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The First Driller Back in the Deepwater

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After tuning into Ensco's (NYSE: ESV  ) second-quarter conference call, I have a ton to talk about, and not much space. Let's see if we can hit all the big points.

As far as the quarterly financials, there were no huge surprises. Jackup revenue took a dive as dayrates eased by more than $50,000 per day compared to last year. Deepwater revenue surged as some new rigs were added to the fleet. Overall, the top line shrunk by 18%. The earnings decline got mischaracterized as a disappointment by some commentators, but adjusted results were at or above consensus expectations, for whatever that's worth.

Now to the interesting stuff.

During the quarter, Ensco made a pass at Scorpion Offshore, but rival Seadrill (NYSE: SDRL  ) brought a higher bid to the table, and Ensco got a nice little break-up fee for its trouble. A few weeks ago, the firm emerged with a new transaction, picking up a 2008-vintage premium jackup rig from Diamond Offshore (NYSE: DO  ) for $186 million. That's hardly a discount price, but overall, the drillers are pretty well-capitalized, and fire sales just aren't happening. The new rig, currently working for Apache (NYSE: APA  ) in Australia, should command excellent dayrates in deep gas drilling environments in the future. Every jackup of its type is currently contracted, even in this soft market.

Obviously the major event for the quarter was the Macondo blowout in the deepwater Gulf of Mexico. Ensco has been tangling with the U.S. government, as well as certain jumpy clients, ever since. On the government side, one drilling moratorium has already been instituted and struck down in court. Another one soon popped up in its place, and remains in effect until the end of November. Ensco has filed suit to have this moratorium overturned as well, largely on procedural grounds.

Ensco is also involved in litigation with some clients, as Anadarko Petroleum (NYSE: APC  ) , Chevron (NYSE: CVX  ) , and Apache have each declared force majeure. In the case of the latter two companies, it's a rather odd claim, given that the rigs involved are jackups that are not prevented from drilling under the moratorium. Apache itself has shown that new shallow-water wells can get permitted under the new regulatory regime.

As for Anadarko, that brings us to the most surprising revelation on yesterday's conference call: Ensco's two deepwater rigs located in the Gulf, the ENSCO 8500 and 8501, are now actually working. Anadarko is the client on the 8500, so that takes care of the force majeure issue, at least for the time being.

As it turns out, several deepwater activities are permitted under the moratorium, including completions of wells that have already been drilled to a certain point, as well as plugging and abandonment work. Ensco reports that its two rigs are the first (and so far only) ones to have their blowout preventers recertified under the murky new safety regulations.

It certainly helps that Ensco's rigs are shiny and new. Operators with older assets may have a much tougher time jumping through all of the government's hoops.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. Chevron is a Motley Fool Income Investor selection. The Fool owns shares of Ensco. The Motley Fool has a disclosure policy.

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