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ENSCO INTL (ESV) Q3 2008 Update

 October 31, 2008 01:14 AM

All results US$ unless otherwise noted:

  • Through nine months of 2008, operating cash flow (OCF) came in at $743M, down 12% YoY from $844M.  As noted previously,the company registered very large cash outlays for accrued taxes and other liabilities as well as its ARS fiasco.
  • In the current credit crunch, Ensco's solid balance sheet is precious (even if the stock hasn't been rewarded for it).  The company has more cash than debt, with only $20M in annual debt expense and half of their minimal long-term debt (0.06 debt/equity) doesn't come due until 2027.  No worries about Ensco's ability to survive a sustained downturn in the energy markets.
  • Nothing terribly interesting lurking in the income statement.  Margins remained sky-high during Q3 (operating margin @ 58%, net margin @ 47%).  The company took a small $20M hit due to the loss of ENSCO 74 in the wake of Hurricane Ike, which should be covered by an insurance payment in Q4.

[Related -Transocean LTD (RIG): Offshore Drillers Could Face Margin Pressure]

In light of the global financial crisis, the emphasis for earnings isn't so much past results but the outlook going forward .  In this respect, Ensco's outlook was interesting in the dichotomy that management presented.  As one would expect in an unprecedented global crisis, management struck a very cautious note — reducing their outlook on the Asia-Pacific region due to new rigs coming on market, unofficially suspending their share buyback, not aggressively pursuing industry consolidation and just emphasizing a very conservative approach going forward.  But when pressed on the details, CEO Rabun and his team presented strong underlying fundamentals which haven't been overly affected by either the massive drop in energy prices nor the credit crisis:

  • Management estimates 85% of ESV customers are investment grade or national oil companies which are projected to continue their capital drilling programs despite recent market events.
  • 2008 is fully contracted except for 1 rig.
  • Despite a possible surplus of rigs and discount bidding in the Asia-Pacific region, the company's high-spec rigs hasn't seen any softening to date in demand or pricing.
  • When one analyst mentioned the slowing North Sea drilling market, management countered that North Sea was probably their strongest market, with all rigs projected under contract through 2009.
    • North Sea contracts generally have 120/180 day termination notice clauses so while it's not set in stone, there is some visibility on this.
  • The Gulf of Mexico is seeing increased utilization and firming day rates as past weakness prompted an exodus of premium rigs out of the region.

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