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Will Preserving Cash Help Ensco Fight the Downturn?

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Cost-management measures

In the previous part of this series, we saw that Ensco’s (ESV) revenues will likely tumble. In this scenario, the most important thing for any offshore driller (IYE) to do is manage its costs and try to preserve its cash as much as possible. Now, let’s see what steps Ensco is taking to cut costs.

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Scrapping older rigs

Amid a lack of rig demand, companies are forced to scrap older rigs to reduce costs and preserve capital. Rigs without contracts don’t earn revenue but incur costs. Since September 2014, when the downturn started, Ensco has sold off four jackups and scrapped three floaters, which were more than 30 years old. The company further plans to scrap 12 rigs, which are all currently cold stacked.

Stacking rigs

Ensco stacks rigs that don’t have contracting opportunities in the near term. Stacking rigs is a great way to preserve cash in a downturn. To put this in perspective, Ensco’s cost to cold-stack a drillship is around $10,000 per day, while the cost to warm-stack is $40,000 per day. Similarly, cold-stacked jackups cost the company $5,000 per day, and warm-stacked jackups cost $20,000 per day.

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Dividend cut

Ensco has reduced its dividends to $0.01 per share, an 80% cut. Reducing the dividend will provide the company with $130 million of additional liquidity on an annual basis. Ensco’s peers Seadrill (SDRL), Pacific Drilling (PACD), Ocean Rig (ORIG), and Transocean (RIG) have suspended dividends to preserve cash.

Other cost management techniques

Ensco has taken a variety of steps to reduce costs. For example, it has reduced its offshore unit labor costs by 15%. The company has also reduced its onshore positions by 15%. There’s been a sequential fall in drilling expenses. Contract drilling expenses in the fourth quarter amounted to $398 million, which is expected to decline to $385 million–$390 million in the first quarter of 2016.

In the next part, we’ll see what analysts are saying about Ensco’s earnings in 2017.

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