There hasn't been a lot of good news for offshore drilling companies in the last six months but they may not be in the dire condition the market would make you think, at least not yet. Ensco plc (NYSE:ESV) reported first-quarter results late Wednesday night and revenue actually grew year over year and profits were up as well.
But it's not all good news for investors. Here's what you need to know about Ensco's Q1.
Growth in a falling market
Results from continued operations included a 9% increase in revenue to $1.16 billion and an 18% jump in earnings to $1.49 per share. The strong results were driven by more up-time for the fleet and a slight uptick in dayrates from $243,000 a year ago to $244,000 in the first quarter.
One of the factors investors should watch is utilization and that has remained strong for Ensco. Floaters ran at a 86% utilization in the quarter and jackups improved slightly year over year to 87%.
Ensco's rigs are managing to find work and we haven't seen a huge deterioration in margins yet. But the key word there is "yet."
Fighting for survival
Ensco's management has also made important moves to keep the company afloat long term. Management refinanced upcoming debt through a $1.1 billion debt offering that pushes out significant maturities until 2019. The hope is that pushing out maturities and having $1.6 billion in cash and equivalents on the balance sheet will allow Ensco to weather the storm offshore drilling is currently going through.
But before you start to think the storm is almost over there's one alarming figure that points to dark clouds ahead.
The numbers that should alarm investors
Every quarter, companies announce revenue backlog for their fleet and at the end of the first quarter Ensco's backlog stood at $8.4 billion. That sounds impressive but at the end of the fourth quarter backlog was $9.7 billion and at the end of the third quarter 2014 it was $11 billion.
Backlog has declined $2.6 billion while revenue totaled just $2.3 billion over the same time frame. Not only are they not replacing revenue with new backlog, companies are cancelling or renegotiating contracts, something we've seen across the industry.
Not only are oil and gas explorers cutting back on capital spending, they're signing shorter contracts when they do. That will reduce certainty for offshore drillers long term, even if dayrates don't decline significantly.
A lot of questions ahead
Offshore drilling is in a strange place today. Although offshore drillers, like Ensco, are reporting solid numbers short term, the possibility of a complete collapse long term remains. The industry is oversupplied with rigs and even more rigs are coming online in the next three years, which will make current problems worse.
I think companies with balance sheet flexibility and new drilling rigs will survive the downturn and be able to take advantage when oil prices rise, even if they don't climb to $100 per barrel again. Ensco doesn't have the newest fleet but it does have the balance sheet to survive, so I'm cautiously optimistic for the stock in the long run. But it'll be a rough ride and investors shouldn't expect a big recovery anytime soon.