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Why Ensco Expects a Spike in 3Q17 Drilling Costs

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Aug. 1 2017, Updated 1:36 p.m. ET

2Q17 expenses

Ensco’s (ESV) drilling expenses were $291 million in 2Q17, down from $350 million in 2Q16 but higher than the previous quarter’s $278 million. The drilling expenses are higher than the previous guidance of $270 million–$280 million primarily due to reactivation expenses ahead of the commencement of new contracts that will return rigs to operation.

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3Q17 guidance

Ensco expects its drilling expenses in the third quarter to be in the $295 million–$305 million range. The company expects an increase in drilling expenses primarily due to contract preparation costs for Ensco 102 ahead of its contract commencement later this year. Also, maintenance costs for jack-ups are expected to rise, which could be partially offset by a $10 million decline related to the settlement of a dispute.

G&A expenses

Ensco’s general and administrative (or G&A) expenses for 2Q17 rose by $4 million to $31 million from the corresponding period last year. The increase was mainly due to transaction costs related to the proposed acquisition of Atwood Oceanics (ATW). To know more about the acquisition, read Market Realist’s Analyzing Ensco’s acquisition of Atwood.

Ensco expects its third quarter G&A expenses to fall by $2 million quarter-over-quarter excluding transaction costs related to the Atwood acquisition.

EBITDA

With a fall in revenue and a rise in drilling costs, EBITDA (earnings before interest, taxes, depreciation, and amortization) is bound to fall. In 2Q17, Ensco recorded an EBITDA fall of $149 million from 2Q16’s EBITDA of $327 million and 1Q17’s $160 million. Falling EBITDA has been common in this downturn among offshore drillers like Transocean (RIG), Noble (NE), and Seadrill (SDRL).

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