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Ensco Remains Neutral

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We maintained our long-term Neutral recommendation on Ensco plc (ESV - Free Report) on Mar 20. The reiteration was backed by its strength in the offshore markets accompanied with its manageable newbuild program as well as impressive execution. However, headwinds like a change in the exploration and production spending pattern and commodity price fluctuation remain the causes of concern.

Why the Neutral Stance?

Ensco − a leading supplier of offshore contract drilling services to the oil and gas industry − remains well positioned to improve its earnings and revenues in the foreseeable future, as well as benefit from a recovery in oil-directed drilling. On Feb 20, Ensco reported impressive fourth quarter 2012 results on the back of increased utilization, rising customer demand as well as new rigs joining the fleet.

Ensco continues to register robust demand for floaters in the Gulf of Mexico and international regions. Ensco DS-2 will likely be re-contracted by the present operator in Angola at a higher rate, while Ensco 8502 (available Jun 2013) and Ensco 8503 (Jan 2014) continue to attract customers. Again, the arrival of the next newbuild drillship (the DS-8) is expected in the third quarter of 2013. Management expects to recommit the deepwater rigs ENSCO 6001 and 6002 to Brazilian energy company Petrobras beyond their mid-2013 contract-end dates.

Again, Ensco will likely gain from meaningful day rate improvement, particularly for its jackup fleet, over the coming months. The company has substantial leverage to jackup day rates, which have relatively shorter contracts and particularly convincing supply and demand fundamentals. Hence, the day rate momentum in the jackup business is expected to be a strong catalyst for Ensco in the future.

With $10 billion of contract revenue backlog (excluding bonus opportunities), the company exhibits an excellent cash flow visibility. Moreover, with the completion of the construction phase of its 6 additional rigs − scheduled to be delivered by the end of 2014 − Ensco is expected to achieve significant growth. Simultaneously, its impressive balance sheet provides flexibility to pay dividends and develop the fleet.

On the flip side, Ensco’s business remains closely linked with oil and gas exploration and production (E&P) activity. Hence, any change in oil and gas prices could put pressure on E&P spending and create lower demand for its service offerings.

Ensco’s financial and operational performances face a number of headwinds, including changes in the exploration and production spending pattern, commodity price fluctuation, geopolitical risk, regional spending trends, competition, the emergence of new technology and economic fluctuations.

Other Stocks to Consider

Ensco retains a Zacks Rank #3 (short-term Hold rating). Other stocks worth considering in the oil and gas drilling industry are Helmerich & Payne, Inc. (HP - Free Report) , Tesco Corporation and Patterson-UTI Energy Inc. (PTEN - Free Report) . Tesco and Helmerich stocks carry a Zacks Rank #1 (Strong Buy), while Patterson-UTI Energy carries a Zacks Rank #2 (Buy).

In-Depth Zacks Research for the Tickers Above

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