Will Lower Capex Plans Hurt Ensco?

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Part 2
Will Lower Capex Plans Hurt Ensco? PART 2 OF 8

How Does Ensco’s Management View Its Outlook?

What does ESV’s CEO think?

Ensco’s (ESV) management expects upstream producers to accelerate their capex cuts in fiscal 2016. While offshore drill contractors continue to add rigs, lower demand for energy drilling should lead to lower rig utilization and day rates next year. This may reduce ESV’s revenues going forward.

In the company’s 3Q15 press release, Carl Trowell, Ensco’s chief executive officer, noted, “Additional announcements of incremental CapEx cuts by customers will further reduce rig demand in 2016, and coupled with new build deliveries, add pressure to utilization and day rates. Our response has been decisive action in terms of further expense reductions, streamlining our business unit reporting structure, strong operational performance, and several contracting wins with customers.”

How Does Ensco&#8217;s Management View Its Outlook?

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Ensco’s management expects to reduce its fiscal 1Q16 offshore unit labor costs by 15% compared to the fiscal 2014 level.

In the fiscal 3Q15 conference call, Jay Swent, who was EVP’s then chief financial officer at the time, described the cost reduction initiatives: “We have continued to expedite the cold-stacking of rigs without near-term contracting opportunities. On the floater side, Ensco 8501, Ensco 8502, and Ensco DS-1 are now fully cold-stacked, and cash costs for these rigs are now less than $10,000 per day. We have cold-stacked five jackups, and we are in the process of cold-stacking another jackup in the US Gulf. Cash costs for these rigs are expected to be less than $5,000 per day.”

New trends in offshore drilling

Ensco’s management has observed the following opportunities in the offshore drilling market:

  • new offshore exploration activities, including a significant recent discovery in the Mediterranean
  • the longer-term potential of offshore reserves
  • more opportunities for floaters in Brazil and Mexico
  • appraisal and development of newly discovered reserves will require drilling rigs

Analysts’ targets for ESV

Due the unpredictability of the energy price recovery, Wall Street analysts’ opinions show limited upside potential about ESV’s target prices in the next 12 months. While the highest target price for ESV is $25, the lowest is $11. ESV’s median target price, surveyed among the sell-side analysts, is ~$16.30. ESV is currently trading at ~$16, implying a ~2% upside at its median price.

Transocean (RIG), ESV’s higher market cap peer in the oilfield equipment and service industry, received a $12.00 median target price. Relative to its current price of $13, this implies an 8% downside. ESV comprises 0.29% of the Energy Select Sector SPDR ETF (XLE).

Next, we will discuss ESV’s revenue and earnings by its segments.


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