Take Profits in Ensco as Oversupply of Rigs Pressures Industry

2014-10-10

NEW YORK (TheStreet) -- Investors in offshore drilling giant Ensco (ESV)  should take profits following a flood of bad news that has caused the company's stock to plummet 30% since it reached a high of $55.89 in June.

Now an oversupply of rigs is building, creating new pressure on the outlook for the entire industry.

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Shares of Ensco closed Tuesday at $38.69, up 0.44%, though investors have seen their holdings decline 28% for the year to date, compared with the 6.3% gain for the S&P 500. Like otheroffshore drillers Seadrill (SDRL)  and Transocean  (RIG) Ensco shares are trading at extremedepressed levels, just 2.4% shy of a new 52-week low.

The shares look cheap and are slightly just above their book value. But Ensco's stock is likely to continue as a falling knife, with $32 to $35 a share seeming like the next destination, another potential decline of 10%.

First, there were concerns that Ensco, which pays one of the strongest yields in the industry at 7.8%, won't be able to maintain its payout due to rising costs of credit protection, in the form ofcredit-default swaps.

Now, according to Credit Suisse analysts Gregory Lewis and Neesha Khanna, the offshore drilling market is about to suffer from an oversupply of rigs, which is bad news for the entire industry.

The analysts cited the fleet status report of Maersk Drilling, which the company released on Oct. 1. This new drilling venture from Maersk  (AMKBY) which is known broadly for its shipping containers, is now being taken seriously.

The company has invested $2.6 billion to build four drillships, which are being put to work.

Although Maersk didn't disclose contractual terms or customers, the analysts expect that the company will land Total SA (TOT) as a partner and commence work in areas such as Southeast Asia, among other places.

And Maersk is expected to launch more drillships in the first half next year.

If that is true, the oversupply will hurt the entire industry including Diamond Offshore (DO)Seadrill and Transocean. But given Transocean's and SeaDrill's status as the world's top twooffshore drillers by market capitalization, it is the smaller players that are likely to suffer more severely.

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For Ensco, investors have to worry about even lower day rates. The company has already expressed concern.

Ensco Chief Executive Carl Trowell addressed market concerns recently, telling analysts, "In terms of the deepwater market, a significant number of new drillships and semis are being built, and customers have tightened CapEx spending, which, together, are pressuring the supply/demand dynamics."

Trowell was also unable to project when this downturn would end.

The reduction of capital is money that the company is unable to allocate toward deepwater exploration. This mean that peers such as Seadrill are better positioned to withstand the arrival of these new drillships from Maersk, which now changes the landscape of the entire market.

 

Maersk has already dedicated a second and third ultra deep-water drillship to begin a three-year contract with ConocoPhillips (COP) and Marathon Oil (MRO)

Must Read: Drill Into Ensco

Ensco investors would be wise to secure any profits they have left now and wait for better clarity regarding its operations.

At the time of publication, the author held no position in any of the stocks mentioned.

Follow @Richard_WSPB

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


TheStreet Ratings team rates ENSCO PLC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation: 

"We rate ENSCO PLC (ESV) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, deteriorating net income and disappointing return on equity." 

You can view the full analysis from the report here: ESV Ratings Report


TheStreet Ratings team rates TRANSOCEAN LTD as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation: 

"We rate TRANSOCEAN LTD (RIG) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, compelling growth in net income and attractive valuation levels. However, as a counter to these strengths, we find that the stock has had a generally disappointing performance in the past year." 

You can view the full analysis from the report here: RIG Ratings Report


TheStreet Ratings team rates SEADRILL LTD as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation: 

"We rate SEADRILL LTD (SDRL) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its notable return on equity and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."