July 24, 2009
It feels like only yesterday that Ensco International (NYSE: ESV ) launched its ambitious push into the deepwater drilling market. Today, the firm has funded more than half of the program's $3 billion-plus price tag.
With massive discoveries by the likes of Chevron (NYSE: CVX ) and Petrobras (NYSE: PBR ) in the world's premier offshore basins, and access to more-conventional oil pools dwindling by the day, this ultra-deepwater push has proved a sound strategy. When considering that Ensco has funded its fleet buildout from cash flow, rather than with piles of debt, the plan looks sounder still.
I should point out that the shallow-water jackup market isn't chopped liver. Sure, it's sagging today; Ensco's jackup utilization fell to 72% in the quarter, from 80% last quarter and 95% in the second quarter of 2008. But Ensco's high-margin, efficient operations in the shallow water have kicked off billions in free cash flow over the years, and they will remain a valuable piece of the enterprise. Yes, Pride International (NYSE: PDE ) is disassociating itself from the shallow-water market as fast as it can, but Pride has never executed on the same level as Ensco -- or Noble (NYSE: NE ) or Diamond Offshore Drilling (NYSE: DO ) , for that matter.
So now that Ensco has funded more than half of its new venture into deep waters, is the firm eyeing its next round of rigs? Actually, no. CEO Dan Rabun said the company has its hands full with the current seven-vessel rollout. The most probable use of excess cash generated over the near term would be a return of capital to shareholders. That's a rare circumstance for an oil service firm these days, and it speaks to Ensco's financial savvy.
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