ENSCO International Incorporated

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ENSCO International Incorporated

500 N. Akard Street, Suite 4300
Dallas, Texas 75201-3331
U.S.A.
Telephone: (214) 397-3000
Toll Free: (800) 423-8006
Fax: (214) 397-3370
Web site: http://www.enscous.com

Public Company
Incorporated: 1975 as Blocker Energy Corporation
Employees: 4,300
Sales: $698.1 million (2002)
Stock Exchanges: New York
Ticker Symbol: ESV
NAIC: 213110 Drilling Oil and Gas Wells

ENSCO International Incorporated, based in Dallas, Texas, is one of the world’s leading offshore drilling contractors, operating 56 offshore drilling rigs: 43 jackup rigs, seven barge rigs, five platform rigs, and one semisubmersible rig. The company provides its drilling services on a “day rate” contract basis, eschewing risk-based contracts that might provide great profits. ENSCO operates primarily in the Gulf of Mexico with 22 of its jackup rigs as well as its five platform rigs and lone semisubmersible rig. Of the company’s remaining 21 jackup rigs, seven are operated in the North Sea, 12 in the Asia Pacific area, one offshore in West Africa, and one offshore Trinidad and Tobago. Six of the company’s seven barge rigs are located in Venezuela, the other in Indonesia. Until 2003 ENSCO operated a 27-vessel transportation fleet, which management elected to sell in order to focus exclusively on its contract drilling business.

Founding the Company in 1975

ENSCO was incorporated in 1975 as Blocker Energy Corporation by longtime oilman John R. Blocker. After graduating from Texas A&M in 1948 he worked on a Gulf of Mexico oil rig for several years before establishing a South Texas drilling company with his father in 1954. When an oversupply of oil on the market crippled the contract drilling business the company was dissolved, and in 1958 Blocker went to work for Dresser Industries as operations manager for the oil equipment division in Argentina and Venezuela, a natural fit because he had grown up in South America, learning Spanish before English. Over the next several years he learned the political and financial realities of the foreign oil business, lessons that would later serve him well with Blocker Energy. In 1965 he moved to Dresser’s Houston office and ultimately rose to the level of a senior vice-president. When he left Dresser in the mid-1970s Blocker bought a small drilling company that became the core of Blocker Energy, a venture he planned to run with his son along with a ranch he purchased. His attention, however, was soon fixed on the drilling company, due to a domestic exploration boom that resulted from the 1973–74 Arab oil embargo. In recent years the major oil companies had sold off their drilling operations and were now forced to turn to contract drillers like Blocker Energy. Blocker took advantage of his South American experience to position the company in the international market, believing it was less risky than the domestic market, where he would have to contend with some 800 to 900 competitors. Not only were there only a handful of international competitors, Blocker hoped to shield his company from the volatility of the oil business, notorious for boom-or-bust cycles, by placing his drilling rigs around the globe. Blocker Energy expanded rapidly to meet the demand for its services and as a result soon found itself $44 million in debt. Blocker took the company public to pay down some of the debt and fund further expansion. By the early 1980s Blocker Energy was the world’s 15th largest contract drilling company, operating in eight countries with 54 rigs. Starting in late 1978 Blocker Energy made a major commitment to exploration by investing more than $50 million. Committing further millions to the effort, however, did little more than to distract the company from its core contract drilling business. The company restructured itself in the early 1980s but was devastated by a slump in oil drilling that put it on the verge of bankruptcy by the summer of 1984.

