Slack

Fun Trading profile picture
Fun Trading


  • Total revenues declined to $454.2 million from $504.6 million in the year-ago quarter. However, we notice that a revenue stabilization driven by a nascent recovery is shaping up as evidenced by the recent fleet status.
  • The company is putting in place a firm defensive financial position while waiting for a recovery, by reducing costs and re-organizing its debt and liquidity.
  • A cautious accumulation on any weakness at $4.50 or below for investors who own already ESV seems a possible strategy.

Ensco PLC - Semi-submersible Ensco 5005: Design: F&G L-1033 Enhanced Water Depth: Midwater: 1,000' - 4,499'.

Investment Thesis

Ensco PLC. (ESV) is one of my long-term offshore drillers, and I am still confident the company will survive these severe and everlasting headwinds. Market capitalization is $1.94 billion (as of March 2018), which qualifies the company as a mid-cap stock.

ESV is a very volatile stock and should be considered a useful trading tool only, due to the uncertainty surrounding the oil prices at the moment and the potential effect of the merger with Atwood.

I recommend ESV as a long-term hold until we can figure out the real effects of the Atwood acquisition, which continues to worry me. A cautious accumulation on any weakness at $4.50 or below for investors who own already ESV seems a possible strategy.

A simple look at the fleet status and the fourth quarter results is very telling. We are experiencing an offshore drilling recovery supported by oil prices above $60 per barrel. I recommend reading my preceding article about Ensco's February fleet status.

The caveat lector is that the day rates and profit margin are extremely low in order to entice oil majors and O&G companies to drill offshore again on projects that otherwise would not have been economical. This situation will put pressure on revenues and results for many quarters to come.

Ensco CEO Carl Trowel said on the conference call:

we see positive signs for the offshore sector, including constructive commodity prices, attractive breakeven economics for offshore projects, and rig retirement. These factors have created a more favorable backdrop for the supply-and-demand dynamics for the offshore drilling rigs, and we believe the early stages of a recovery are taking hold.

Ensco - Balance sheet: The Raw Numbers


This article was written by

Fun Trading profile picture
Fun Trading is a retired engineer and independent investor. In addition to writing on investing in all aspects of gold, oil, and gas, he runs his own portfolio..

Analyst’s 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.

I trade ESV actively

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (61)

canyonwlf7 profile picture
Sold all my ESV at 4.80 from 4.50, looking to buy back lower
Fun Trading profile picture
A profit is a profit...

Good luck!
As a follow up, what is the tipping point for the lack of investment in exploration that calls for an oil spike down the road (how far down the road is your thought)...Are we there yet?
This may be a poor example/comparison, but here in the US, after the housing crisis and lack of demand, many construction workers were laid off and worked in other industries. You could see about 3 years ago, when builders started back up, demand outstripped supply. Houses in my neighborhood were selling in under 2 weeks. I had one neighbor who ended up selling to someone who just left an offer on the doorstep without ever entering the house. I am thinking the same will happen with oil. Well, that is my guess/dream.
Grippa profile picture
Agree with this I work in the oil industry and know alot of guys have retired or got other jobs. Will be another year before it happens but I beleve we have at least one more decent BOOM. and the length of this downturn only benifits that the BOOM will last longer than if the recession was shortlived. For me my favourite is ESV but also watching Seadrill closely once restructured! Good luck everyone
Fun Trading profile picture

The situation with oil is much more complicated I believe because it is global and involves the whole world. It is an interesting question though and it could happen as you said?

Best regards,
Fun Trading profile picture

Good comment... Yes, SDRL will be a good candidate after the restructuring is completed.

Best regards,
FT (& Vlad), as an earlier poster mentioned, thanks for all your work. I would be lost without it. Keeps me sane from the Electric vehicles will shut down every oil rig...okay, an exaggeration, I admit it, but, you know what I mean.

