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Morningstar | Newly Merged Ensco Rowan Is One of the Largest Offshore Drillers

Ensco Rowan has reshuffled its fleet to stave off the impact of oversupplied markets. Clearing near-term debt obligations, selling unfit assets, and stockpiling younger rigs has improved stability while sacrificing little in the way of customer satisfaction. Nonetheless, Ensco is not out of the woods yet. We expect results to suffer at the hands of weak pricing and abysmal demand for some time. To battle back from forecast headwinds, we believe the company will need to dutifully approach which rigs are suitable for its portfolio. With shale producers lowering industry break-evens, investment in offshore projects has weakened and consequently challenged fundamentals for offshore drillers. Offshore stakeholders have worked toward lowering break-evens and made considerable progress, but it remains that only a select portfolio of offshore projects are competitive with shale. Long payback periods and high costs of investment continue to plague the prospects of offshore investment. As a result, opportunities have dried up for offshore drillers, and we expect it will be a while before they return. Because day rates are mired in a flood of excess supply, we don’t expect returns to reach value-accretive marks through our midcycle. Further, we expect drillers will fall short of market-balancing attrition requirements. This should equate to rig utilization no higher than the mid-70% range. Moreover, we believe demand will be arrested through 2021 with our “lower for longer” oil price forecast of $60/barrel Brent. Without materially higher investment in offshore projects, we expect driller performance will suffer for many years to come. Therefore, we don't believe drillers offer much upside for investors.