Ensco Plc (ESV) Q2 Earnings: Disappointment In The Cards?

Ensco plc (NYSE:ESV) , a leading supplier of offshore contract drilling services to the oil and gas industry, is expected to report second-quarter 2016 earnings on Jul 28.

In the last quarter, the company’s earnings of 74 cents per share missed the Zacks Consensus Estimate of 80 cents and also plunged 50.3% from the year-ago earnings of $1.49. Let’s see how things are shaping up prior to the announcement.

Factors Likely to Influence this Quarter

The persistent weakness in crude prices and the freefall in the commodity cost to below the $30 per barrel level has resulted in the top energy companies resorting to spending cuts (particularly on the costly upstream projects) due to lower profit margins. This, in turn, means less work for drilling contractors like Ensco and hence, less earnings.

Moreover, Ensco is expected to have increased downtime in 2016. This will affect its utilization rates in the coming quarters and thus, lower revenues. Further, the challenges associated with contracting rigs for extensions in Brazil remain concerns.

ENSCO PLC Price and EPS Surprise

ENSCO PLC Price and EPS Surprise | ENSCO PLC Quote

The increased supply of high-spec rigs is likely to put pressure on utilization for standard jackups in the long run. Also, the company's execution ability with respect to the jackups under construction will play a major role in determining its growth.

With large, multinational energy firms looking to cut their skyrocketing capital expenses, the drilling space is witnessing intense competition, as multiple firms chase a single contract. This excess capacity, in turn, could lead to further lowering of utilization or dayrates.

However, Ensco has a contracted revenue backlog (excluding bonus opportunities) of $5.8 billion, which provides it with excellent cash flow visibility. With the completion of the construction phase of its eight additional rigs in 2015, as well as the recent order of two 140 series jackups, Ensco is expected poised for growth. Moreover, the company remains on track to enhance its has operational efficiency as evidenced by its decision to scrap 12 cold stacked rigs comprising eight jack ups and four floaters.

Ensco cut its dividend to 1 cent per share from 15 cents per share due to the prolonged weakness in the offshore market. The reduction in payout will save the company $130 million annually. It will also help in capital preservation amid the continued market uncertainty.

Earnings Whispers

Our proven model does not conclusively show that Ensco is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -1.96%. This is because the Most Accurate estimate stands at 50 cents, while the Zacks Consensus Estimate is pegged at 51 cents.

Zacks Rank: Ensco carries a Zacks Rank #5 (Strong Sell).

We caution against Sell-rated stocks (Zacks Rank #4 and 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies from the same space which according to our model have the right combination of elements to post an earnings beat this quarter:

Spectra Energy Corp. (NYSE:SE) has an Earnings ESP of +16.00% and a Zacks Rank #1. The company is slated to release earnings on Aug 3.

EOG Resources, Inc. (NYSE:EOG) has an Earnings ESP of +2.00% and a Zacks Rank #2. The company is slated to release earnings on Aug 4.

Hess Corporation (NYSE:HES) has an Earnings ESP of +2.38% and a Zacks Rank #3. The company is slated to release earnings on Jul 27.