Drilling into Ensco: Is the Worst Over?

11/09/2017 5:00 am EST

Focus: ENERGY

Jack Adamo

Editor, Jack Adamo's Insiders Plus

At first glance, the earnings report from offshore contract driller Ensco PLC (ESV) looked awful, but closer examination revealed a much more optimistic picture, notes growth and income investing expert Jack Adamo, editor of Insiders Plus.

Revenues fell 16% while reductions in expenses were unable to make up the difference. As a result, the company posted an $0.08 per share loss.

It may seem frightening that, as the price of oil is recovering, Ensco's revenue fell so steeply. Keep in mind, however, that work is contracted a year or more in advance, with a specified number of drilling days and rates. So, 2016 still had revenues from contracts initiated before the huge oil glut and price collapse.

It was only when those contracts expired that the true weight of the downturn was felt. Other drillers were affected the same way. We may now have seen the trough of that trend, at least for Ensco. The firm has closed on more new contracts than any offshore driller year to date.


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Ensco has year after year gotten the highest customer ratings in the industry for safety and satisfaction. The new contracts show that Ensco remains the driller of choice among customers. It now has $3.2 billion in contracted backlog, excluding possible extensions.

Meanwhile, with a net debt to capital ratio of just 30%, the company's balance sheet is probably the strongest in the industry. It has no debt maturities until Q2 2019, and less than $1.0 billion maturing before 2024.

It currently holds almost a billion in cash and cash equivalents. This, along with its safety and satisfaction record, will undoubtedly provide the confidence customers need to continue to choose Ensco.

Getting back to earnings for a moment, it should be noted that Ensco's loss this quarter would have been almost breakeven were it not for major tax differences from last year.

It seems illogical that the company posted a $4.6 million pre-tax loss this quarter, yet taxes were $23 million, while last year's pre-tax profit was $85 million and it got a $4 million tax rebate. But tax accounting and financial accounting have significant differences, and they've really stuck out like a sore thumb during this period. Let's hope they treat us more kindly next year.

With the Atwood merger completed, one overhang is behind us; I'm now satisfied that the worst is over for Ensco, although there is still end-of-year tax selling that may be a further drag. What is more on my mind is the overall economy.

Given ESV's growing contract backlog and strong balance sheet, I think it's likely that money put into the stock at this time will be a good investment. Ensco is a buy up to $5.50 in our high income portfolio.

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