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Ensco plc (ESV - Analyst Report) has reported second quarter 2011 earnings of 59 cents per share from continuing operations. Results came in well below the year-ago earnings of 85 cents per share and missed the Zacks Consensus Estimate of 71 cents, mainly due to steeper costs.

Ensco’s total revenue surged 37% to $564.2 million in the reported quarter from the year-ago revenue of $411.4 million, and surpassed the Zacks Consensus Estimate of $562 million. Most of the year-over-year increment came from the Pride International acquisition.

Segment Performance

Jackup: Revenues from the Jackup fleet fell marginally to $289.3 million from the year-earlier level of $290.5 million. The decline was mainly due to a fall in the average dayrate to $99,024 from $105,124 in the year-earlier period. Overall jackup utilization remained unaltered at 75% on an annualized basis.

Deepwater: The segment’s revenue jumped a whopping 92% from the year-earlier level to $232.3 million. The outperformance was mainly related to the Pride International acquisition as well as the addition of two ultra-deepwater rigs (ENSCO 8502 and ENSCO 8503). However, the result was partially tempered by a decline in revenues for ENSCO 7500 that was undergoing an enhancement project in a shipyard during the quarter.

Rig utilization in this segment plunged to 86% from 91% in the year-earlier quarter. Dayrate also plummeted to $347,024 from the year-earlier level of $403,307.

Midwater: The segment generated revenue of $36.1 million in the reported quarter mainly from the acquisition as prior to this, Ensco had no midwater rigs. Midwater registered a dayrate of $237,139 and rig utilization of 79%.

On the cost front, depreciation expense increased almost 61%, contract drilling expenses climbed 39% and general and administrative expenses increased considerable to $83.5 million (versus $22 million in the second quarter 2010), on a year-over-year basis.

Balance Sheet

At the end of the quarter, Ensco had $554 million in cash and long-term debt of $4,964.9 million, with debt-to-capitalization ratio of 31.9%.

Outlook

We appreciate Ensco’s financial discipline, attractive dividend yield and organically developed asset base. International deepwater market opportunities are stepping up aided by new multi-year programs in West Africa, SE Asia, Brazil and the Mediterranean. This should eventually be accretive to the company’s earnings.

Moreover, we foresee substantial earnings visibility for Ensco following the merger with Pride International. The combined company is expected to benefit from the international jackup market recovery coupled with continued strength in the deepwater market. All of Ensco’s deepwater rigs in the U.S. Gulf of Mexico are now earning at a full-day rate.

Management also remains optimistic about the broader recovery in jackup demand, particularly in the Middle East, where Ensco has contracted five jackups to Saudi Aramco in the recent times. Additionally, all the company’s rigs are contracted into 2012 in the North Sea. The company believes that Mexico will likely experience additional demand for jackups later this year.

Ensco has over $9 billion of contract revenue backlog excluding bonus opportunities. The company’s solid backlog position provides it with excellent cash flow visibility. Additionally, the company’s impressive balance sheet and sufficient liquidity helps it to address any operational or corporate needs.

However, the increased supply of high-spec rigs is likely to put pressure on utilization for standard jackups in the long run. Hence, we currently maintain our long-term Neutral recommendation for Ensco shares. The company, which retains a Zacks #3 Rank (short-term Hold rating), competes with Rowan Companies Inc. (RDC - Analyst Report).

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