ENSCO International Inc. (ESV) on Thursday announced the commencement of operations of its second ultra-deepwater semisubmersible rig ENSCO 8501. The rig began operations in the Gulf of Mexico (GoM) on Oct 8 under a three-and-a-half year contract with Nexen Inc. (NXY) and Noble Energy (NBL).

In September 2008, ENSCO received the first of the seven new ultra-deepwater semisubmersibles in the ENSCO 8500 Series®. ENSCO 8502 and ENSCO 8503 are scheduled for delivery in the first and fourth quarters of 2010, respectively, each with two-year contracts in the GoM. ENSCO 8504 is scheduled for delivery in 2011. ENSCO 8505 and ENSCO 8506 are scheduled for delivery in 2012.

The company is on the track toward having the world’s largest fleet of ultra-deepwater semisubmersibles capable of drilling in water depths of 7,500 feet or more, given its investment of more than half of the $3 billion committed to the ENSCO 8500 Series® new build program.
We believe that the company’s competitive advantage lies in the design of its new build deepwater rigs. The fundamentals surrounding the deep water segment remain solid and there is significant visibility for continued day rate improvement despite the lower price for oil and gas. The company has excellent cash flow visibility, given its solid contract backlog position. Hence, there is sufficient liquidity to address any operational and corporate needs.

While we find some upside potential in ENSCO’s shares in the short to medium term, we are concerned about the company’s emphasis on the shallow water market, which makes it difficult for the stock to keep up with its peer group. Our Neutral recommendation is unchanged.

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