The offshore drilling market is in turmoil and companies like Ensco (VAL) are doing their best just to survive. After reporting fourth-quarter earnings and an 80% cut in the company's dividend, management gave us an idea of what they see in the future on a conference call with analysts. It's not a rosy picture, but at this point the goal is just to survive. Here are five things Ensco's CEO Carl Trowell wants investors to know.
Conditions will get worse before they get better
We do not anticipate an improvement in the market in the near term and as such, our approach will be to stack rigs which come off contract and have no follow-on work.
The offshore drilling market has gotten so bad that as rigs come off contract Ensco's management expects to stack them instead of keeping them active and ready for duty. Part of this is because of the aging fleet, which has become a big problem for Ensco as of late.
Signs of Ensco's aging fleet
Several of our rigs in our go-forward fleet are currently being cold stacked to rapidly reduce expenses, such as three jackups in the U.S. Gulf of Mexico, noted in our last fleet status report. In addition to these rigs, we've decided to cold stack ENSCO 8502 with the possibility that we stack an additional 8500 series rig if we do not see sufficient market opportunities. We expect ENSCO 8502 will be fully cold stacked by the middle of this year. This decision is not related to the capability of these rigs, which have an excellent track record; rather, it is a reflection of having six out of seven of these rigs rolling off contract by year-end and having to compete with more than 40 other sixth gen floaters that are either idle, rolling off contract in 2015, or being delivered this year from a shipyard.
The challenge for all offshore drillers today is a declining drilling market and new rigs that will be completed in the next two years. This has made older rigs in the global fleet less desirable for oil explorers, and for companies who own them they either need to cold stack them (put them out of service and reduce expenses to a minimum) or retire them and scrap them for parts.
Portions of Ensco's aging fleet are already being cold stacked or written off, meaning that they won't be generating revenue anytime soon. This is a sign of weakness for Ensco and could lead to a significant decline in revenue and earnings in 2015.
The supply problem is easing
We are encouraged to see that the rate of rig retirements has increased significantly and there is some moderation in the marketed rig supply, as additional assets are being stacked and newbuilds are being deferred. More needs to happen and we will continue to be proactive.
Ensco is contributing to an easing of oversupply in the offshore market by deferring newbuilds and cold stacking aging rigs and others are doing the same. In the fourth-quarter earnings presentation, Ensco said that 26 floaters and 14 jack-ups had been retired or cold stacked since the beginning of the fourth quarter.
Retirements, in particular, will ease the supply glut in the market long-term and give more upside potential if the offshore market improves. For Ensco's sake, investors should just hope it doesn't have to retire too many rigs before supply and demand come more into balance.
Financial flexibility is at a premium
Reducing our quarterly dividend would give us greater capital management flexibility to navigate a more challenging market environment. In addition, we've already begun a process of implementing plans that will structurally reduce contract drilling and general and administrative expenses.
One of the main focuses in offshore drilling recently has been preservation of capital. Seadrill eliminated its dividend in an effort to save enough money to survive. Transocean already cut its dividend by 80% and will likely follow in Seadrill's footsteps sometime in 2015. Ensco is no different and with an uncertain future it simply couldn't keep its dividend payment unchanged.
Debt markets are still open for business... for now
In terms of capital management, we raised $1.25 billion of new capital through a debt offering and increased the amount of our revolver to $2.25 billion in September of last year.
As I've mentioned above, the offshore market is deteriorating and financing is getting tight, so the ability to access capital markets is key to fund future operations. Ensco did that in 2015, showing capital markets are open at least somewhat.
We don't know if Ensco would be able to sell debt if they needed the funding later this year but management was at least trying to say they have some flexibility going forward. After all of this talk, the bottom line is that oil prices need to improve significantly for Ensco to be a winning stock for investors. There's just no way they'll maintain a profit or grow revenue with oil below $50 per barrel, a reality taking a bite from both shale and offshore drilling today.
