UK: Customer Demand for Offshore Rigs Continues to Strengthen, Ensco CEO Says

Ensco plc reported diluted earnings per share from continuing operations of $0.88 for third quarter 2011, compared to $0.92 per share in third quarter 2010. There were no discontinued operations in third quarter 2011. Losses from discontinued operations in third quarter 2010 were $0.01 per share related to a rig that was reclassified as held for sale. Diluted earnings per share were $0.88 in third quarter 2011, compared to $0.91 per share in third quarter 2010.

On 31 May 2011 , Ensco plc acquired Pride International, Inc. in a cash and stock transaction. Results from the former Pride International operations are included in the Company’s third quarter 2011 results with no corresponding amount in third quarter 2010. As required by generally accepted accounting principles, former Pride International drilling contracts were adjusted to their estimated fair market values at the acquisition date. Third quarter 2011 revenues include approximately $22 million related to these adjustments.

Professional fees, severance payments and other integration-related costs associated with the Pride International acquisition totaled approximately $7 million , $0.03 per share, in third quarter 2011 general and administrative expense. In addition, third quarter 2011 contract drilling expense included approximately $3 million , $0.01 per share, of severance and relocation costs related to the acquisition.

Chairman, President and Chief Executive Officer Dan Rabun stated, “Customer demand for offshore drilling has continued to strengthen, and we recently contracted two rigs under construction: the ENSCO 8505 ultra-deepwater semisubmersible and our first ultra-premium harsh environment jackup rig that has been named ENSCO 120. ENSCO 8505 was contracted to three customers in the U.S. Gulf of Mexico reflecting optimism that permitting in the region will continue to improve. ENSCO 120 was contracted in the Central North Sea where demand for high-specification equipment has risen to meet new drilling requirements. Given the strength of this market, we ordered a third rig of the same design.

“ENSCO 8504 successfully commenced drilling for Total in Brunei under its initial contract and we are pleased that ENSCO 8503 drilled a major discovery on its maiden well for Tullow in French Guiana . All of our deepwater and midwater rigs in the active fleet are contracted and we anticipate that jackup rig utilization will improve further in the fourth quarter. Ensco has approximately $9 billion of contracted revenue backlog, which provides significant visibility of future cash flows.”

Mr. Rabun added, “The integration of operations and systems following the Pride International acquisition in May is proceeding well, and we are on track to achieve our targeted synergies. Our seven rigs under construction, which will drive future earnings growth, are on schedule to meet their planned delivery dates.”

Revenues in third quarter 2011 were $916 million , compared to $428 million a year ago. Approximately $444 million of the $488 million increase was related to the Pride International acquisition. Adding new ultra-deepwater rigs to the active fleet also contributed to the increase in revenues.

Contract drilling expense was $478 million , up from $194 million in third quarter 2010. Excluding $277 million from the effect of the Pride International acquisition, contract drilling expense increased $7 million . Newly delivered ultra-deepwater rigs and higher costs from improved utilization in the jackup segment increased expenses, partially offset by an $11 million gain from a cash settlement of the ENSCO 69 insurance claim and lower costs for ENSCO 7500 that was mobilizing to Brazil during third quarter 2011.

Depreciation expense rose to $136 million from $56 million a year ago. Excluding $71 million from the effect of the Pride International acquisition, the $9 million increase was mostly driven by the addition of ultra-deepwater rigs to the fleet and upgrades completed for ENSCO 7500.

General and administrative expense was $41 million , compared to $21 million in third quarter 2010. The effect of the Pride International acquisition added $15 million to general and administrative expense. Professional fees, severance payments and other integration-related costs associated with the Pride International acquisition totaled approximately $7 million in third quarter 2011. Approximately $3 million of severance and other expense items for former Pride International operations is included in both the $7 million integration-related costs and $15 million effect from the Pride International acquisition noted above. Therefore, adjusted for integration-related costs and the effect of the Pride International acquisition, general and administrative expense increased $1 million from third quarter 2010.

Other expense in third quarter 2011 was $14 million , compared to Other income of $3 million in third quarter 2010. Other expense in third quarter 2011 included $31 million of interest expense, net of $27 million of interest that was capitalized, partially offset by $11 million of Other, net that included $12 million of foreign currency exchange gains. In third quarter 2010, all interest expense was capitalized. The increase in interest expense is due to the issuance of senior notes in March 2011 to fund a portion of the Pride International acquisition and assuming Pride International’s debt.

Ensco’s effective tax rate was 17% in third quarter 2011 and the year ago period.

Segment Highlights

Deepwater

Deepwater segment revenues were $440 million in third quarter 2011, up from $111 million a year ago. Approximately $277 million of the $329 million increase was related to the effect of the Pride International acquisition. Adding three ultra-deepwater rigs, ENSCO 8502, ENSCO 8503 and ENSCO 8504, contributed to the increase, partially offset by a decline in revenues for ENSCO 7500, which was mobilizing during third quarter 2011 following a shipyard enhancement project.

The average day rate was $391,000 and utilization was 74%, compared to $388,000 and 75%, respectively, in third quarter 2010. Excluding the impact of the Pride International acquisition, the average day rate was $406,000 and utilization was 83% in third quarter 2011.

During third quarter 2011, all deepwater rigs operating in the U.S. Gulf of Mexico earned full day rates, whereas certain of these rigs earned lower standby or sublet rates in the prior year quarter following the Macondo incident.

Contract drilling expense was $233 million in third quarter 2011, up from $48 million in third quarter 2010. Approximately $174 million of the $185 million increase was due to the effect of the Pride International acquisition. Increased expenses from adding ENSCO 8502, ENSCO 8503 and ENSCO 8504 to the fleet were partially offset by lower expenses for ENSCO 7500.

Midwater

Prior to the Pride International acquisition, Ensco had no midwater rigs. Therefore, midwater segment revenues totaling $121 million in third quarter 2011 were entirely related to the effect of the Pride International acquisition. The average day rate was $239,000 and utilization was 89% in third quarter 2011. Contract drilling expense in third quarter 2011 was $72 million .

Jackup

Jackup segment revenues were $330 million , up from $318 million a year ago. The effect of the Pride International acquisition added approximately $22 million to revenues, which was partially offset by a decline in utilization and the average day rate.

Utilization was 77% versus 79% in the year ago period, and the average day rate was $100,000 versus $105,000 in third quarter 2010. Excluding the effect of the Pride International acquisition, utilization improved to 83% from 79% a year ago, while the average day rate declined to $102,000 from $105,000 . Sequentially, on the same basis, utilization increased six percentage points and the average day rate increased $3,000 from second quarter 2011.

Contract drilling expense increased $9 million to $155 million , compared to a year ago. The effect of the Pride International acquisition added approximately $13 million to contract drilling expense, which was partially offset by an $11 million gain from a cash settlement of the ENSCO 69 insurance claim.

Other

Other is comprised of managed drilling rig operations acquired through the Pride International acquisition and the ENSCO I barge rig that has been cold stacked. Revenue totaling $24 million in third quarter 2011 is entirely related to the effect of the Pride International acquisition. Contract drilling expense increased to $18 million from $1 million in third quarter 2010.

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Source:Ensco Plc , November 3, 2011