Ensco Profit Falls Less Than Expected

Earlier today, ENSCO International Inc. (ESV - Analyst Report) -- a leading supplier of offshore contract drilling services to the oil and gas industry -- reported second-quarter results. Earnings per diluted share from continuing operations came in at $1.59, topping our expectations of $1.52 and market expectations of $1.46. The Dallas-based company’s outperformance was driven by robust performance of its deepwater segment. 

However, on a year-over-year basis, ENSCO’s earnings per share declined 19.7%, while revenue was down 16.1% to $511.6 million. The year-over-year negative comparison was due to a significant dip in the company’s jackup rig utilization (from 95% to 72%) on the back of lower oil and gas prices, partially offset by a 6% increase in average jackup dayrates to $158,849. 

The average dayrate in the Asia-Pacific region decreased approximately 5% year-over-year to $144,517. The Asia-Pacific jackup rig utilization was 63%, down from 91% in the year-ago quarter.
 
Average dayrates for the company’s Europe/Africa fleet was up marginally (by 0.9%) over the 2008 second quarter to $219,715, while rig utilization in the region was 87%, down from 97% in the year-ago period. 

Dayrates in the company’s North and South America jackup market averaged $119,190, up nearly 28% year-over-year. Jackup utilization in the region reduced to 72% during the quarter, as compared to 100% in the year-ago period. 

The star performer during the quarter was the deepwater segment whose sales more than doubled year-over-year to $67.7 million. This can be attributed to the company’s ENSCO 7500 rig that started drilling at a higher day rate of $550,000 in Australia in early April 2009 and the mobilization of ENSCO 8500 in the U.S. Gulf of Mexico in early June 2009. 

At the end of the quarter, the company had $882 million in cash and long-term debt of $283 million (debt-to-capitalization ratio of 5.2%). 

Management said that it is actively working towards addressing the current jackup market weakness through cost reduction initiatives and fleet alignment. Incidentally, roughly 87% of the company’s total revenues come from its jackup fleet. 

We maintain our Buy recommendation on the stock following the better-than-expected results. While the near-term situation is expected to remain weak, with rig oversupply and soft demand weighing on dayrates, the medium to long-term outlook remains favorable. ENSCO enjoys strong leverage to this outlook given its fleet of premium jackup rigs, an exceptionally strong balance sheet, and growing deepwater exposure.