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ESV AT A GLANCE

P/E ► 4.48 AVG EV/EBITDA ► 34.7 VERY HIGH ROA ► 19.8% HIGH ROE ► 25% AVG Debt to Equity ► 0.243 LOW Current Ratio ► 3.54 HIGH

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating ExpensesSG&AAmortization & Depreciation

ENSCO International contracts its 45 jack-up drilling rigs, one deepwater semisubmersible, and one barge rig to oil exploration and production companies operating around the world. Since mid-2007, the company has benefited from rising oil prices, which have caused demand for drilling rigs to skyrocket and boosted the dayrates charged by the firms that provide rigs to exploration and production companies. ENSCO's fleet is one of the youngest in the industry, so its top-notch technology commands premium prices in an already high-price environment - and since ENSCO purchased many of the rigs in the '90s, when demand for rigs (and, therefore, rig prices) was low, the company's margins are among the highest in the industry.

Many of the rigs ENSCO has deployed in America are located in the shallow Gulf of Mexico; since 2003, production in the Gulf has been in decline, causing many oil companies to pack up and head out of the region. For this reason, ENSCO's North/South America segment is the only segment of the company that has seen dayrates and revenues decline. The company has realized the weakening position of the Gulf, however, and is slowly moving its rigs abroad, to higher-price markets in Europe, Africa, and Asia Pacific. The Gulf is seeing rising demand in the deepwater sector, however, and ENSCO has one deepwater rig and is in the process of building four more. These rigs do not have any high-end specifications, like 10,000 foot ultra-deepwater capability, but are simply capable of drilling in 8,500 feet of water. Without the high-end specs, however, these rigs cost far less for the company to build, allowing the company to build more on the same budget. ENSCO competes with offshore drill contractors, including Transocean, Diamond Offshore Drilling, Noble, and Rowan Companies.

[edit] Business and Financials

All results in $US unless otherwise noted:

• Through nine months of 2008, operating cash flow (OCF) came in at $743M, down 12% YoY from $844M. As noted previously, the company registered very large cash outlays for accrued taxes and other liabilities as well as its ARS fiasco.
• In the current credit crunch, Ensco’s solid balance sheet is precious (even if the stock hasn’t been rewarded for it). The company has more cash than debt, with only $20M in annual debt expense and half of their minimal long-term debt (0.06 debt/equity) doesn’t come due until 2027. No worries about Ensco’s ability to survive a sustained downturn in the energy markets.
• Nothing terribly interesting lurking in the income statement. Margins remained sky-high during Q3 (operating margin @ 58%, net margin @ 47%). The company took a small $20M hit due to the loss of ENSCO 74 in the wake of Hurricane Ike, which should be covered by an insurance payment in Q4.

In the past three years, ENSCO has seen revenues (in $ Millions) increase everywhere except North/South America.^[1]

Total fleet utilization rate increased to 95%, up 2 bp from 2007 levels. Average day rates are registering double-digit increases across all regions except for the Gulf of Mexico jackup market and even there, day rates and utilization levels are increasing markedly from YE 2007 and Q1 2008. Ensco is the sole provider of 250 foot, independent leg rigs in the GOM region and is currently operating at 100% utilization. Management announced probable accepted tenders for 2 rigs with PEMEX as well as a possible additional rig to Venezuela. If Congress allows drilling on the Outer Continental shelf, the rig market will come under stress to supply extra rigs.

Dallas, Texas-based ENSCO International Inc. (ESV) is a supplier of offshore contract drilling services to the oil and gas industry. The company's drilling fleet consists of 45 jackup rigs, one ultra-deepwater semi-submersible rig, and one barge. Additionally, the company has four ultra-deepwater semi-submersible rigs under construction.

ENSCO operates around the world, with rigs in the Gulf of Mexico, Venezuela, Mexico, Thailand, Singapore, Malaysia, India, Indonesia, Saudi Arabia, Quatar, Tunisia, New Zealand, Australia, Denmark, the Netherlands, and the UK. Though no one company was responsible for more than 10% of ENSCO's revenue, the five largest customers accounted for 35%.

