Offshore drillers like Ensco Plc (NYSE:ESV) have had a tough year as oil and natural gas prices have plunged around the world. That has forced them into cost-saving mode, and has put an urgent focus on balance sheets and rig fleets to see who can survive this downturn.
After Ensco reported third-quarter earnings, it talked with analysts and investors about where the business is heading and how it views the market conditions. Here are the five biggest takeaways from that conference call.
It's not out of the woods yet
Additional announcements of incremental CapEx cuts by customers will further reduce rig demand in 2016 and, coupled with newbuild deliveries, add pressure to utilization and day rates.
-- Carl Trowell, CEO
Low oil prices have driven the deterioration we've already seen in offshore drilling, and it doesn't look like a turnaround is even on the horizon. Lower capital expenditures from energy companies big and small will hurt demand, impacting both dayrates and utilization.
In other words, it's going to be a long year, and investors shouldn't get their hopes up in offshore drilling.
Cost savings are underway
As previously announced, during the third quarter we took additional steps to reduce expenses in line with our fleet restructuring. We consolidated our business unit reporting structure from five business units to three, centralized onshore support functions, and reduced head count accordingly. As a result, onshore support cost savings now total $57 million annually.
As the offshore drilling industry endures its current lull, companies have to cut costs in any way they can. Ensco has scrapped and cold-stacked rigs to cut expenses in operations. Saving $57 million may be a Band-aid, but it's important that the company is making the effort.
It's in a financial position to survive
Expense management actions coupled with our strong financial position -- including no debt maturities until second quarter 2019, $1.1 billion of cash and short-term securities, a fully available $2.25 billion revolver, and $6.6 billion of revenue backlog -- puts us in a solid competitive position.
Cutting costs is an important step, but offshore drillers also need the financial flexibility to stay in business. Part of that is having a revenue backlog that will keep cash coming in for the next year or two, and part of it is having a manageable debt load.
Ensco has $5.9 billion in long-term debt, but it also has a significant cash hoard and years until it has significant maturities. Those factors doesn't guarantee its survival, but they certainly will help.
Ensco is keeping rigs afloat
Let me underscore that ENSCO 8505 earned new work in the U.S. Gulf, and we were awarded multiple jackup contracts in various regions including the U.S. Gulf, Asia and the North Sea, including ENSCO 71 and ENSCO 72 that recently had their contracts finalized. In total, these contracts represent $400 million of additional revenue backlog. While some of these contracts are for shorter terms, they showed the teamwork between our marketing operations and engineering teams to keep rigs working as much as possible despite challenging market conditions.
Over the last few quarters we've seen offshore drillers take more short-term contracts and give dayrate concessions to oil companies that are willing to extend contracts. This keeps rigs working and generating cash, even if they aren't enjoying the profit margins we saw a year or two ago.
Look for more low-margin work to be added where Ensco can find it, something that's good for rig owners and oil companies too. The oil companies need to drill at lower cost to make money in this low-cost energy environment, and lower rates for rigs make it easier to justify drilling new wells, which means contracts for Ensco and its rivals.
Spending cuts continue
Our CapEx will peak in 2015 at $1.65 billion and then decline significantly in future years. We currently forecast 2016 CapEx to be $625 million.
Cutting operational spending is important, but capital expenses are where the real cash burn is. Given the completion of new rigs recently and pushing newbuilds out further, Ensco is planning to cut capital expenditures by nearly two-thirds next year. That's a positive for financial flexibility and will give the company a fighting chance to survive until oil prices rise again.
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.