Rig Demand Driving Profit at Ensco Int'l

The Company: ENSCO International, a global offshore oil and gas-drilling contractor
The Filing: Form 10-Q filed with the SEC on July 24, 2008
The Finding: Ensco reported another record quarter with net income up 17 percent year-on-year to $297 million, reflecting higher day rates and improved utilization. With the planned expansion of its active deepwater rig fleet commencing in 2009, management believes that its deepwater assets will contribute 30 percent of total revenue by 2012.

The Upshot: The average day rate for Ensco's 44-rig jackup fleet for the quarter ended June 30 increased to $148,200, up 3.7 percent from the prior year quarter. Significant price increases in Asia/Pacific offset a 14 percent rate decline in the Gulf of Mexico. Utilization of the Company's jackup fleet was 95 percent in the second quarter of 2008 compared to 93 percent in the second quarter of 2007.

Of particular interest, the average day rate for the company's deepwater rig, Ensco 7500, increased by 83 percent in the second quarter to $365,500.

Management has invested more than $2.5 billion in the construction of six ultra-deepwater semisubmersible rigs, scheduled for delivery between September 2008 and 2012. Each rig is being leased at sequentially higher day rates, from $270,000 to $510,000 (plus cost adjustments).

The Gulf of Mexico, Brazil, and West Africa continue to be the most active deepwater areas of drilling activity. Ensco expects offshore exploration activity to pick up in Asia, Australia, and India, too. The limited availability of premium deepwater equipment to address any new offshore activity on a global basis combined with continued strong demand will likely push day rates even higher.

Further complicating the supply equation is finding a shipyard with idle capacity to build new deepwater rigs, according to Ensco Chairman and Chief Executive Dan Rabun.

The Question: If there are no rigs availabile, might discussions about opening up more of the U.S. outer continental shelf to offshore drilling prove to be moot?

David Phillips

David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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