Ensco Ready For The Future

Oil rig contractor Ensco (NYSE:ESV) reported 2011 first quarter earnings of 45 cents per share versus $1.33 a year ago, respectively. Revenues in first quarter 2011 were $362 million, compared to $449 million a year ago. Jackup segment revenues decreased $55 million and deepwater segment revenues declined $32 million. Statistically, the quarter looked bad for Ensco, but the company has laid the groundwork for a solid future. (For a quick refresher, check out A Primer On Offshore Drilling.)

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Drilling Profits
While both of the company's deepwater and jackup segments experienced revenue declines, Ensco did make some notable progress in the quarter. During the quarter, the company announced the acquisition of Pride International (NYSE:PDE) and successfully arranged for the financing to make that happen. The Pride acquisition will give Ensco a greater presence in the highly valuable deepwater drilling rig segment. Pride has one of the youngest and most advanced deepwater rig fleets.

In addition, Ensco announced several new contract awards for its deepwater rigs during the quarter. With oil prices again climbing, drilling demand increases. With more and more of the world's oil located in hard-to-find places, the need for deepwater drilling rigs is elevated. As a result, Ensco should generate significant profits from those deals. (For more, see Unearth Profits In Oil Exploration And Production.)

An Industry Leader
With the Pride acquisition, Ensco has cemented itself as an industry leader. With a market cap of $8.3 billion, Ensco trails behind Diamond Offshore (NYSE:DO) and industry leader Transocean (NYSE:RIG), which sports a market cap of $24 billion. But market valuations can be deceiving: With a P/E of 14, Ensco trades at a vast discount to Transocean which commands a P/E of 25. Transocean has come under fire recently as BP recently launched a $40 billion lawsuit against Transocean as a result of the oil spill last April in the Gulf of Mexico.

The Bottom Line
While it is uncertain how that lawsuit will ultimately play out, Ensco could benefit from picking up customers at Transocean's expense. Along with the Pride acquisition, Ensco will now have one of the biggest and youngest fleets of deepwater rigs in the industry. With the greatest fundamental outlook for oil drilling coming from deepwater drilling, Ensco could be in a sweet spot for years to come. (For more, see Oil And Gas Industry Primer.)

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