Bp Drillship

Source: BP images via Flickr.com 

Wall Street has little love for offshore rig company Ensco (NYSE:ESV) and its peers. Over the past year, the company's shares have declined more than 60%. What's even more surprising about that statistic is that it isn't the worst-performing stock of its peers. That award goes to Seadrill (NYSE:SDRL)

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Prospects for the company haven't improved that much in recent months, so investors shouldn't expect anything great when the company reports third-quarter earnings.

By the numbers
So much of the decline in Ensco's stock price over the past year has been on the idea that future income would decline thanks to reduced offshore drilling activity. Well, this is the quarter where we should start to see those earnings declines. Consensus estimates from S&P Capital IQ put Ensco's normalized earnings per share at $0.75 for the third quarter; a stark drop from the $1.87 per share it pulled in this same time last year.

The big decline in earnings is expected as several of the company's floating rigs have come off contract in recent quarters. The lack of revenue combined with the costs of maintaining those idle rigs could hit Ensco hard this quarter and in the coming quarters without any uptick in drilling activity.

The big picture stuff: Exposure to Brazil and cost-cutting measures
One region that has been a particularly difficult region in which to work recently has been Brazil since the national oil company, Petrobras (NYSE:PBR), is the operator on every offshore project in the country. As oil prices decline, many of the company's planned deepwater projects are uneconomical and could be postponed when it revises its exploration budget. On top of that, the company is still working through the kickback scandal that has resulted in several top officials getting the boot. Earlier this year, Petrobras cancelled more than $1.1 billion in contracts with Seadrill to pare down its offshore drilling plans. 

The reason this is a big deal for Ensco is that of the 12 floating rigs it has under contract, five of them are employed by Petrobras for contracts beyond 2016. If Petrobras were to reduce its exploration budgets even further than they already have, Ensco may see some of those contracts go away and the company may be forced to reduce its backlog like Seadrill did early this year. Investors should see if management gives any outlook for its operations in Brazil in the company's conference call.

Another component worth checking up on is how much more the company has been able to reduce its operating costs. Toward the end of the quarter, management announced that it had reduced headcount and onshore support costs. Many of these cost-cutting initiatives are not expected to go into full effect until the first quarter of 2016, but operational costs are expected to be as much as 15% lower compared to this time last year. 

This quarter will be an opportune time for investors to make sure that those cost savings are actually happening. Without them, the expected declines in revenue in the coming quarters as existing contracts come to a close could really sting. 

What a Fool believes
There aren't many things Ensco can do right now to improve its prospects other than cut costs and try to put off payments for new rigs under construction. The companies that typically employ its services simply aren't spending money right now and all investors can hope for is for Ensco to weather the storm as best it can. The company has so far maintained a dividend payment, but as cash flows dry up, it would not be completely surprising if management decides to suspend its dividend like Seadrill did last year. Ensco reports its third-quarter earnings before the market opens on Oct. 29 and the management conference call will take place the same day at 11:00 am EST. 

Tyler Crowe owns shares of Seadrill. You can follow him at Fool.com or on Twitter @TylerCroweFool.

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