As a long time follower, Thanks!
If you think that buy some EV shares too. I own BYD and BAIC - some chinese cobalt miners have also gone tru the roof.
Aventador profile picture
Ray Branton,
Very well said. You make some very valid points. You can look at many of these type of situations and see many results. I have found when these type of merger buyouts happen the company doing the buying had better be on solid footing or in many cases its domed from the start. I think ESV really went out on a limb given the situation. They gambled on things at one point returning to what they were in the past. In watching many companies that took that path if the business changed they failed. OSD is under pressure from many fronts. To take on expansion is a gamble of epic proportions factoring in if ESV closed its doors today it wouldn't even be a blip on the OSD service capacity. It would still remain over supplied and rigs sitting cold stacked.. That is what is worrisome to me.
Ray Branton profile picture
Acquisitions like ESV's and RIG's (Atwood and Songa) are inevitably controversial and they invite both second guessing and criticism, No one is infallible, and no one knows the future -
but bear in mind that the leaders of ESV, RIG and other likely survivors have handled their business so far in this downturn so that they are still surviving. They are also, at the moment, doing a bit better. The situation reminds me of a conversation that I had in about 1985 with Hugh Kelly - then CEO of Odeco - a pioneering offshore driller. Things were gloomy in the industry, but Mr. Kelly was buying rigs from troubled companies - and taking plenty of heat from shareholders and others for doing so. As it turned out, Hugh Kelly's timing was superb. Are we in a Hugh Kelly type moment? No one knows for sure, but I think we are and I have bought some RIG and some ESV.
Fun Trading profile picture

Thank you for your opinion, however, what I can tell you is that there is an acquisition that makes sense and one that doesn't. Why the hurry for ESV?

RIG acquiring Songa made sense and the cash invested translated directly into cash flow and powerful new customer (Statoil) conversely, Ensco bought an idle fleet with almost no backlog and two drillships under construction.
Cash flow potential is zero, and recovery in deepwater is many months away with sluggish day rate at best. Meanwhile, ESV paid two times what ATW could be valued now without the acquisition. It has been a lose-lose decision indeed for ESV and its shareholders.

Best regards,
I own 3 tranches of ESV - one to sell at $6, one to sell at $7 and one to hold long term. Seems I will be waiting at long time even on the first two transactions. OSD's are a difficult bunch ATM....
Prudent Man profile picture
ESV may be the best house on a bad block but I can't see the payoff when their customers are far from out of the woods. Oil stocks will trend with the price of oil which, given the endless available low cost oil production and the pressure from climate-change initiatives on oil consumption, remains in a lengthy downtrend.

So for the reality check.
Fun Trading profile picture

Thank you for your opinion... My experience is that as an investor you can profit from ANY investment and ANY industry as long as you know how it works. The oil Industry is very volatile and quite unpredictable. A trading/investing strategy is paramount. It is important to balance the good and the bad and I agree.
However, how do you explain "remains in a lengthy downtrend."

It is not true fundamentally and it is not true technically look at the chart and look at the fundamentals of most of the oil majors and E&P.

Best regards,
Prudent Man profile picture
Let me preface my response by acknowledging your granular contribution to this site’s analysis of the drillers. I for one very much appreciate it and read your reports attentively.

As it regards my opinion on the fundamentals for this sector and my investment conclusion for the sector and ESV, I believe I have something to bring to the discussion.

As to my analytical grounding, for a decade I was a Wall Street analyst covering both the oil and the oil-service sectors. As it pertains to investing, in 1996 I left Wall Street and founded an investment-management firm which is now in its 21st year and possesses a performance record demonstrating both appreciation during the good times and risk management in the bad (thus the “Prudent Man” handle).

As it pertains to ESV specifically, at some future date this company within the sector would be favored by me but not as an “equity” investment. When the oil sector outlook catches a cold the service sector bears the consequences typically catching pneumonia. I believe the oil producers will remain exposed to the secular “downtrend” for oil prices that will continue to erode their leveraged cash flows leaving little of the pie to fund the driller’s recovery. In addition to the poor current outlook for the price of oil, which is at great risk due to the “backwardation” of the oil futures market, the long-term outlook for the price of oil will be constrained by weak global population growth (Africa is the only continent replacing its population at any meaningful rate), by political collaboration to substitute for fossil fuel, and by production technology that allows producers to virtually stick a straw in the ground and produce onshore profits. All of these trends will keep the offshore capital-equipment returns underwater (pardon the pun). Furthermore the offshore market has always reminded me of the tanker market with its cast of manufacturers that boom & bust, and corporate players that have little in common with their shareholders.

