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A Voided Rig Contract Triggered Shares of Ensco plc to Slide 36% in January

By Tyler Crowe - Feb 10, 2016 at 8:45AM

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Ensco's contract with Petrobras may have got the ball rolling on what could be a tough 2016.

What: Shares of Ensco ( VAL ) declined 36% in January. The large catalyst for the decline came when Petrobras ( PBR 3.89% ) announced it was voiding a contract for one of Ensco's drillships.

So what: The year hasn't been kind to Ensco thus far, and by the looks of the company's fleet status reports things may only be getting worse from here. Petrobras' decision to void the contract with Ensco goes back to when the drillship in question was owned by Pride International -- Ensco bought pride back in 2011. As part of the investigation of corruption at Petrobras, investigators are claiming that Pride had knowledge of improper payments from the shipbuilder to a marketing consultant with ties to Petrobras. Ensco has said it found no such evidence to support this claim, but it doesn't change the fact that this particular drillship is now out of work. 

To make matters worse, Ensco has to deal with the fact that a decent chunk of its rigs will go off contract in 2016. Based on most capital spending budgets from big oil companies and others that have reported spending plans, it doesn't look like there will be a huge appetite for taking on new rigs. With the company already seeing cash flows get tight, this could make it incredibly difficult to keep its unused equipment idle and pay for the rigs it currently has under construction.

Now what: This downturn in oil and gas is dragging on and on much longer than most people anticipated 12 to 18 months ago, and now companies such as Ensco are facing some pretty tough decisions. Ensco has been one of the more conservative companies in the space with a much more modest balance sheet, but the amount of rigs going off contract and the amount of idle equipment it has will be challenging for any company. For investors watching this space, it's probably best to hold off before making any decisions about this company's stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Valaris plc Stock Quote
Valaris plc
VAL
Petroleo Brasileiro S.A. - Petrobras Stock Quote
Petroleo Brasileiro S.A. - Petrobras
PBR
$11.09 (3.89%) $0.41

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