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We reaffirmed our Neutral recommendation on Ensco plc (ESV - Analyst Report) on Sep 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 an overhang.

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 $11 billion of contract revenue backlog (excluding bonus opportunities) that gives it an excellent cash flow visibility. With the completion of the construction phase of its 8 additional rigs − scheduled to be delivered by the end of 2015 − 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.

Ensco’s impressive balance sheet and sufficient liquidity help it to address any operational or corporate need. Recently, the company boosted the dividend by approximately 33% to $2.00 per share annually from $1.50 per share. With a current dividend yield of 3.7%, we believe Ensco remains well positioned to comfortably increase its dividend in the future amid a manageable debt position.

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

Other Stocks to Consider

While we prefer to remain on the sidelines for Ensco, there are other Zacks Ranked #1 (Strong Buy) stocks such as Pembina Pipeline Corp. (PBA - Snapshot Report), Stone Energy Corp. (SGY - Analyst Report), and China Petroleum & Chemical Corp. (SNP - Analyst Report) that are expected to perform impressively over the short term.

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