Offshore drilling companies have been victims of the slump in oil prices and the negative impact on the stock has been higher on companies that have significant leverage as compared to others. From a balance sheet perspective, I have liked Ensco (ESV, Financial), compared to companies like Seadrill Partners LLCÂ (SDLP) or Transocean Ltd (RIG, Financial) that have higher leverage. This article discusses the recent bond issue by Ensco and why it is a positive for the stock.
On March 4, Ensco announced the issue of $1.1 billion in bonds that included $700 million in bonds maturing in 2025 and $400 million in bonds maturing in 2044. From the proceeds of the bond issue, Ensco will be paying off the $1.1 billion bond that is scheduled to mature in 2016.
I believe that this bond issue is a big positive from a fundamental perspective, as Ensco has $35 million in bond maturity in 2015 and had $1.1 billion in bond maturity in 2016. With the 2016 bond being replaced with extended maturities, Ensco now has $35 million debt maturing in 2015, no debt maturity in 2016 and $5 million debt maturity in 2017 and 2018. Therefore, for the next four years, Ensco has practically no debt maturity and hence any further debt refinancing pressure. I believe this is a big positive at a time when the offshore industry conditions are sluggish and high debt refinancing might mean significantly higher cost of debt for any company.
Ensco now has $505 million debt maturity coming in 2019 and $905 million in debt maturity coming in 2020. Before these bond maturities are due, I can say with some conviction that oil prices will stage a strong recovery and the company might be in a good position to repay the debt through internal cash flows or refinance the debt at a significantly lower cost of debt.
I must also add here that Ensco has a $2.25 billion undrawn revolving credit facility that will be due to repayment in 2019. Even if the facility is completely consumed before 2019, Ensco will have $3 billion in debt maturity for that year. I believe that is not a concern, considering the point that Ensco will have practically no debt maturity until 2019.
I must add here that Ensco has significant capital expenditure coming only in 2015 and a large part of the capital expenditure can be covered through internal cash flows. With minimal capital expenditure in 2016 and 2017, I believe that the RCF is unlikely to be utilized by 2019. The only condition in which the facility will be fully utilized is when there is a renewed capital expenditure boom coming from higher oil prices. If the latter scenario pans out, Ensco will be well positioned to refinance $3 billion in debt in 2019.
In addition to the positive related to an extended debt maturity, I must also mention that Ensco has been active in cold stacking of rigs that are idle. This has helped the company in cost control and I believe that the EBITDA margin is likely to remain healthy in FY15. Therefore, even in a gloomy industry outlook, the company’s operating cash flow is likely to be strong even when it is not expected to be high as compared to FY14.
In conclusion, investors who are seeking exposure to offshore drilling companies with a 3-5 year investment horizon can consider some exposure to Ensco at current levels. The stock is unlikely to move higher in the immediate future, but these levels look good for some long-term accumulation.
