In this article let's take a look at Ensco PLC (ESV, Financial), the international offshore oil and gas contract drilling company, which is the world's second largest offshore drilling rig fleet amongst competitive rigs, with an ultra-deepwater fleet which is the newest in the industry.
New Multi-Year Projects
For more than 25 years, the company has focused on operating safely and going beyond customer expectations. It´s primary focus is on premium jackup and ultra-deepwater semisubmersible rig operations.
Although Ensco has a major presence in the most strategic offshore basins across six continents, new multi-year projects in West Africa, Brazil, Southeast Asia and the Mediterranean are gaining importance and probably would impact the company´s earnings.
Ensco 122 will become available in the third quarter of 2014 and is likely to be contracted in the North Sea. The company announced two strong jackup contracts in North Sea and SE Asia for Ensco 100 and Ensco 108, respectively. The firm recently sold its ENSCO 85, a jackup rig built in 1981, for $64 million. The net book value of the rig was approximately $54 million, so the pre-tax gain was about $10 million. Ensco has 8 additional rigs under construction, scheduled to be delivered by the end of 2015, which points to Ensco achieving significant growth.
Ensco's main industry peers are Noble Corporation (NE) and Seadrill (SDRL). Both peers are making investments to improve their fleets.
Acquisition & Divestitures
Over the past years, Ensco has divested assets which are considered non-core. In 2006, the company sold its one remaining platform rig. On the other hand, in 2011, Ensco completed its acquisition of former offshore drilling rival Pride International (PDE) for $7.2 billion in cash and new shares, in a deal that will create the world’s second-largest offshore drilling company.
Strong Cash
Ensco has a strong balance sheet, a good level of cash that allows it to reward current shareholders through higher dividends. During the third quarter, the company raised its quarterly dividend by 50% to $0.75 per share from its earlier payment of $0.5 per share, or $3.00 per share annually from $2.00 per share. According to company´s report, dividends have been paid since 1997 and with a current dividend yield of almost 5%, we believe Ensco remains well positioned to comfortably increase its dividend in the future. We must say that the company´s dividend yield is also among the top 5% of the S&P 500 companies.
Relative Valuation and Price Performance
In terms of valuation, the company sells at a trailing P/E of 9.1x, trading at a discount compared to the industry mean.
| Ticker | Company | P/E |
| ESV | Ensco | 9.1 |
| DO | Diamond Offshore Drilling | 13.5 |
| NBR | Nabors Industries Ltd | 93.1 |
| RIG | Transocean Ltd | 10.7 |
This ratio indicates that the stock is relatively undervalued when compared to Diamond Offshore Drilling (DO, Financial), Nabors Industries Ltd (NBR, Financial) and Transocean Ltd (RIG, Financial).
In the next graph we can see the evolution of the stock price together with EPS. The reason is that earnings often lead the stock price movement. As we can appreciate, the price performance showed an upward trend in the last five years. A long position of USD 10K five years ago today represents USD 17,871 (which means a 12.3% annual return).
With respect to earnings per share, they have decreased from $1.36 to $1.25 in the most recent quarter compared to the same quarter one year ago.
Final Comment
As outlined in the article, the international deepwater markets are looking strong and we expect the company to benefit from a recovery in oil-directed drilling. The demand for drilling activities has grown over the past years and because we expect to continue this trend in the future, I would recommend investors to consider adding the stock for their long-term portfolios, because the stock has good upside potential.
Hedge fund gurus have also been active in the company in the first quarter of 2014. Jean-Marie Eveillard (Trades, Portfolio), Ray Dalio (Trades, Portfolio), David Dreman (Trades, Portfolio), Steven Cohen (Trades, Portfolio), John Hussman (Trades, Portfolio) and John Buckingham (Trades, Portfolio), as well as FPA Capital Fund (Trades, Portfolio) have taken long positions.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
