Recent earnings results may not show it, but it's looking like the offshore rig market is starting to pick up again. There was no better example of this than Ensco's (VAL) most recent quarter. Not only did the company succeed in obtaining new contracts, but management swung for the fences by acquiring Atwood Oceanics (ATW).
Let's take a look at the conflicting narratives for Ensco right now -- its deteriorating earnings and its prospects -- to figure out what is going on with this stock and the rig market in general.
By the numbers
|Metric||Q2 2017||Q1 2017||Q2 2016|
|Revenue||$457 million||$471 million||$909 million|
|Operating income||$27.8 million||$57.8 million||$419.6 million|
|Net income||($44.3 million)||($25.7 million)||$592.6 million|
There are three distinct stories to follow this past quarter at Ensco. Let's start with the short one: Earnings. Revenue and earnings continued to slide as several rigs rolled off contract. While management had been able to offset these revenue declines with cost cutting efforts, it seems as though it has wrung out as many cost efficiencies as possible because cost reductions have not been able to keep up with revenue declines over the past couple of quarters.
Comparing this quarter to the prior year isn't an apples-to-apples comparison because Ensco netted $460 million in one-time gains related to the early retirement of debt and an early termination fee for a rig. However, several operating metrics continued to decline. Utilization rates for floaters fell to 43%, and the average daily rate fell to $339,000. Its jackup fleet utilization rate increased to 64%, but that was a product of retiring a couple of older rigs rather than new contracts. The average daily rate for jackups also fell to $89,000.
This earnings situation doesn't look good, but the second story -- winning contracts -- helps to ease the pain. This past quarter, Ensco signed 12 new contracts. What's even more promising is that six of those contracts are multi-year contracts. Most new contracts lately have been shorter duration work such as for one or two wells or a several month extension for an existing contract. These long term contracts are a sign that producers are getting back to spending money again. Three of those long term contracts are for Ensco's highest value-floating rigs. Putting these rigs to work is going to be critical for getting back to profitability.
The third thread from this past quarter was Ensco's big acquisition of Atwood. The $6.9 billion all-stock deal is a move to capture even greater market share as producers look to make final investment decisions on new projects. Atwood has the kind of fleet that is desirable in today's market -- new, high specification rigs that can handle ultra-deepwater depths of more than 10,000 feet. It also helps that Atwood isn't overburdened with debt, which will put the combined companies in good financial standing if the deal gets completed.
What management had to say
CEO Carl Trowell was more interested in discussing the future of Ensco with Atwood in the fold than the recent earnings results.
During the second quarter, we took additional steps to better position our rig fleet for the future. We announced our proposed acquisition of Atwood, which will significantly enhance our fleet through the addition of high-specification floaters and jackups at a compelling purchase price. Coupled with targeted synergies, we expect this transaction will create meaningful value for our shareholders. Integration planning is well underway and we expect to close the transaction during third quarter 2017.
Our recent contracting success across a range of water depths and geographies highlight the benefits of our diverse rig fleet and global footprint. As customers look to contract offshore drilling rigs from a select group of established service providers, we will continue to leverage our proven operating and safety track record as well as a strong financial position to capitalize on new contracting opportunities.
What a Fool believes
It's starting to look like Ensco can see the end of the tunnel. These multi-year contracts are a sign that producers want to start investing again. These new contracts could be just the beginning, too, because several oil and gas producers have stated they want to deploy capital soon. If Ensco can build on this momentum and utilize Atwood's fleet of rigs in a similar way, then Ensco's stock could be poised for that long awaited turnaround.