QUOTE AND NEWS
Motley Fool  Sep 15  Comment 
This offshore drilling stock is down, but not out as the industry adjusts to a new normal.
SeekingAlpha  Sep 15  Comment 
By Economics Fanatic: This is what Seadrill (NYSE:SDRL) has to say in their latest investor presentation (September 2014). (click to enlarge) The next slide says that Seadrill went on to become the world's leading drilling company. ...
SeekingAlpha  Sep 14  Comment 
By IAEResearch: The offshore drilling segment has been through turbulent time and the complete industry is following the negative trend. Despite the concerns about the sector, Ensco (NYSE:ESV) has reported impressive earnings in the first half of...
Motley Fool  Sep 12  Comment 
The offshore drilling market is down and out right now, but there's reason to think Ensco will rise as the industry improves.
SeekingAlpha  Sep 11  Comment 
By Stone Fox Capital: The offshore drilling segment has seen numerous downgrades and negative valuation calls in the last year. The segment is facing a two-pronged short-term issue of customers delaying spending on large capital intensive projects...
SeekingAlpha  Sep 7  Comment 
By SA Editor Miriam Metzinger: Stocks discussed on the Lightning Round segment of Jim Cramer's Mad Money Program, Friday September 5. Bullish Calls: Ensco (NYSE:ESV): "ESV yields 6.5%. Its quarter was good, but no one cares. We are bottom...
TheStreet.com  Sep 5  Comment 
This article originally appeared on RealMoney.com onaSept. 3, 2014 ata11:00aa.m. To read more content like this AND see inside Jim Cramer's multi-million dollar portfolio for FREE...aClick Here NOW. Like many other large-cap offshore rig lessors,...
SeekingAlpha  Sep 3  Comment 
By Casey Hoerth: Like many other large cap offshore rig lessors, Ensco (NYSE:ESV) had a difficult second quarter, at least in the market's eyes. When the company reported earnings at the end of July, shares were over $51. Today shares sit just...
SeekingAlpha  Aug 28  Comment 
By Economics Fanatic: Ensco (NYSE:ESV), which provides offshore contract drilling service to the oil & gas industry, is an attractive investment option to consider at these levels. This article elaborates on this conclusion and discusses the...
Motley Fool  Aug 26  Comment 
Ensco has suffered this year in light of the drop in global offshore drilling activity. Nevertheless, the company has navigated the soft patch well, and is anticipating a turnaround.




 

ENSCO International contracts its 47 jack-up drilling rigs, one deepwater semisubmersible, and one barge rig to oil exploration and production companies operating around the world. 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. The company earned $1.9 billion in revenue and $779 million in net income in 2009.[1]

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.

Company Overview

Contract Drilling Operations[2]

ENSCO owns and operates 42 jackup rigs, four ultra-deepwater semisubmersible rigs and one barge rig. 19 rigs are located in the Asia Pacific geographic region, ten in the Europe and Africa region, and 13 in the North and South America region. The company's ultra-deepwater semisubmersible rigs are operating in Australia and in the Gulf of Mexico.

Business Growth

FY 2009 (ended December 31, 2009)[1]

  • Net revenue fell 19% to $1.9 billion. Revenue declined primarily due to a decline in jackup rig utilization in all geographic regions, partially offset by the commencement of ENSCO 8500 and ENSCO 8501 drilling operations and an increase in average day rates earned by our jackup rigs contracted in Mexico and ENSCO 7500.
  • Net income fell 32% to $779 million.

Trends and Forces

ENSCO Benefits from High Oil Prices Driving Up Dayrates

Oil and gas prices have fluctuated heavily over the past few years. As oil prices rise, E&P companies are desperate to ramp up production, causing demand for drilling rigs (and, therefore, dayrates) to skyrocket. However as prices increase, the company's rig utilization is falling. But despite the company's falling 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.

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. However, it has had 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.[3] In response, ENSCO has been slowly decreasing the number of its jackups in North/South America, moving its rigs abroad. 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).

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, 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; Petrobras has contracted 80% of the world's deepwater fleet, leaving the remainder in high demand, and driving dayrates for deepwater rigs through the roof.[4] Indeed, these pieces of capital can contract for upwards of $800,000 per day,[5] 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[6] and making their dayrates potentially lower; however, they are 35-40% cheaper to build, 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.[7]

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 today.[8] 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, allowing it to command premium prices as E&P companies are willing to pay more for better technology.

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, 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. 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.

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, as well as 48 deepwater rigs.
  • Noble: 86% of Noble's fleet of 66 rigs are deployed internationally, 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, 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.

References

  1. 1.0 1.1 ESV 2009 10-K "Selected Financial Data" pg. 39
  2. ESV 2009 10-K "Contract Drilling Operations" pg. 4-5
  3. Access My Library: "The Gulf of Mexico shelf: still a cash flow machine: majors out, independents in.(GULF OF MEXICO)(Cover story)"
  4. Bloomberg.com: "Petrobras Hires 80% of Deepwater Rigs, Inflates Rents (Update1)"
  5. Energy Current: "Deepwater rig day rates hit new high"
  6. MSN Money: "ENSCO International Announces Letter of Intent for Ultra-Deepwater Semisubmersible Rig ENSCO 8503"
  7. MSN Money: "ENSCO International Announces Letter of Intent for Ultra-Deepwater Semisubmersible Rig ENSCO 8503"
  8. Oil Prices Graph
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