Financial Summary
ENSCO International Incorporated and Subsidiaries
* Earnings Before Interest, Taxes, Depreciation and Amortization
** Earnings per share amounts and weighted average common shares outstanding have been restated for the adoption of SFAS No. 128, and adjusted for the two-for- one stock split effective September 15, 1997.
In millions, except per share data
By any measure, ENSCO's time is now. Industry fundamentals are as strong as they have been for years. The world's excess production capacity is being largely absorbed as demand for energy continues to grow, and as depletion continues to ravage supply. In response to these market conditions, exploration and production spending has increased, with many industry analysts expecting 1998 to be the third successive year of double-digit spending growth. Influenced by moderate commodity prices, oil companies today target spending on projects that increase near-term production, or volume, in order to meet earnings and cash flow objectives.
Technology has lowered the risk and increased the efficiency of finding and developing hydrocarbons; however, this is a double-edged sword. Although technology has allowed oil companies to deplete reservoirs at a much faster rate, this reduction in production capacity has to be replaced before there can be any net increase in production to meet rising energy demand. While technology has lowered finding and development costs, it has caused oil companies to "run faster" to stay in place, as more production is required to replace depletion of reserves.
Oil companies are i n c reasingly looking to the ocean for this much needed pro-duction. Demand for offshore drilling services has risen dramatically over the last several years, out-pacing supply in many markets, and pushing day rates higher.
As we approach the next century, were main very positive on the long-term outlook for the industry, and continue to commit capital to projects that we believe will enhance ENSCO's future earnings potential. In December 1997, the Company completed the acquisition of a harsh environment jackup rig, the ENSCO 100 (formerly known as the West Omikron). The Company also announced in January 1998 plans to build a new harsh environment jackup rig, the ENSCO 101. This rig is scheduled for delivery in early 2000. Growth through acquisitions, asset enhancements, new construction, and market improvement has been, and will remain, the cornerstone of our business plan. We are on course, and confident that our strategy is sound.
In this year's Annual Report, we reflect on some recent questions from our stockholders and the investment community, and reiterate our strategy for success as we approach the new millennium.
Operating Focus
Over the years, the Company has narrowed its operating focus to two business
lines: offshore contract drilling and marine transportation. ENSCO operates the
world's largest fleet of premium jackup rigs and the Gulf of Mexico's fourth
largest fleet of oil field support vessels. The Company is totally focused on
delivering the highest quality service at the most efficient cost. As a result, ENSCO
has consistently achieved the highest operating margins in the industry, despite the
shipyard downtime byproduct of the Company's asset enhancement program.
Quality Operations
Strategic FocusENSCO has narrowed its operating focus to two business lines: offshore contract drilling and marine transportation. By concentrating on offshore rigs and boats, the Company controls the major asset base required by oil companies in their off shore exploration and production efforts. ENSCO is totally focused on delivering the highest quality service at the most efficient cost.
Why has ENSCO chosen to concentrate on premium jackup rigs as its core business?
From the outset, ENSCO has targeted the most utilitarian equipment that could address the major oil and gas provinces of the world. Historically, jackup rigs have drilled the major-ity of all offshore wells. We expect this to continue.
Within the jackup sector, we have con-centrated on the high-end of this market, premium jackup rigs. Premium jackups are rigs that feature independent-leg design, and are capable of drilling in water depths of 250 feet and greater. Armed with more detailed seismic information, oil compa-nies today are re-evaluating reservoirs once considered uneconomic. Over-plat-form drilling has become the mainstay of many oil companies in their efforts to increase near-term production. Using this technique, oil companies can re-enter old fields, or drill to smaller satellite fields and connect into existing production facilities. Jackup rigs with longer legs and greater load-ing capacity are essential to this effort.
What synergies are there between the offshore rig and boat businesses?
By concentrating on offshore rigs and boats, we control the major asset base required by oil companies in their offshore exploration and production efforts. The two businesses have a common customer base, and can be supported by the same shorebase facilities to minimize overhead. Both are cyclical businesses requiring similar management skills, where the tim-ing and focus of capital deployment is critical in achieving superior results.
In the future, we see opportunities to market larger towing and supply vessels together with our offshore rigs, since both are in short supply. This will have particular application in international markets, where logistical requirements are more complex.
What is the Company's geographic business mix, and how do you see this changing over time?
ENSCO is diversified geographically, with almost half of the Company's offshore contract drilling revenue generated from international operations. With the addition of the ENSCO 100, ENSCO 101, and three barge rigs in Venezuela, and the anticipated movement of equipment from the Gulf of Mexico to foreign jurisdictions, it is likely that the revenue mix will shift more to foreign sources in the future.
We will continue to target international markets with long-term potential, and establish strong customer alliances that can provide continuity of work. For example, four of our North Sea jackup rigs are committed to the Royal Dutch Shell / Exxon joint venture in Holland through 1999. ENSCO is the largest independent off-shore drilling contractor to Petroleos de Venezuela, S.A., the Venezuelan national oil company, with ten barge rigs under contract.
Concentration of assets in select geo-graphic cores also contributes to efficiency. Support costs are minimized as fewer shorebase facilities are required, and more focused and effective support and market-ing efforts can be achieved.
On Course for Future Growth
ENSCO's growth has been dramatic over the last five years, and the Company
continues to position for further expansion in the years ahead. Acquisitions, like
the purchase of the harsh environment jackup rig, ENSCO 100, will continue to
be instrumental in increasing the Company's earnings potential. ENSCO expects
to largely complete its basic enhancement program by the end of 1998 or early
1999, with 1999 being the first year when the benefits of this program can be
fully realized. New construction, when the economics warrant such investment,
is likely to become a greater source of earnings growth in the future. As the shortage of offshore rigs becomes more acute, we believe day rates will
increase which will also contribute to future profitability.
