Now that Ensco (VAL) has completed its merger with Atwood Oceanics, management can get back to doing the little things that make offshore rig companies succeed. This past quarter, we saw a hint of it in the company's operational results, but the more important news was that the company is finding work for its fleet. Here's a look at Ensco's most recent result.
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By the numbers
| Metric | Q3 2017 | Q3 2016 |
|---|---|---|
| Revenue | $460 million | $548 million |
| Operating income | $35.8 million | $115.4 million |
| Net income | ($25.4 million) | $85.3 million |
| EPS | ($0.08) | $0.28 |
Data source: Ensco earnings release. EPS= earnings per share.
Going up and down Ensco's earnings release, there aren't many surprises. These results are the first time we get to see Ensco's and Atwood Oceanics' results as a single company, but the result is the same as every other quarter we have seen over the past couple of years: declining revenue and earnings as producers either finish or terminate contracts with existing rigs.
Two things have kept results from being even worse: The company has drastically cut its costs related to stacked and idle rigs, and it is maintaining a high utilization rate for its rigs under contract. For the quarter, Ensco's operational utilization -- the amount of time a contracted rig is working and not down for maintenance -- was over 99% for both its floating and jackup fleet.
What is much more interesting than Ensco's earnings is the contract awards it received in this past quarter. Ensco received 10 new contracts and extensions in the quarter. That is, by far, the best quarter regarding new contract awards in a long time. A couple of those contracts are one or two well extensions that will likely be complete by the end of the year, and several of those contracts will mobilize idle equipment. This will probably lead to better utilization rates and higher revenue in the next quarter.
Getting new rigs mobilized is a big deal. Not only does it mean that the company will get more revenue now, but it also increases the chances that it will get another contract. Diamond Offshore executives have said a large part of their ability to manage this downturn is that customers want "hot" rigs that are working and don't require time and money for activation and mobilization. With Encso's assets now running hot, this could lead to a potential sustained recovery.
What management had to say
Rig owners haven't had much to celebrate lately, but CEO Carl Trowell has more reason than most to celebrate since his company has taken a significant portion of the new contract awards for 2017. Here's Trowell giving his employees some credit:
Our offshore crews and onshore employees continue delivering the highest levels of service quality and operational excellence to our customers, creating efficiencies and helping to reduce offshore project costs. This outstanding performance has contributed to Ensco winning more new contracts than any offshore driller year to date – including four drillship contracts during the third quarter – demonstrating that Ensco remains the driller of choice among customers.
What a Fool believes
We may or may not be in the midst of a recovery for offshore drilling and rig owners. It depends on whom you ask, really. While some producers have said they want to start spending more on exploration and development, their proposed budgets seem to indicate otherwise.
Despite the push and pull in the offshore market, Ensco seems to be emerging from the downturn better than most of its peers. The addition of Atwood's fleet will give it some more high-specification rigs to market, and reactivating idle rigs could start a virtuous cycle for more contracts in the future. The company's most recent results might not show it, but the company looks to be on the road to recovery.
