Ensco Sublets New Deepwater Rig - Analyst Blog

The U.K. based Ensco plc (ESV) has strategically signed a short-term contract for its new ultra-deepwater semisubmersible drilling rig Ensco 8503, which is recently mobilized to the U.S. Gulf of Mexico (GoM). Ensco will sublet the new rig to Tullow Oil for three months, while original customer Cobalt International Energy (CIE) seeks drilling permits in the U.S. Gulf of Mexico.

This is a three-month contract excluding approximately 50 days of mobilization and demobilization period with the day rate of $440,000. Under the sublet agreement, the rig will mobilize to offshore French Guianato commence drilling operations for Tullow Oil once rig acceptance procedures are completed in the U.S. GoM.

Ensco said the original two-year deal with Cobalt for the 8503 at a day rate of $520,000 would be effective once the rig resumes work in the U.S. GoM.

This contract benefits all parties concerned and Ensco has gained another deepwater customer in a new market. Though Ensco faces immense competition from large-cap peers, we believe that the company is well positioned with an organically-growing asset base (three ultra deepwater rigs under construction). An alternative solution like this highlights Ensco's commitment to being an offshore driller of choice.

The post drill ban scenario hit hard offshore drillers. Although the ban has lifted, new drilling permits are trapped with new regulations. We think this will have negative impacts on offshore drillers such as Ensco. Though we expect a minimal short-term impact, the long-term effect of regulatory changes might hit Ensco as approximately one-third of its total revenue comes from the GoM region. Our Neutral recommendation for the stock remains unchanged with the Zacks #3 Rank (Hold).