Why is ENSCO investing so much money upgrading older rigs?
By the end of 1998, the Company will have invested approximately $500 million for enhancements to, and extending the service life of, our asset base. This program was start-ed in 1994, and much of the associated rig downtime was incurred when opportunity costs relative to idle time was not as great as it is today.
These investments are attractive for several reasons. First, the economics are com- pelling. Much like the oil companies who look for projects with rapid production rates to improve project economics, enhancement projects can be completed in less time than new construction, and at much less cost. These enhancements address the requirements of our cus-tomers, who are drilling deeper, more complex wells, and in deeper water than in years past. By increasing the service life of our assets, we will have a potential source of earnings and cash flow for years to come. Enhancements on 22 of the Company's large jackup rigs will be com-plete by early 1999. Additionally, all seven of ENSCO's Gulf of Mexico heavy-duty platform rigs are being upgraded for deeper drilling application, and are now committed under term contracts.
What will be the Company's criteria for future acquisitions and new construction?
ENSCO will continue to focus on the high-end of the equipment market. In the future, we believe larger, more capable rigs and boats will likely generate the highest returns due to increased demand. In terms of jackup rigs, the ENSCO 100 acquired late last year and the planned construction of the ENSCO 101 announced in early 1998 are representative of the premium equipment that the Company will target in the years ahead. Both are harsh environment rigs that address requirements for deeper drilling and deeper water capability.
A natural extension for ENSCO is the semisubmersible market. As with premium jack-ups, ENSCO will focus on the most utilitarian semis that will address the heart of the deepwater market, that being in water depths up to 7,500 feet. The Company is developing a proprietary design for a new semi that we believe can be built at a competitive price. ENSCO's Management, many of whom were formerly with SEDCO, Inc. and Penrod Drilling Company, companies with large semisubmersible fleets, has extensive experience in building and operating semis.
On Course
Building for the FutureENSCO continues to position for further expansion in the years ahead. The Company expects to largely complete its basic asset enhancement program by the end of 1998 or early 1999. New construction is likely to become a greater source of earnings growth in the future. We are on course, and confident that our strategy is sound.
Quality People
In an industry that went through significant downsizing and restructuring in the
eighties and early nineties, the offshore contract drilling sector is today being
rejuvenated. A generation of managers lost to other industries during this last
down turn must now be replaced. In response to this challenge, the Company has
greatly expanded its human resources effort.
With labor markets as tight as they are, how can ENSCO continue to attract and retain talented people?
Recruitment and development of employees are top priorities at ENSCO, and vital to the Company's continued success. In order to attract and retain employees, our basic compen-sation structure is highly competitive, and is supplemented with performance-based awards. These additional incentives promote safety and efficiency consistent with the exemplary standards that we have set. With ENSCO's commitment to quality and growth, the Company provides a safe and dynamic work environment that offers attractive career devel-opment opportunities for our people.
Significant resources are also devoted to employee training. By way of example, we recruit young college graduates to fill training programs in each of our business units. We are developing an international team of field professionals who will be trained in all aspects of our operations, and available to address key personnel requirements as they arise in any jurisdiction.
How does the Company plan to build and maintain a high-quality work force while retaining its superior operating margins?
ENSCO's future success is dependent on meeting both objectives. We regularly review our compensation program to ensure that it remains competitive. We structure our compensa-tion with a significant variable component to reward performance and tenure.
With regard to our training programs, new recruits are rotated through various posi-tions on the rigs, and are part of, not an addition to, rig complements. In this way, we pro-vide valuable on-the-job training, without the added burden of extra labor cost.
ENSCO uses performance-based incentives, equity participation, and profit sharing to properly align the interests of all employees with those of the Company, its customers, and its stockholders.
By implementing cost-effective training programs, the utilization of performance-based incentives to supplement competitive pay, and the appropriate utilization of equity and profit participation to properly align interests, the Company believes that it will be able to attract and retain a quality team while maintaining attractive operating margins.
Financial Strength
ENSCO's ability to address expansion opportunities is based upon the Company's
financial strength. During its early years, the Company relied primarily on equity
capital to fund acquisitions. The major asset enhancement program that began in
1994 has been funded primarily with internally generated funds. As the
Company has grown and profitability has increased, ENSCO has been able to
pursue other financing alternatives. In November 1997, the Company completed
its first public debt offering which received an investment grade rating from
both Moody's and Standard & Poor's.
What does the Company intend to do with its significant cash flow?
ENSCO has a history of investing its cash flow in projects that have generated attractive returns. The reinvestment of cash flow will continue. In each of the last five years, ENSCO has completed acquisitions that added to our asset base and increased the Company's earn-ings potential.
New construction, while limited to eight new barge rigs for Venezuela over the last five years, will likely play a greater role in the future. In 1997, the Company announced plans to build a harsh environment jackup rig and three enhanced barge rigs for Venezuela. With ENSCO's excellent liquidity and strong cash flow, the Company should have the resources to take advantage of future growth opportunities.
In closing, it is gratifying to note our progress over the last several years. ENSCO's offshore rig fleet has grown from four rigs to 53 during the past five years, while revenues increased at a compound annual growth rate of 57 percent. In The Wall Street Journal's recent Shareholder Scoreboard of stock price performance, ENSCO was named the tenth-best performer among 1000 U.S. companies on the basis of stock price performance over the 1992-1997 period, achieving a compound annual growth rate of 72 percent.
As we move to the new millennium, our course is set. We are confident that we have the people, asset base, financial resources, and strategic focus to prosper.
Carl F. ThorneSome of the foregoing may contain forward-looking statements. Please refer to "Outlook and Forward-Looking Statements" on page 23 of Management's Discussion and Analysis of Financial Condition and Results of Operations for further information.