On Jul 9, 2014, Zacks Investment Research issued an updated research report on Ensco plc (ESV).
For the first quarter, Ensco reported mixed results with its revenues up on an annual basis, while earnings declined on a year-over-year basis. Notably, the company delivered a positive earnings surprise in three of the last four quarters with an average beat of 2.73%.
Having transformed from a Gulf of Mexico (GoM) company to a pure international play, Ensco should be well positioned to improve its earnings and revenues in the foreseeable and benefit from a recovery in oil-directed drilling. The international deepwater markets are looking strong with new multi-year projects in West Africa, Brazil, Southeast Asia and the Mediterranean. Again, Ensco’s two uncontracted newbuild HDHE (heavy duty, harsh environment) jackups are well positioned for the rapidly improving Central North Sea, the Middle East, and South East Asian markets. These efforts should eventually be accretive to the company’s earnings.
Ensco will continue to experience tightness in the jackup markets as well around the world throughout 2014. The rig market, on the other hand, has witnessed a series of lucrative contracts and possibly has a stronger outlook than even the floater market.
The company announced two strong jackup contracts in North Sea and SE Asia for Ensco 100 and Ensco 108, respectively. Both contracts are for a period of three years and at rates higher than the current contracts. The recent contracts received by Ensco DS 8 for a period of five years with Total SA in Angola, is expected to augment the company’s earnings. The Middle East and India have also showed requirements for further 8–10 jackups and 6–10 rigs, respectively. The company has 8 jackups under contract in 2014. Most of these are expected to receive higher rates, as they are in regions where pricing was recently hiked.
Ensco’s impressive balance sheet and sufficient liquidity help it to address any operational or corporate need. During the third quarter of 2013, the company boosted its dividend by 50% to $3.00 per share annually from $2.00 per share. With a current dividend yield of 5.6%, we believe that Ensco, with a manageable debt position, remains well poised to increase its dividend in the future. The company’s dividend yield is also among the top 5% of the S&P 500 companies.
However, the company is expected to have increased downtime in 2014, mainly on account of the jackup fleet with 95 days, while floaters are estimated to have a downtime of 31 days. This will lower revenues. Further, issues arising from extending the contract period for rigs in Brazil are a concern.
Key Picks in the Sector
Ensco has a Zacks Rank #3 (Hold). Currently, we prefer to remain at the periphery regarding the stock. However, better-ranked players in the energy sector like EXCO Resources, Inc. (XCO), BPZ Resources, Inc. (BPZ) and Statoil ASA (STO), all sporting a Zacks Rank #1 (Strong Buy), are worth reckoning.
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