Despite modestly better-than-expected fourth quarter results, earnings estimates of the first two quarters and full-year 2010 for ENSCO International plc (ESV) are on a downtrend. However, for 2011, estimates are on the rise.
Fourth Quarter Recap
Earnings per share from continuing operations came in at $1.24 in the fourth quarter of 2009, topping the Zacks Consensus Estimate of $1.22. However, on a year-over-year basis, ENSCO’s earnings per share declined 42%, while revenues were down 17.4% to $499.6 million.
For more details please see our earnings blog by clicking on this link.
Key Facts
• With the redomestication to the UK, the company currently expects its 2010 effective tax rate will be approximately 16% to 17% versus 19% in the last year. As the restructuring activities are expected to wrap up by mid-year, ENSCO will not get the full benefit of these changes in 2010. However, it expects to achieve an effective tax rate below 15% in 2011.
• ENSCO’s 2010 deepwater revenue is estimated to be about $525 million, down from the previous guidance of $600 million. Total costs for 2010 were guided up 6% and total capital expenditures were guided down 14% to $740 million in 2010.
• The company foresees a mixed bag in jackup utilization this year. As a result of this, 2010 jackup utilization rate will average around 72%, essentially flat with the fourth quarter of 2009.
Estimate Revisions Trend
Based on the company’s performance and 2010 guidance, several analysts following the stock have revised their estimates. Over the past 30 days, 8 of the 28 analysts following the stock have lowered their earnings estimates for fiscal 2010, with 7 analysts moving in the opposite direction.
While management indicated that tendering activity remains positive, near-term utilization will be under pressure as many contracts do not begin until the second half of this year or early 2011. This is one of the main reasons behind the downtrend in 2010 earnings revisions, in our view.
However, earnings are on the rise for fiscal 2011, with 7 of the analysts following the stock raising their estimates over the last 30 days. Only 4 analysts moved in the opposite direction during this time-period.
We believe that the tax savings on the back of the company’s redomestication to the UK and new contract commencements are reasons for the upward estimate revisions for 2011.
Meanwhile, we note that 11 of the 25 analysts covering the stock have reduced their earnings estimates for the first quarter of fiscal 2010 over the past 30 days. The downward revision is not surprising as the company said that first quarter revenue is expected to decrease by approximately 13%.
The situation is even worse for the second quarter as 13 of the 24 analysts covering the stock have reduced their earnings estimates over the past 30 days. Many North Sea rigs remain uncommitted for the second quarter, which we think has forced analysts to lower their estimates.
In terms of earnings surprises, earnings exceeded the Zacks Consensus Estimate in each of the last four quarters, with a four-quarter average of 3.8%. This means that on average, earnings beat the Zacks Consensus Estimate by 3.8%.
Outlook
We currently have a Neutral recommendation on ENSCO shares as we believe that the jackup market remains oversupplied in the long run.
Though ENSCO is facing immense competition from the peers such as Transocean Ltd (RIG), Diamond Offshore (DO) and Noble Corporation (NE), we believe that the company is well positioned with an organically growing asset base (five ultra deepwater rigs under construction) and a solid balance sheet ($1.1 billion in cash and debt-to-capitalization ration of 4.8% at the end of fourth quarter).
Read the full analyst report on “ESV”
Read the full analyst report on “RIG”
Read the full analyst report on “DO”
Read the full analyst report on “NE”
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