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Analyst Blog

We reaffirmed our Neutral recommendation on Ensco plc (ESV - Analyst Report) on Jun 24, 2013. The company remains well positioned to benefit from the recent strength in the offshore markets thanks to its high quality fleet, manageable newbuild program and impressive execution. However, the increased downtime of deepwater rigs in 2013 remains a concern.

Why Maintained?

Ensco Plc – a leading supplier of offshore contract drilling services – is well positioned to improve its earnings and revenues in the foreseeable future. It will also benefit from a recovery in oil-directed drilling, having transformed from a Gulf of Mexico (GoM) company to a relatively pure international play.

Ensco has $12 billion of contract revenue backlog (excluding bonus opportunities), providing it with an excellent cash flow visibility. With the completion of the construction phase of its 6 additional rigs − scheduled to be delivered by the end of 2014 − Ensco is expected to achieve significant growth.

The international deepwater markets are looking strong with new multi-year projects in West Africa, Brazil, Southeast Asia and the Mediterranean. Again, Ensco’s two uncontracted newbuild HDHE (heavy duty, harsh environment) jackups are well positioned for the rapidly improving Central North Sea, the Middle East, and South East Asian markets. These efforts should eventually be accretive to the company’s earnings.

Demand for floaters continues to be robust for Ensco in the GoM and international regions. Ensco DS-2 will likely be re-contracted by the present operator in Angola at a higher rate, while Ensco 8502 was contracted by Stone Energy Corp (SGY - Analyst Report).

The deepwater rigs ENSCO 6001 and ENSCO 6002 received five-year contract extensions from Brazilian energy company Petrobras (PBR - Analyst Report). Further, Ensco continues to market midwater rigs Ensco 5000, 5002, and 5004. These will be available in the latter half of 2013, in Brazil and abroad. The company also sees demand for additional 2–3 deepwater floaters in the Asia Pacific region in 2013.

However, the deepwater rigs are expected to have increased downtime in 2013 that will adversely affect its revenue. Further, the challenges in contracting rigs for extension in Brazil is also a concern.

Other Stocks to Consider

While we prefer to remain on the sidelines for Ensco, Zacks Ranked #1 (Strong Buy) stock – Hornbech Offshore Services, Inc. (HOS - Snapshot Report) could be a good buying option for the short term.

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