Dark clouds are building over the offshore drilling industry, but there's no storm yet for the industry's biggest companies. Ensco Plc's (NYSE:ESV) third-quarter results showed that today is good, but next year brings uncertainty.
The headlines will read that Ensco's revenue of $1.01 billion was down 16% from a year ago, and earnings of $292.0 million, or $0.89 per share on an adjusted basis, beat expectations. But the real story is beyond the headlines.
Utilization is up and down
Reported utilization figures are important for the offshore drilling industry because they tell us how much of the company's fleet has work. Ensco reported a 99.8% operational utilization rate for jackups in the third quarter, and 95.4% for floaters. That sounds great until you consider rigs that aren't in operation anymore.
Overall, Ensco's utilization fell from 89% a year ago to 62%, a huge drop-off that's driven by the company taking old rigs out of service. That's the alarming figure in third-quarter results, and it shows just how fast the industry has deteriorated.
Third-quarter results also benefited from a $146 million lump sum payment by a customer to cancel a contract. That's a lot to pay to not drill for oil. It's also half of Ensco's reported net income for the quarter. Without that gain, floater revenue dropped 24% from a year ago.
Light at the end of the tunnel?
Maybe the most important developments in the third quarter were some newly signed contracts. Management said five new contracts were signed in the quarter, and although they may be at lower rates than we've seen in the past, the revenue will help tide the company over until the market improves.
Oil and gas companies are still cutting capital spending plans, and 2016 won't bring an industry recovery. But for now, survival is all investors can ask for.
Positioned for survival
To better position itself for the future, Ensco has scrapped, sold, or cold-stacked old drilling rigs. But it has also ensured it has financial flexibility to stay afloat.
There are no debt maturities due until the second quarter of 2019, and the hope is that market conditions will improve dramatically by then. Offsetting $5.9 billion in debt is $1.1 billion of cash and short-term investments, so in the near term, there's some flexibility.
What's key for Ensco is to keep as many rigs possible busy until 2016 or 2017, when we should see a recovery in oil prices. $6.6 billion in contracted backlog will get it most of the way there.
Tumultuous times ahead
Like all of its offshore drilling competitors, Ensco is trying to do everything it can to survive until oil companies open up their wallets and start drilling again. Each quarter the company can squeeze out a profit and sign new contracts is a quarter closer to that recovery. The third quarter was a step in the right direction, even if it doesn't mean Ensco is out of the woods yet.
Travis Hoium owns shares of Ensco. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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