Richard Rainwater’s Investment in 1986

After Blocker Energy lost nearly $3 million in 1985, it found much needed help from multimillionaire Richard Rainwater, whose BEC Ventures made an initial investment in the company in 1986. He then commenced negotiations with Blocker Energy and its creditors to acquire a controlling interest in the company. Rainwater would one day become known for his relationship with George W. Bush and their ownership of the Texas Rangers, which provided the latter with his fortune and the political platform for his successful election as governor of Texas and one day the presidency of the United States. At the time he was buying into Blocker Energy, Rainwater was already well known in financial circles as the financial advisor to the wealthy Bass brothers, heirs to a Fort Worth, Texas, oil fortune. Rainwater himself had grown up in more modest circumstances in Fort Worth. After majoring in math and physics at the University of Texas he went on to the Graduate School of Business at Stanford University, where he became friends with Sid R. Bass. Rainwater served two years at Goldman, Sachs, & Co. as a trader, and then in 1970 went to work for the Basses as a financial advisor. Over the next 16 years his advice proved so beneficial that the Basses’ net worth increased from $50 million to more than $5 billion. In particular, Rainwater was responsible for the Basses buying into Disney before its dramatic increase in value. Rainwater also did well for himself, so that by the time he decided to strike out on his own he had accumulated a $100 million stake. Blocker Energy was his first solo deal, followed by a string of other investments that would result in making him a billionaire.

In December 1986 Rainwater-led Ventures acquired a controlling interest in Blocker Energy. In May 1987 John Blocker stepped down as chief executive officer, although he remained chairman until his retirement in November of that year. He was replaced as CEO by Carl F. Thorne, a partner in BEC Ventures. He grew up in the oil industry, born in Texas, the son of an electrical engineer who worked for Mobil Oil Corp. for 46 years, and was raised in a Mobil field camp. After receiving a degree in petroleum engineering at the University of Texas, Thorne worked briefly as a drilling and production engineer for Tenneco Inc. before continuing his education at Baylor University School of Law, earning a juris doctor degree. He returned to the oil business, serving as assistant general counsel for Sedco Drilling Co., eventually becoming president of the company. When Sedeo merged with Schlumberger in 1984, Thorne became president of the resulting drilling group. Two years later, and only in his mid-40s, Thorne retired, but soon decided to join Rainwater, taking over the running of Blocker Energy, which subsequent to the acquisition by BEC changed its name to Energy Service Company Inc., its abbreviation becoming ENSCO. The company assumed the name ENSCO International Incorporated in 1992.

ENSCO, well positioned because it possessed little debt, immediately announced plans to expand its presence in the oil drilling industry, which appeared ready to rebound after one of the worst down cycles in U.S. history. It attempted to acquire Anson Drilling Co. as well as Gearhart Industries but failed. ENSCO was more successful, however, in the transportation area, in 1988 paying $22 million to acquire Golden Gulf Offshore Inc. for ten boats that supplied offshore oil rigs and another four vessels that moved the rigs’ massive anchors. Finally in 1993 ENSCO completed a major acquisition, buying Penrod Holding Corporation in 1993 and adding 19 rigs to its fleet. Penrod was owned by the Hunt family, which during the 1980s had invested heavily in the fleet, but massive debt, a downturn in drilling activity, as well as an ill-fated attempt at silver speculation, forced the Hunts to seek bankruptcy protection for Penrod and eventually led to the business being sold to ENSCO.

ENSCO began to withdraw from secondary endeavors to focus solely on offshore drilling rigs. In 1993 the company sold its supply business, and then in 1994 and 1996 sold off its land-based drilling rigs. ENSCO’s technical services business was divested in 1995. Anticipating increased demand for premium jackup rigs, ENSCO initiated a rig enhancement program in 1994. It also kept an eye out for attractively priced rigs that became available from other drilling companies. Rigs were purchased from J. Lauritzen in 1994, Transocean in 1995, and Smedvig in 1997. A much larger transaction took place in 1996 when ENSCO acquired Dual Drilling Company in 1996 from Mosvold Shipping A.S. of Norway, adding 15 rigs and other holdings in a stock swap transaction valued at approximately $200 million. The company now consisted of 52 drilling rigs, divided among four subsidiaries operating in the United States, the United Kingdom, the Caribbean, and Asia. In addition, ENSCO boasted a large fleet of support vessels, including tug, supply, and anchor hauling ships. The company changed the composition of its rig fleet somewhat in 1998 when it sold off four Venezuelan barge rigs.