While it goes without saying that “an investor can profit from any investment and any industry” (though it appears you believe it had to be said), successful investment results must first be rooted in the quantification of investment-risk versus investment-return relative to one’s investment benchmark. In my humble opinion, again grounded in thirty years of experience with both this sector and portfolio management, a significant wave of restructurings must first occur (i.e. bankruptcies) to bring investment-reward in alignment with investment-risk. While ESV’s franchise would be a prized opportunity in the event a restructuring occurred, and one in which i would expect to partake, I believe the risk is that current ESV “equity” investors will be left with little to show for the risks they are taking by buying the stock today. Obviously, for the sake of current investors, I hope that the outlook improves and I am proven wrong.

Again, this is just one man’s opinion and I look forward to your ongoing coverage of the sector.
Fun Trading profile picture

Thank you very much for your opinion and yes, you have brought something valuable to the discussion. It is always appreciated when someone is participating honestly in the debate and help everyone to get a better view of what is going on.

"When the oil sector outlook catches a cold the service sector bears the consequences typically catching pneumonia."

Totally agree with this principle and I have been vocal about this issue when the OSDs jumped with oil without any real recovery in sight.

"in the event a restructuring occurred, and one in which i would expect to partake, I believe the risk is that current ESV “equity” investors will be left with little to show for the risks they are taking by buying the stock today."

It is here where I do not follow you? Do you mean that ESV is potentially heading to bankruptcy? I really do not see it happening at all. Look at the debt and basically the business model based on a U recovery coming. The risk of bankruptcy is very low.
In fact, RIG, ESV, RDC and probably NE, SDLP and DO are the backbone of the offshore drilling industry and will definitely survive the cycle.

Best regards,
Aventador profile picture
Well I like to read oil price for pure entertainment as they are the biggest flip flop fish in the sea but they just dropped a interesting article from the IEA and to quote ...

"Over the next three years, the U.S. will cover 80 percent of the world’s demand growth, the IEA says in its newly-released Oil 2018 annual report."

Now before you get exited and I know the usual suspects are jumping up and down after reading that there is naturally a big if attached to that. Now lets play along since oil bulls have lived in the "if world' for three straight years but if that is the case the OSD sector is doomed. Well doomed is a pretty strong word but the dream of recovery will be very strained to put it mildly. As well the kick the debt can folks and there are many will run head on into massive debt being due. If thats not bad enough when these legacy contracts keep rolling off and keep getting replaced by break even to loss ones we are currently seeing it will make the last three years look good.

In the end we can take these articles for what they are. Just a guess looking forward but if you are paying attention the hope of sky high prices in oil again is getting some serious push back.

parisbiker profile picture
Massive cash burn in 2018 & I mean massive. The recent guidance for 2018 was a disaster & thats why the stock tumbled. Trowell better hope for improved pricing in 2019 or else it will be another year of massive cash burn.
Fun Trading profile picture

Yes, you are right and it is because of the ATW acquisition. Now, the company will have to show that it was the right timing and contracts will follow that will make ATW acquisition worthwhile. Trowell is in the hot seat now.

Best regards,
Thanks FT.

We just need oil constantly above 65 (not even 70) and Atwood acquisition will turn into a very profitable asset. I see ESV in double digits in 2018.
Fun Trading profile picture
You are welcome VRX,

We need mostly contracts and rig attrition and price above or at $65 is the solution.

Best regards,
FT how many of newly acquired from Atwood are contracted? Can you share some light on it?
Fun Trading profile picture

The best way is to look at my article about the fleet status (Feb.)


I see only one Drillship small contract and one Jackup until 8/18. all the others are either newbuild (2) or stacked.

