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We maintained our Neutral recommendation on Ensco plc (ESV - Analyst Report) on Dec 26, 2013. Ensco’s impressive balance sheet and sufficient liquidity help it to address any operational or corporate need. However, Ensco’s business depends on oil and gas exploration and production activity, volatility in which could put pressure on E&P spending and create lower demand for its service offerings. Rowan carries a Zacks Rank #3 (Hold).

Why Maintain?

Having transformed from a Gulf of Mexico company to a relatively pure international play, Ensco should be well positioned to improve its earnings and revenues in the foreseeable future, as well as benefit from a recovery in oil-directed drilling.

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.

The last few years saw an upgrade of several Ensco rigs. The upgrade project of ENSCO DS-1 is complete while ENSCO 5005, ENSCO 5006, ENSCO DS-2, ENSCO 6001 and ENSCO 6002, are undergoing modernization. Almost 55% of the jackups completed upgrades in 2012–2013 and in 2014–2015 fewer jackup upgrades are expected. This is a positive for the company as it will improve utilization and boost operating margins.

Ensco has $11 billion of contracted revenue backlog (excluding bonus opportunities), providing it with 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.

However, the deepwater rigs are expected to have increased downtime in 2014 that will affect its revenues. Further, the challenges arising in contracting rigs for extensions in Brazil raise concerns.

Stocks That Warrant a Look

While we expect Ensco to perform in line with its peers, one can consider Zacks Ranked #1 (Strong Buy) stocks Harvest Natural Resources Inc. (HNR - Snapshot Report), Blueknight Energy Partners, L.P (BKEP - Snapshot Report) and Tesco Corp. (TESO - Snapshot Report) as good buying opportunities for the short term.

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