Business Dropping Off in 1999

At the end of 1998 ENSCO had posted five consecutive years of improved earnings. The company produced record revenues of $813.2 million in 1998 and net income of $253.9 million. The following year, however, proved difficult. Economic troubles in Asia, a drop in oil prices, and cutbacks in exploration activities combined to create a major reduction in the demand for contract drilling rigs. But ENSCO, which had always taken a conservative approach to doing business, was well positioned to wait out the downturn. Although it had long-term debt of $375 million it also had $330 million in cash at the end of 1998. Management cut operating costs and essentially broke even in 1999. Matters improved significantly in 2000, when ENSCO earned $85.4 million on revenues of $533.8 million.

Company Perspectives

ENSCO is focused on the offshore contract drilling business that is essential to oil companies in their worldwide exploration and development efforts.

Even as it was retrenching during a down cycle, ENSCO was making plans for the future, becoming increasingly more committed to deep water operations, in keeping with an oil industry trend. In a 1999 interview with Oil & Gas Investor, Thorne explained: “The industry’s movement into the deep water is an evolution, not a revolution. In the continuous search for hydrocarbons, we’ve evolved from land drilling to offshore shallowwater drilling, to drilling on the continental shelf and beyond. At the same time, the cost structure of many companies has become such that they now have to look for the bigger elephants in deeper water, where their unit finding and lifting costs are much less. If one accepts that we’ve got to bring on large volumes of hydrocarbons to meet rising demand, then the deep water is going to play an increasingly important role.”

To support deepwater development efforts, ENSCO upgraded platform rigs acquired from Dual. All told, in the late 1990s the company invested some $500 million in rig upgrades. Moreover, it invested in the construction of a deepwater semisubmersible rig, able to drill in water depths of 8,000 feet. It was the first deepwater drilling unit ever built in the United States, a project that was completed on time and within budget. In December 2000 the rig went into service in the Gulf of Mexico. ENSCO also invested in harsh environment jackup rigs, completing the construction of a unit in 2000. It built a second harsh environment rig in partnership with Keppel FELS Limited, holding an option to purchase a 100 percent interest. In light of the company’s shifting priorities in the composition of its rig fleet, ENSCO elected in 2001 to remove four less competitive rigs from operation. Two of its platform rigs were retired and two barge rigs were put up for sale.

Financial results continued to improve in 2001, with revenues growing to $817.4 million and net income soaring to $207.3 million. ENSCO added to its fleet in 2002 when it acquired Chiles Offshore Inc., paying $578 million in stock and cash, and the assumption of $140 million in debt. It was a deal that made sense for both parties. ENSCO picked up the kind of state-of-the-art jackup rigs it preferred, and in the process stifled some Wall Street critics who expressed concern that the company had not been as aggressive as its competition in making acquisitions. Chiles was simply too small to compete in the current marketplace, and as part of the deal its president and CEO, William E. Chiles, secured an executive position with ENSCO. In addition, the sale to ENSCO was profitable for Chiles’s shareholders, who received close to a 20 percent premium, based on the price at which Chiles was trading before the transaction was announced.

ENSCO’s balance sheet suffered somewhat in 2002, due to a weakened demand for drilling rigs in the Gulf of Mexico and a resulting drop in day rates. For the year, the company generated revenues of $698.1 million and net income of $59.3 million. Early in 2003 management announced that it was selling its 27-vessel fleet of support ships located in the Gulf of Mexico to New Orleans-based Tidewater Inc., owner and operator of more than 550 vessels used to support offshore drilling. Although the subsidiary, ENSCO Marine Company, was a profitable venture, it would require a significant investment to keep the business viable. Instead ENSCO elected to make an even greater financial commitment to its offshore rig fleet.