Ensco, Nexen in Rig Contract

Ensco plc (ESV - Analyst Report) has entered into a contract with Nexen Petroleum, a subsidiary of Nexen Inc. (NXY - Analyst Report) for its ultra-premium harsh environment jackup rig, ENSCO 120. The rig will be employed for the development of 10 wells in Nexen’s Golden Eagle acreage in the Central North Sea.

The value of the deal has been estimated at $120 million, which can expand to approximately $140 million, if Nexen extends the contract through 11 one-well options.

The contract is slated to be functional in fourth quarter 2013. The ENSCO 120 series of jackup rigs comprising ENSCO 120, ENSCO 121 and ENSCO 122 are being manufactured in the Keppel FELS Limited shipyard in Singapore and are scheduled to be delivered in the second quarter of 2013.

Ensco placed the order for rigs with Keppel in early October. The shipyard construction price of about $245 million for the new ultra-premium harsh environment jackup rig will be paid in two installments.

These rigs are constructed on advanced and upgraded versions of the KFELS Super A design that are capable of housing a crew of 150 members, drilling at water depths of up to 400 feet in harsh environmental regions and reach a total depth of up to 40,000 feet.

The other rigs in the series – ENSCO 121 and ENSCO 122 – are expected to be delivered in fourth quarter 2013 and third quarter 2014, respectively.

The to-be constructed jackup rigs show a marked improvement from the previous ones and highlight Ensco’s efforts to achieve a high performing and superior drilling fleet.

The U.K.-based Ensco is a leading supplier of offshore contract drilling services to the oil and gas industry. The company’s drilling fleet consists of 7 ultra-deepwater drillships, 13 dynamically positioned semi-submersibles, 7 moored semi-submersibles and 49 premium jackup rigs.

We believe that with support from the broader recovery in jackup demand in the oil and gas sector, Ensco is favorably positioned in the industry. The company’s rigs are contracted into 2012 in the North Sea, and Mexico will likely experience additional demand for jackups in the next few months.

However, we believe these factors are adequately reflected in the present valuation, leaving little room for meaningful upside from the current levels. Hence, we expect the stock to perform in line with the market as well as the sector in the coming quarters and rate the shares of Ensco as Neutral over the long run. The company currently retains a Zacks #3 Rank, which translates into short-term Hold rating.

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