In the past three years, ENSCO has seen dayrates ($) increase everywhere except North/South America.^[2]

From 2006 to 2007, ENSCO's revenues increased from $1.8 billion to $2.1 billion, while operating income increased from $1 billion to $1.2 billion.

[edit] Trends and Forces

[edit] ENSCO Benefits from High Oil Prices Driving Up Dayrates

Oil and gas prices have fluctuated heavily over the past few years, though since mid-2007, the trend has been up. Oil traded on international markets for $120/bbl in early May, a record high, while natural gas traded at over $10/Mcf.^[3] As oil prices rise, E&P companies are desperate to ramp up production, causing demand for drilling rigs (and, therefore, dayrates) to skyrocket. From 2006 to 2007, ENSCO's average dayrates rose from $114,762 to $139,882. At the same time, the company's rig utilization fell from 95% to 91%^[4], but revenues rose from $1.8 billion to $2.1 billion and net income rose from $770 million to $992 million. Despite the fact that the company's rig utilization (an indicator of productivity measuring how many rigs were used out of the company's total) fell, rising oil prices artificially inflated ENSCO's financials and allowed the company to grow nonetheless.

[edit] By Moving its Rigs Abroad, ENSCO is Avoiding a Declining Market for Shallow-Water Drilling in the Gulf of Mexico

Most of ENSCO's North/South American operations occur in the Gulf of Mexico. Aside from one deepwater semisubmersible, ENSCO's rigs are shallow-water jack-ups, mostly confined to the Continental Shelf. Historically, the Shelf has been responsible for much of U.S. oil and gas production; in 2007, for example, it was responsible for 7.6% of U.S. oil production and 10.2% of U.S. gas production. These production numbers, though, are part of an overall decline in production rates since 2003. The Minerals Management Service (MMS) estimates that production in the region will fall from 329,000 barrels per day to 182,000 barrels per day in the next nine years - a decline of 55%, and a big reason why many of the oil majors are leaving the shallow shelf for deeper or international waters.^[5] In response, ENSCO has been slowly decreasing the number of its jackups in North/South America, moving its rigs abroad. Since 2005, the company has moved two jack-ups out of the Gulf, growing its rigs in Asia Pacific by three and Europe/Africa by one (two new jack-ups were constructed in the same period).ref>ESV 2007 10-K, Page 33</ref>

[edit] ENSCO is Investing in Deepwater Rigs

While moving rigs out of the shallow Gulf, ENSCO began construction on four deepwater drilling rigs. The company's one existing ultra-deepwater rig already commands a premium price, at just under $200,000 in 2007^[6], and building new ultra-deepwater semisubmersibles will let ENSCO grow in the one part of the Gulf that has not been declining - the deepwater sector. Deepwater rigs are in high demand; as of May 2008, Petrobras had contracted 80% of the world's deepwater fleet, leaving the remainder in high demand, and driving dayrates for deepwater rigs through the roof.^[7] Indeed, these pieces of capital can contract for upwards of $800,000 per day,^[8] though the rigs that contract at such prices have either 10,000 foot capabilities or productivity-improving technologies. ENSCO's current and future rigs are standard ultra-deepwater rigs, capable of drilling in 8,500 feet of water^[9] and making their dayrates potentially lower; however, they are 35-40% cheaper to build^[10], letting the company build more of them at lower cost. Furthermore, all ENSCO's semisubmersibles can be upgraded with 10,000 foot capabilities if necessary.^[11]

[edit] By Purchasing Most of its Rigs in the Low-Price Environment of the 1990s, ENSCO Commands One of the Youngest Fleets in the Industry - and the Premiums that Come With It

Between 1992 and 2002, ENSCO acquired 37 jack-ups and built one harsh environment jack-up and one deepwater semisubmersible. In the same period, oil prices fluctuated between $9 and $33 per barrel, on average four times lower than prices at the end of 2007.^[12] At that time, because oil prices were low, E&P companies weren't fighting to increase production, so rigs were cheap to come by. Starting in 1996, the company embarked on a 10-year. $1.3 billion journey to upgrade these rigs. As a result, ENSCO's fleet is just seven years old on average^[13], allowing it to command premium prices as E&P companies are willing to pay more for better technology.

[edit] Legislation Supporting the Development of Renewable Energy Threatens the Long-Term Strength of Hydrocarbons in the U.S.