Best regards,
I went long Friday for the first time
johnny..cage profile picture
You will be very happy. Should be a decent report Wednesday.
Making less money than a year ago; the US is set to become the biggest oil producer in the world due to shale; and ESV is cutting day rates to attract companies. Seems like a perfect formula for the big recovery that has now been forecast for the last several years.
Hi Jack, there is a philosophical concept called "Condition of Possibility" that lies at the heart of every turn (formalized initially by Kant, but not fully developed until the early 20th century by Husserl). The paradox is that, at the apex, it must look as linear as all hell, otherwise the apex wouldn't exist to begin with - right before the second derivative takes the face off reality. Pull out any 30 year chart. Look at the turns. It's always the same. BTW - is anyone amused that shale can grow by 5Mbbls/day during the fast few years, while the global price continues to go up?
Fun Trading profile picture

Very interesting post, thank you. It reminds me the artisan/cube example in the philosophy class and totally forgot about Edmund (epoché)... A good correlation to the chart analysis that demands some deep thinking.

By the way, I did not get

"is anyone amused that shale can grow by 5Mbbls/day during the fast few years, while the global price continues to go up?"

Can you explain, thank you.

Best regards,
Put another way, between 2010 and now, US oil production is up 5 Mbbls/day (!) - yet...Brent is the same price (having gone up sharply the last 8 months). I doubt the Boslego-types would have predicted this outcome if asked to consider this production scenario in 2010. I find it interesting that US production could grow roughly 1Mbbls/day, year after year, yet here we are. Obviously, OPEC+R is helping, but by holding production steady - not by hitting the brakes. It makes one wonder what would happen if the US stopped growing at 1 Mbbld/yr, and (scary thought) if this were to happen at the same time aggregate legacy offshore projects begin the steep decline phase of their production curves.
earlyriser profile picture
I have been playing ESV and RIG on and off. I also owned the debt. I only hold ESV bonds and stock right now. I would have tendered my ESV bonds on the latest buyback offer, but since they extended all their debt, my bonds are very safe. I am surprised that while ESV bonds have weakened, the stock has been destroyed. If bankruptcy was really in play I would have expected the bonds to have done much worse.
Fun Trading profile picture

Yes, it was puzzling... ESV is not threatened by bankruptcy.

Best regards,
Grippa profile picture
FT couldn't thank you enough for help here, without you and Vlad wouldn't have a clue what is going on! Big thanks 😁👊🤞
Fun Trading profile picture
Thank you Grippa. Good luck!
Long ESV in my ten year small cap allocation. Emphasis on the ten year part. This stock requires a lot of patience.
Fun Trading profile picture

Yes, 2017 was not really a good year for long but hopefully, 2018-2020 will be better.

Best regards,
Equivocation profile picture
It is only a matter of patiently waiting. As is often the case, the impulse to trade a stock is the main enemy.
Fun Trading profile picture
Hello Equivocation,

Nice to read you here. What is going on with Gabon?

Best regards,
Equivocation profile picture
Hi FT. Not sure what you mean by Gabon?

Drilling off Gabon?
Fun Trading profile picture

About the Tortue prospect and Panoro Energy and BW. I heard that they are dilling right now.

Best regards,
Thank you FT and guess you have no direct family joint ventures investments with

Crammer. Thanks for the uplifting comments.
Hello Fun,

maybe one should factor in that Q4 results are influenced by new contracts and some little backlog of the ATW acquisition. The pre-acquisition ESV fleet would have generated a slightly less revenue I think which would lessen the stabilization on the revenue side. Not speaken of revenue per share, which came down drastically, compared to say Q2 2017.

Nevertheless, industry fundamentals are improving (rig scrapping and utilization increase). New tenders are in sight, the US is lowering royalties on shelf and possibly on deepwater projects which increases competetiveness. We may have the worst behind us now.
Thanks for the update FT.. Slowly buying back my shares..
I just went long ESV last week and expect to see the stock price rise within the next 2 years. Guess Ill initiate a position in RIG as well as the market leader in this segment.

Fun Trading profile picture

Good timing...

Best regards,
Thanks, but I guess it was more luck than wisdom ;)

Thanks for the article, and good luck investing!
Fun Trading profile picture
We can all use a little luck from time to time... Now, do not be too greedy or impatient. This is the way you are selling that will make this investment a good investment.

Best regards,
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