Ensco plc (ESV) reported adjusted second quarter 2012 profit of $1.41 a share, which surpassed the Zacks Consensus Estimate of $1.24. Moreover, the quarterly earnings increased significantly from 71 cents earned in the year-earlier quarter.
The substantial jump in the quarterly profit was buoyed by the $7.3 billion purchase of Pride International last year as well as intense demand for oil rigs.
Total revenue surged 90% to $1,072.0 million from last year's revenue of $564.2 million. However, total revenue fell short of our expectation of $1,078.0 million.
Most of the increment came from the Pride International acquisition and new ultra-deepwater rigs in the active fleet. Overall higher utilization and average day rates in all segments also contributed to the revenue increase.
Segment Performance
Deepwater: Revenue jumped to $571.8 million in the reported quarter from the year-earlier level of $232.3 million. The outperformance was mainly aided by the addition of one ultra-deepwater semisubmersible rig (ENSCO 8504). Additionally, ENSCO 7500, which was undergoing an enhancement project in a shipyard in the year-earlier period, also commenced a multi-year pact in Brazil in late December 2011.
Rig utilization in this segment climbed to 91% from 86% in the year-earlier quarter. Dayrate increased to $389.761 from the year-earlier level of $347,024.
Midwater: Revenue came in at $101.4 million in the reported quarter versus $36.1 million in the second quarter of 2011 mainly because of the acquisition, as prior to the acquisition Ensco had no midwater rigs. Midwater registered a dayrate of $227,378 (versus $237,139) and rig utilization of 79% (came in flat year over year).
Jackup: Revenues from the Jackup fleet jumped to $377.6 million in the second quarter from last year's $289.3 million, with its average dayrate showing an increase of 6.4% to $105,356 from $99,024. Overall jackup utilization in this segment jumped to 83% from 75% in the year-earlier period.
Costs and Expenses
On the cost front, depreciation expense increased 67%, contract drilling expenses climbed 71%, while general and administrative expenses declined almost 25% on a year-over-year basis.
Balance Sheet and Dividend
At the end of the quarter, Ensco had $226.7 million in cash. Long-term debt (inclusive of current maturities) was $4,885.5 million, with a debt-to-capitalization ratio being 30.0% (compared to 30.7% in the preceding period).
The company boosted its quarterly cash dividend by 7% to $1.50 per share annually, aided by a strong financial position and an encouraging outlook for future earnings growth fueled by mounting utilization and day rates, associated with organic growth from newbuild rigs.
Outlook
We appreciate Ensco’s financial discipline, attractive dividend yield and organically developed asset base. International deepwater market opportunities are stepping up on new multi-year programs in West Africa, SE Asia, Brazil and the Mediterranean. This should eventually be accretive to the company’s earnings.
Moreover, we foresee substantial earnings visibility for Ensco following the merger with Pride International. The company also ordered two additional drillships that will broaden its earnings growth profile in the future.
We believe Ensco should be well positioned to improve its earnings and revenue in the foreseeable future, as well as benefit from oil-directed drilling. Recently, leading contract drilling company, Noble Corporation’s (NE) second quarter earnings also surged almost threefold on the back of enduring strength in the offshore drilling business.
Ensco has more than $10 billion of contract revenue backlog excluding bonus opportunities. The company’s solid backlog position provides it with excellent cash flow visibility. Additionally, the company’s impressive balance sheet and sufficient liquidity help it to address operational or corporate needs.
However, we believe that Ensco’s current valuation adequately reflects its growth profile, and would rather wait for a better entry point before accumulating shares. Hence, we are maintaining our Neutral recommendation on Ensco shares, reflecting a balanced risk/reward profile.
The company retains a Zacks #3 Rank (short-term Hold rating).
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