Ensco plc Orders 2 New Rigs: What Do Investors Need to Know?

On April 15, offshore drilling giant Ensco plc (NYSE: ESV  ) announced that it has ordered two high-specification jack-ups in order to fulfill demand for the company's services in the Middle East. The company has entered into a contract with the Lamprell Shipyard in the U.A.E. to have the new rigs constructed. 

Advantages of fleet standardization
One of the core aspects of Ensco's fleet expansion over the past few years has been the company's strategy of fleet standardization. This means that Ensco uses the same rig design for all of the rigs of a given type (shallow-water or ultra-deepwater) that it builds over a given time. This is a very different strategy from a company such as Seadrill (NYSE: SDRL  ) whose fleet includes rigs of many different designs. This strategy offers several benefits to Ensco, such as ease of training for the employees that will be operating and maintaining the rig. It also allows Ensco to get a broken rig back into operation more rapidly because the company can keep a supply of spare parts on hand. In the end, this strategy allows Ensco to save money on both training and maintenance compared to its peers.

Capable rigs
In the case of these rigs, which will be named ENSCO 140 and ENSCO 141, Ensco will be using a modified version of the LeTourneau Super 116E design. This is not the most common design for this type of rig but it is a capable one. Initially, each of these rigs will be outfitted to operate in up to 340 ft. of water but can be upgraded to operate in up to 400 ft. of water. 400 ft. is considered to be the operating depth of the world's most capable jack-up rigs.

All of the jack-ups owned by competitors such as Seadrill and Vantage Drilling are capable of operating at this depth and only Rowan has jack-up rigs that can operate in deeper water. However, with that said, the majority of the world's jack-up fleet consists of rigs that are not capable of operating at these depths so Ensco's two rigs are still competitive.

Effect on revenue and cash flow
As these rigs will expand Ensco's fleet, they will increase its revenue and cash flow. But, by how much? Unfortunately, Ensco does not state in its announcement what the dayrates for either of these two rigs are or even if it has already secured contracts for them. So we cannot say for certain. But we can make an estimate.

Ensco's competitor Seadrill recent announced that it had secured contracts for four of its jack-up rigs, all of which received dayrates in excess of $160,000 and some of which exceeded $200,000. Unfortunately, dayrates vary significantly by region and since none of these contracts were for operations in the Middle East we do not have a direct point of comparison. However, based on the dayrates for other contract announcements, $160,000 seems to be a conservative estimate.

The revenue that the company will derive from its new rigs is the dayrate, which we are assuming to be $160,000. In addition, Ensco will amortize the mobilization fee that it receives over the full term of the rig contract, but since this represents the customer reimbursing Ensco for the costs that it incurs in moving the rig to its drilling location and not new money coming into the firm, we can safely ignore it.

However, this only gives us the company's revenue. As investors, we are also concerned with profits, as all the revenue in the world won't make for a good investment if the company spends more than it brings in. In order to estimate the company's profit from these two rigs, we need to know how much it costs to operate a jack-up rig.

Fortunately, Seadrill provides us with some insight into these costs. Here is a chart that Seadrill has used in several industry presentations that show the costs of operating several different types of offshore drilling rigs:

Source: Seadrill

As the chart shows, it costs Seadrill approximately $60,000 per day to operate a jack-up rig. There is no reason to believe that Ensco's costs would be any higher, particularly given the cost advantages that Ensco has with its rig standardization strategy. As Seadrill has also been using this chart in presentations stretching back over two years, it would be reasonable to assume that inflation has increased the cost of operating rigs since this number was first published. That is not necessarily the case in this instance because Seadrill has consistently increased the dayrate figures on this chart to conform to market realities. However, the operating expenses figure has not budged. This would seem to indicate that the cost of operating a jack-up rig has not changed significantly in recent years. Thus, we will use this $60,000 per day figure, which would give an estimate of $100,000 of cash flow per day from each of these two rigs prior to taxes being paid.

As the chart above shows, Seadrill estimates that the company pays total taxes of 4% of revenue for each rig. This figure appears to be fairly consistent throughout the industry so it presumably would apply to Ensco as well. In this case, 4% of revenue would be $6,400 per day. If we subtract this from the calculated pre-tax cash flow then we get an estimated after-tax cash flow of $93,600 per day. This works out to approximately $8.5 million per quarter per rig. 

Continued commitment to growth
Ensco will not begin to receive this increase to its cash flow until the middle of 2016 when the rigs leave the shipyard and join the company's fleet. However, we do see here the company's commitment to growing its cash flow over the long term, which should ultimately be rewarding for investors.

Another way to profit from deepwater drilling
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2926524, ~/Articles/ArticleHandler.aspx, 9/3/2015 11:29:24 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Daniel Gibbs

Daniel is an independent research analyst whose focus is on tangible, income-producing assets. He primarily covers the energy sector for

Today's Market

updated Moments ago Sponsored by:
DOW 16,521.21 169.83 1.04%
S&P 500 1,969.60 20.74 1.06%
NASD 4,793.00 43.02 0.91%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 11:14 AM
ESV $16.79 Up +0.55 +3.39%
Ensco CAPS Rating: ****
SDRL $7.49 Up +0.08 +1.08%
Seadrill CAPS Rating: ****