Whether it’s because of the desire for energy independence, the rising price of oil, or fears of climate change, public opinion has turned away from petroleum, and is driving government policy changes that encourage the adoption of alternative fuels. Environmentalists have been calling for a shift to renewable energy for years, and though the river of change is running slow, it is running deep. The Energy Independence and Security Act of 2007 is the first step towards a grander series of changes. By forcing automakers to achieve 35 mpg by 2020 and setting a Renewable Fuel Standard of 36 billion gallons of biofuels in 2022^[14], the Act has potential to get the ball rolling to greatly reduce American dependence on hydrocarbons.

Already, 26 states across the country have adopted Renewable Energy Standards to increase the share of renewables in their energy mixes, while both Democratic candidates for President have pledged to reduce carbon emissions by 80% below 1990 levels by 2050.^[15][16] While the Republican candidate isn't so tough on climate action, he still supports a strong cap-and-trade system. In emerging markets like China and India, the drive for economic growth supersedes environmental concerns, but since the world's largest oil importer is the U.S., meaning the majority of the oil drilled with ENSCO's rigs are sold to the U.S., a changing American environmental and energy paradigm would be disastrous to its business without the development of some effective carbon sequestration technology.

[edit] Competition

ENSCO, with its fleet of 45 rigs and one barge, competes with:

• Transocean - This drilling behemoth has 138 offshore rigs, including 10 high-spec jack-ups and 56 standard jack-ups^[17], as well as 48 deepwater rigs.^[18]
• Noble: 86% of Noble's fleet of 66 rigs were deployed internationally in early 2007^[19], with its markets ranging from the Gulf of Mexico to India, Mexico, the North Sea, the Middle East, and West Africa.
• Diamond Offshore Drilling: 21 of Diamond's 44 rigs were deployed in the American Gulf of Mexico^[20], with the rest divided between Brazil, Malaysia, Australia, New Zealand, Egypt, Vietnam, the North Sea, and the Middle East.
• Rowan Companies - Rowan's 21 jack-ups specialize in harsh environment, shallow-water drilling, and are deployed in the Gulf of Mexico, Middle East, North Sea, offshore eastern Canada, offshore West Africa, and Trinidad. The company also operates 29 onshore deep-well rigs.^[21]

[edit] References

1. ↑ ESV 2007 10-K, Page 31
2. ↑ ESV 2007 10-K, Page 32
3. ↑ Energy Prices Data, Accessed May 7th, 2008
4. ↑ ESV 2007 10-K, Page 32
5. ↑ Access My Library: "The Gulf of Mexico shelf: still a cash flow machine: majors out, independents in.(GULF OF MEXICO)(Cover story)"
6. ↑ ESV 2007 10-K, Page 32
7. ↑ Bloomberg.com: "Petrobras Hires 80% of Deepwater Rigs, Inflates Rents (Update1)"
8. ↑ Energy Current: "Deepwater rig day rates hit new high", November 9th, 2007
9. ↑ MSN Money: "ENSCO International Announces Letter of Intent for Ultra-Deepwater Semisubmersible Rig ENSCO 8503"
10. ↑ Morningstar Analysis: ENSCO International, Inc., 4-28-08
11. ↑ MSN Money: "ENSCO International Announces Letter of Intent for Ultra-Deepwater Semisubmersible Rig ENSCO 8503"
12. ↑ Oil Prices Graph
13. ↑ Morningstar Analysis: ENSCO International, Inc., 4-28-08
14. ↑ WhiteHouse.gov, Fact Sheet: Energy Independence and Security Act of 2007
15. ↑ CNN Election Center: Issues: Environment
16. ↑ Washington Post: "A Green(er) Obama"
17. ↑ Yahoo! Finance: "Transocean Inc. Provides Fleet Status Report", April 4th, 2008
18. ↑ International Herald Tribune, July 24th, 2007
19. ↑ Reuters, Noble Corp NE
20. ↑ Diamond Offshore Drilling Inc DO
21. ↑ RDC 2007 10-K
22. ↑ RIG 2007 10-K
23. ↑ NE 2007 10-K
24. ↑ RDC 2007 10-K
25. ↑ ESV 2007 10-K