The offshore industry has been in decline for close to four years now and the price of oil is on the upswing. One would assume that these things would start to show up in Ensco's (VAL) earnings reports in the form of higher revenue. That wasn't the case this past quarter, though, as the issues plaguing the industry are deeper than just low oil prices.
Let's take a look at Ensco's most recent earnings results and see what it might take for the offshore oil driller's luck to turn.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||$417 million||$454.2 million||$471.1 million|
|Operating income||($51.3 million)||($253.4 million)||$57.8 million|
|Net income||($140.1 million)||($207.1 million)||($25.7 million)|
Even though Ensco continues to see declining revenue and net income losses, there is something positive to glean from these numbers. The rate at which revenue is shrinking is slowing down. Some of that has to do with the fact that revenue has fallen so much over the past few years, but it also has to do with the little amount of work that management has been able to secure for its fleet.
According to Ensco's most recent fleet status report, it was able to secure 12 new contracts that have either started operations or will begin this month. Granted, these are shorter-term contracts, but they keep some revenue coming in the door. It also means that management has a fleet of "hot" rigs, which means they are not sitting in dry dock and don't require lots of time and money to get into seaworthy condition. Hot rigs have a higher chance of winning contracts because they are already in working condition and can be deployed rather quickly. Ensco has also done a commendable job of running its rigs well, as its operational utilization rate (the amount of days rigs under contract worked and received a dayrate) was 99%.
The other notable thing that happened this past quarter was on the financial side, as management was able to issue $1 billion in notes due 2026 that paid off $722 million in debt set to mature in the next three years and put a little extra cash on the balance sheet. This should give the company a longer runway to work through the challenges still facing the offshore rig industry.
What management had to say
In his press release statement, CEO Carl Trowell highlighted some of the more notable contract awards from this past quarter and some of the financial moves that should keep its balance sheet looking strong enough for the foreseeable future:
[U]ltradeepwater drillship ENSCO DS-10 commenced its maiden contract offshore Nigeria, which places one of our highest-specification assets into service on a major offshore development in a key strategic market. Our track record of providing safe and efficient operations, coupled with a high-quality rig fleet, helped us win new work for several rigs including recently finalized three-year contracts for jackups ENSCO 108, ENSCO 140 and ENSCO 141 offshore Saudi Arabia that are expected to commence later this year.
[We] improved our financial position by refinancing our nearest-term debt maturities through a $1 billion senior notes offering and subsequently repurchased $722 million of aggregate principal amount due between 2019 and 2021. With increased financial flexibility and just $236 million of debt maturing over the next six years, we will continue to act opportunistically to best position Ensco to capitalize on improving market conditions and create meaningful long-term value for our investors.
Only so much you can do
Looking back at Ensco over the past few years, it's hard to fault management for making any of the moves it did. It has done a commendable job of preserving its financial standing, keeping a trickle of work coming in with short-term contracts, and using the downturn to make strategic acquisitions and revamp its fleet.
The problem is that it is still very much a buyers' market for offshore rigs. Global utilization rates are still less than 60%, which means there are a lot of available rigs for work, putting immense pressure on dayrates. While there are a lot of rigs slated to be scrapped because they are older rigs that don't meet the specifications of today's work, there is still a long queue of unbuilt rigs waiting to replace them. So even if oil and gas producers were to all of a sudden start throwing gobs of money into offshore development projects, the contract rates for those rigs are still likely to be low.
Eventually, this glut will clear. A combination of companies going bankrupt or more aggressively trimming fleets or increased offshore spending will lead to higher utilization rates. The question still remains as to how long that will take. Ensco certainly has the balance sheet to weather the storm, and shares are trading at extremely low levels, but the payoff for an investment today is still likely years off.