Ensco (ESV, Financial) is among the offshore drillers that look good for investment from a medium to long-term perspective. While I am bearish on offshore drillers such as Seadrill (SDRL) and Transocean (RIG, Financial), I am bullish on drillers like Ensco and Atwood Oceanics (ATW). This article discusses the key positives in Ensco’s 1Q15 results and the long-term positives that make the stock worth accumulating.
Coming to the results first, Ensco reported revenue of $1.2 billion for 1Q15 as compared to revenue of $1.1 billion in 1Q14. Further, the operating income for 1Q15 was $478 million, representing a jump of 27% as compared to 1Q14 operating revenue of $377 million. The company’s operating margin surged due to lower contract drilling expense as a percentage of sales coupled with lower G&A expense. This is a significant positive as it underscores the company’s effort to cut cost in difficult times.
Besides the moderate growth in revenue and strong growth in operating income, Ensco also reported strong operating cash flows for 1Q15 and I view this as a big positive. Ensco had an OCF of $468 million in 1Q15 as compared to an OCF of $433 million in 1Q14. With $397 million in capital expenditure for the quarter, the company was free cash flow positive.
While the free cash flow adds to the liquidity position, Ensco already has a robust cash and equivalent position of $1.6 billion as of March 2015. In addition to this, the company has an undrawn revolving credit facility of $2.25 billion. Therefore, the company is well placed from a liquidity perspective in difficult times for the industry.
Between 2Q15 and 4Q15, Ensco has a capital expenditure of $1.7 billion and the current liquidity position implies that the company is fully funded for 2015. In addition, Ensco has a capital expenditure of $1 billion for FY16. The important point to note is that Ensco generated an operating cash flow of $468 million in 1Q15 and this implies an annual cash flow of $1.6 billion. While the contract coverage is lower in the coming quarters, even if Ensco generates an operating cash flow of $1 billion each in FY15 and FY16, a significant part of the capital expenditure will be funded through internal accruals. I therefore don’t expect any meaningful increase in debt in the coming quarters.
Ensco also has an excellent debt maturity profile with no significant debt maturity coming before 2019. Debt refinancing in current markets is likely to increase the cost of debt and Ensco is protected from this factor. Further, from a credit perspective, the company can service debt with ease with EBITDA for FY15 and FY156 likely to exceed $1 billion. It is therefore not surprising to see the company rated BBB+.
In conclusion, Ensco has a strong order backlog of $8.4 billion, robust operating cash flows, good cost management and a fully funded capital expenditure program for FY15 and FY16. These factors make Ensco worth accumulating at current levels with a long-term investment horizon. While the offshore market is not recovering anytime soon, Ensco can be gradually accumulating with the stock trading at attractive valuations.
