Ensco plc (ESV) reported third quarter earnings from continuing operations of 92 cents per share, comfortably beating the Zacks Consensus Estimate of 89 cents. However, results were well below the year-ago quarter earnings of $1.01 per share.

Results were better than expected although the company did not recognize revenues on the ENSCO 8502 newbuild semi given the dispute with Nexen Inc. (NXY).

Ensco’s total revenue came in at $428 million in the reported quarter, beating the Zacks Consensus Estimate of $418 million as well as the year-ago quarter’s revenue of $409 million. This was mainly attributable to the revenue earned from the recently reclaimed ENSCO 69 drilling rig. The positive was offset by the non-recognized ENSCO 8502 revenue.

Segment Performance

Jackup: Revenues from the Jackup fleet totaled $318 million, down more than 8% from the year-earlier level. The decline was mainly due to a fall in average dayrate to $105,000 from $147,014 recorded in the year-earlier period. Overall jackup utilization in the reported quarter increased to 79% from 64% in third quarter 2009.

In the North and South America jackup market, dayrates dropped substantially to $81,689 from $132,985 in the year-ago quarter. Utilization in this market increased to 88% from 62% in the year-earlier quarter.

Rig utilization in the Europe/Africa region increased to 76% as against 63% in the year-earlier quarter. Average day rate was down about 28% from the year-earlier level at $126,160.

In the Asia-Pacific region, jackup rig utilization was 74%, up from 67% in the year-ago quarter. Average day rates decreased 19% year over year to $112,993.

Deepwater: The segment performed significantly well in the quarter with revenue rising 77% from the year-earlier level to $111 million. This can be attributed to the commencement of ENSCO 8501 in October 2009. However, given the current contract dispute with Nexen regarding ENSCO 8502, the company did not recognize any revenue from the rig in the third quarter.

Rig utilization in this segment increased to 75% from 64% in the year-earlier quarter. Day rate also rose to $387,777 from the year-earlier level of $387,407.

Balance Sheet

At the end of the quarter, Ensco had $905.2 million in cash and a long-term debt of $265.8 million (debt-to-capitalization ratio of 4.3%).

Outlook

Having transformed from a GoM-biased company to a relatively pure international player, Ensco appears well positioned to cope with the moratorium on drilling in the GoM, as well as benefit from a recovery in oil-directed drilling.

We remain impressed with Ensco based on its financial discipline, attractive dividend yield and organically developed asset base. The Deepwater segment is showing significant growth opportunities. ENSCO 8503 was delivered on schedule during the third quarter and the company now has five ultra-deepwater semisubmersibles in its fleet.

In addition, Ensco acquired ENSCO 109, an ultra-high specification jackup rig ideally suited for deep-gas drilling. The new rigs should benefit both customers and shareholders.

However, increased supply of high-spec rigs is likely to put pressure on utilization for standard jackups in the long run. Additionally, the offshore drilling scenario after regulatory changes remains our concern.

Hence, we continue to maintain our long-term Neutral recommendation for Ensco shares, and have a Zacks #3 Rank (short-term Hold rating).

 
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