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Ensco plc (ESV - Analyst Report) has reported third quarter 2011 earnings of 88 cents per share from continuing operations. Results came in well below the year-ago earnings of 92 cents per share but surpassed the Zacks Consensus Estimate of 83 cents.

Total revenue surged nearly 114% to $915.6 million in the reported quarter from the year-ago revenue of $428.3 million. Most of the increment came from the Pride International acquisition and addition of new ultra-deepwater rigs to the active fleet.

Segment Performance

Jackup: Revenues from the Jackup fleet jumped to $330.1 million from the year-earlier level of $317.8 million, despite a fall in the average dayrate to $99,775 from $105,068 in the year-earlier period. Overall jackup utilization in this segment dropped to 77% from 79% in the year-earlier period.

Deepwater: The segment’s revenue jumped a whopping 299% from the year-earlier level to $440.4 million. The outperformance was mainly related to the Pride International acquisition as well as the addition of three ultra-deepwater rigs (ENSCO 8502, ENSCO 8503 and ENSCO 8504). However, the result was partially tempered by a decline in revenues from ENSCO 7500 that was undergoing an enhancement project in a shipyard during the quarter.

Rig utilization in this segment dropped marginally to 74% from 75% in the year-earlier quarter. Dayrate climbed to $391,129 from the year-earlier level of $387,777.

Midwater: The segment generated revenue of $121.3 million in the reported quarter mainly from the acquisition. Midwater registered a dayrate of $239,379 and rig utilization of 89%.

On the cost front, depreciation expense increased almost 144%, contract drilling expenses climbed 146% and general and administrative expenses increased considerably to $40.8 million (versus $20.6 million in the third quarter 2010), on a year-over-year basis.

Balance Sheet

At the end of the quarter, Ensco had $479.9 million in cash and long-term debt of $4,949.6 million, with debt-to-capitalization ratio of 31.6%.

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 company has seven rigs under construction, which are expected to be delivered as scheduled and drive earnings growth ahead. The combined company is expected to benefit from the international jackup market recovery coupled with continued strength in the deepwater market.

Management also remains optimistic about the broader recovery in offshore drilling. The company recently contracted two under construction rigs -- ENSCO 8505 and ENSCO 120. Of these, the former was contracted to three customers in the Gulf of Mexico reflecting an improvement in the region's permit scenario. The other newbuild rigs – ENSCO 8503 and ENSCO 8504 are already contracted and have been performing well.

Ensco has approximately $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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