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After Ensco’s Costs Fall in 1Q16, Will They Fall Further in 2Q16?

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Offshore drillers’ cost reduction plans

To withstand the current industry downturn, offshore drilling companies (OIH) (IYE) have no choice but to reduce their costs as much as possible. Ensco (ESV) and its peers Diamond Offshore (DO), Atwood Oceanics (ATW), Rowan Companies (RDC), Seadrill (SDRL), Transocean (RIG), and Noble (NE) have announced cost-reduction plans to maintain their profit margins in this scenario

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1Q16 expenses

Ensco’s (ESV) drilling expenses fell to $364 million in 1Q16 from $415 million in the previous quarter and $518 million recorded in 1Q15. The expenses were better than the company’s guidance of $385 million–$390 million provided on the last conference call.

The 30% year-over-year reduction in expenses was due to lower compensation and repair and maintenance expenses, which were partially related to fewer rig operating days. This more than offset the newbuilds commencing their contracts and the reactivation of a semisubmersible following shipyard upgrades.

The company’s drilling-expense-to-revenue ratio has remained at a similar level. It was 44% in 1Q16 compared to 44.5% in the same period last year. Even after aggressive cost reduction plans, this ratio has not shown improvement.

General and administrative expenses fell to $23.4 million in 1Q16 from $30 million in the previous quarter and also from $30 million in 1Q15. This was mostly due to reduced compensation costs.

2Q16 expectations

Ensco (ESV) expects to further manage its cost base and anticipates a decrease in its contract drilling expenses in the second quarter. It expects the expenses to decline to $350 million–$355 million as the company further reduced its costs on rigs that do not have near-term contracting opportunities.

Ensco anticipates its general and administrative expenses to increase to approximately $27 million in the second quarter. For the second half of 2016, the company expects its total general and administrative expenses to be in line with the outlook of the first half of the year.

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