Image source: BP Images via

It appears that after keeping earnings up in a declining market, the lack of work for Ensco's (NYSE:VAL) rigs started to catch up with it. In the past year, several of the company's rigs have completed contracts without a new one to keep earnings flowing, and the recent termination of a rig by BP (NYSE:BP) simply adds insult to injury. Here's a quick snapshot of what Ensco's earnings looked like this quarter. 

By the numbers

Quarter (figures in millions, except per share figures) Q3 2015 Q3 2014
Revenue $1,012.2 $1,201.4
Operating income $402 $536
Net income per share $1.24 $1.83

Source: Ensco earnings release.

Catching up on the business this quarter

  • The company received a $146 million lump sum payment from BP after it terminated its contract for drillship ENSCO DS-4 working in the Gulf of Mexico. That charge went straight to the bottom line and gave per-share earnings a boost of $0.48. So, this quarter's per share revenue looks quite a bit better than it actually is. 
  • Obtained a three-year contract for ENSCO 8505. Dayrates for the rig will vary from 150,000 to $210,000 per day depending on the scope of work. 
  • Ensco also earned two contracts for jackups from Maersk working in the North Sea. Although day rates for those rigs -- the $90,000 range -- are well below the average rate than the rest of the Ensco jackup fleet.
  • The company was able to reduce its contract drilling expenses by 13% compared to the same quarter last year in large part because of planned maintenance downtime on several of its rigs during the quarter.
  • Fleet utilization for its floaters declined to 59% compared to 82% in the third quarter of 2014. Jackup fleet utilization also declined from 92% last year to 64%.
  • Average day rates across the entire fleet also declined from $239,000 last year to $232,000 this quarter. The largest factor in that decline came from lower day rates for its floater fleet. 

In the company's press release, CEO Carl Trowell pretty much admitted that the contracts signed in the quarter were less than ideal. But working for a discounted rate is better than not working at all:

In terms of new business, we earned a multi-year contract for ENSCO 8505 in the U.S. Gulf of Mexico and finalized three-year contracts for two jackups in the North Sea. We also earned contracts for ENSCO 107 as well as ENSCO 68. These new contracts will help bridge us to better market conditions in the future.

That "bridge to better market conditions" is the equivalent of saying that the market for rigs is really rough, and the company is doing what it can to stay in the black until the market turns. Based on his outlook, though, that may not come too soon:

Recently, some customers announced incremental cuts to their capital expenditure budgets that will further pressure utilization and day rates. In response to the cyclical downturn in our sector, we have taken decisive steps to reduce expenses. Third-quarter financial results reflect these actions including lower offshore operating expenses and onshore support costs. Future financial results are also expected to benefit from ENSCO DS-8, our newest ultra-deepwater drillship, which is scheduled to commence a multi-year contract in the fourth quarter.

10-second takeaway
The market for rigs right now isn't great. Based on the spending habits of Ensco's customers, it doesn't look like it is going to get better anytime soon, either. Ensco was able to secure a couple of contracts that are well below the rates it was contracting for, but having some revenue is better than letting a rig sit in the docks and costing cash to maintain. Luckily, Ensco has one of the better balance sheets in the business, which will help it manage the downturn. However, the company's contracts are going to start to roll off pretty soon, and a lack of work could lead to some big losses in the future.

Investors should watch when Transocean (NYSE:RIG) and Seadrill (NYSE:SDRL) report earnings in the coming weeks to see if the issues we have seen at Ensco are unique to this company or are also affecting Transocean and Seadrill. These two have better contract coverage in place right now. As we saw with the cancellation by BP, though, anything could happen in the coming quarters.