Ensco Slimming Down

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Feb 27, 2015

As gloomy weather hovers over the oil industry worldwide, owing to a dip in the demand for crude oil, the latest enterprise to embrace the "slimming mode" is offshore drilling company Ensco (ESV, Financial), which recently cut down its quarterly dividend by 80% and is also looking to let go of a lot of people from its onshore positions. The company is now grappling for a steadier position in the market after its shares fell by 8%, which is the lowest point the stocks have gotten to over a time span of six years. In a slew of measures, it has also decided to shut down an ultra-deep water rig, which will also mean that the workforce will also be trimmed, thus saving the company an estimated $27 million. To look deeper into this breakup of the costs, the staff redundancy volume would be 270, making $100,000 in salaries and benefits each. Carl Trowell, the Ensco president and chief executive, mentioned that offshore oil drillers were actually undergoing a "multi-year downturn" and that relying on oil price recovery wasn’t going to be enough for them, going forward.

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Source: by Nigel Williams via Wikimedia Commons

What is hurting Ensco?

Ensco is under a decent degree of financial stress as the results have shown. The fourth quarter results showed a loss, as compared to profits which were generated a year before. On revenue of $1.16 billion in the quarter, analysts have put forward earnings estimates at $1.38 a share in the same period, which is a 6.6% year-on-year decline. Delving deeper into the reasons why Ensco is getting hurt includes:

  • Recent trends have shown that the market currently holds an over-supply of oil resources across the market, which by itself is pushing the crude oil prices downwards. With the decline of new drilling, Ensco has assets which are not doing too well, or rather not generating not generating enough revenue for the business. With the annual dividend of $3 a share, which happens to be one of the highest in the industry, the financials are seriously strained. Henceforth, the dip in declared first quarter dividend from $0.75 to $0.15 a share, which will hopefully bring in a $560 million cushion to rest on.
  • Ensco currently has a net debt level of $4.74 billion, which would include a $3 billion goodwill impairment charge, which is a tough number of handle considering current market conditions.

Competitor analysis

The direct completion of Ensco is Transocean Ltd (RIG, Financial), and the fortunes are also pretty much the same. Currently, there are six ultra-deep water rigs on which the company expects to get new contracts, but the competition is known to be too stiff, and the revenues to be generated won’t be good enough looking at the current oil prices. The net loss for the company in the Q4 declared results is shown to be $739 million, compared to a $233 million profit a year earlier. Also, Transocean Ltd has written off $992 million from its balance sheet for the December quarter, due to the same reason as Ensco.

Analysts at Moody’s have downgraded the Transocean stock rating to "junk," and the Standard & Poor ratings are just above that mark. In fact, with the way the company is going, there could be even further downgrades.

Final thoughts

The oil industry worldwide has taken a huge hit. In such a situation, there are a few things that could help companies like Ensco and Transocean stand strong; the main being consolidation. Instead of blindly going in for new oil rig assets, consolidating the existing ones to made more productive is a way to bring in atleast some degree of stability. The next step could be to join hands in future exploration ventures. If there is a suitable arrangement, then 2 companies can jointly use each other’s resources and tackle their debt levels together, but most importantly, control costs and reap benefits together. At last, exploring some of the new markets won’t be such a bad idea, but then the limitations of such a move including the timeline needed for a prospective market to materialize, is huge which the companies currently cannot afford.