Ensco's Drilling Services Continue to Suffer on Oil Price Fall

On Jan 19, 2016, we issued an updated research report on Ensco plc ESV, a leading supplier of offshore contract drilling services to the oil and gas industry.

Ensco is expected to have increased downtime in 2016. This will affect its utilization rates in the coming quarters and thus, lower revenues. Further, getting contract extensions for rigs in Brazil is increasingly becoming a challenge for the firm, which is cause for concern.

Crude price has declined sharply and is currently trading below the $30 a barrel level. Therefore, the top energy companies have resorted to spending cuts (particularly on the costly upstream projects) to grapple with lower profit margins. This, in turn, means less work for drilling contractors like Ensco.

Ensco's business depends on oil and gas exploration and production (E&P) activity. Hence, any change in oil and gas prices could put further pressure on E&P spending and create lower demand for its service offerings.

The increased supply of high-spec rigs is likely to put pressure on the utilization of standard jackups in the long run. Also, the company's execution ability with respect to the jackups under construction will play a big role in determining its growth.

However, the last few years saw an upgrade of several Ensco rigs. The upgrade project of ENSCO DS-1 is complete, while ENSCO 5005, ENSCO 5006, ENSCO DS-2, ENSCO 6001 and ENSCO 6002 are undergoing modernization. Almost 55% of the jackups completed upgrades in the recent past and hence, in 2016 fewer jackup upgrades are expected. This is a positive for the company as it will improve utilization and boost operating margins.
 
Moreover, Ensco has a contracted revenue backlog (excluding bonus opportunities) of $6.6 billion, which provides it with excellent cash flow visibility. Ensco has completed the construction phase of its eight additional rigs in 2015, and recently ordered two 140 series jackups. Initiatives like these are expected to lead to significant growth for the company.
     
Zacks Rank and Stocks to Consider

Ensco carries a Zacks Rank #4 (Sell). Some better-ranked players from the energy sector are EXCO Resources Inc. XCO, ReneSola Ltd. SOL and Boardwalk Pipeline Partners, LP BWP. Each of these stocks sports a Zacks Rank #1 (Strong Buy).

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