Ensco plc (ESV, Financial) provides offshore drilling services to the petroleum industry. The company has a very large fleet size which includes 10 drilliships of which three are under construction, 14 semi-submersible rigs, 46 jackups with four under construction and two deepwater managed units. The company also has five semi-submersible rigs which are due for sale. Ensco plc has a global presence and operates in six continents with its head quarter in London.
In this article I will take you through the company’s portfolio up-gradation plans along with a discussion on its fleet restructuring. The article will also deal other reasons which make me bullish on the stock.
Portfolio Upgrading
Ensco has a clear vision and the company has been working towards the fleet high grading. According to the latest investor presentation the company has eight rigs to be delivered by 2016 of which one is delivered in 2Q2014, four in 2015 and the remaining three by second quarter 2016.
Considering this timely delivery of rigs strong revenue growth could be expected in fiscal 2014, 2015 and 2016. The company has also made new contracts with Total and Shell and extended its contact with Saudi Aramco which supports future cash inflows.
Though additions of new fleet and extending contracts are the company’s high grading strategy, divestment of older rigs would also help to a great extent to upgrade the fleet. This will reduce the average age of Ensco’s fleet to four years, less than Noble Energy’s 8.5 years and Transocean’s 9.0 years.
If we look at the company’s divestiture plans, since 2009 the company has sold 14 rigs and has plans to sell further five rigs. The sale will help the company to leverage on its cost structure by reducing expenses and improving margins. I thus believe that the company has clear rig enhancement plans which will result in a younger fleet portfolio and hence a higher day rate bargaining position.
Financials
For the second quarter of 2014, the company has reported a loss of $5.07 per share. However, I have reasons to believe that the company will have a better fiscal 2014 and an outstanding 2015 and 2016 results.
Ensco has a contract backlog of $11 billion, which in addition to the points discussed above, strengthens strong revenue growth for the company. Moreover, if we look at the company’s cash flow, Ensco has generated positive operating and free cash flows of $989 million and $358 million respectively for six month ended 2014.
Historical cash flow analysis also shows that the company has been generating positive cash flows; this suggests that Ensco is capable of funding the delivery of seven rigs by 2016 with minimal debt on its balance sheet.
Since end 2009 the company has increased its dividend from $0.1 per share to $3 per share. With the delivery of further seven rigs by 2016, cash flow to the company will increase.
I am thus of the opinion that increasing cash inflows with the delivery of new rigs and sale of older rigs, which will reduce the cost to the company, Ensco will be in a position to increase its free cash flow and hence in a position to increase the dividend payout as well.
Valuations
Ensco is currently trading at a trailing PEG of 0.5. Analyst also estimate 2014 EV/EBITDA of 6.9 and 2015 EV/EBITDA of 6.7 for Ensco as compared to Seadrill’s (SDRL, Financial) 2014 and 2015 estimated EV/EBITDA of 10.4 and 9.1 and Tidewater Inc’s (TDW, Financial) 8.0 and 7.0 respectively. Valuation of the company looks attractive in terms of both PEG and forward EV/EBITDA.
Conclusion
Growing dividends supported by fleet high grading translates into Ensco to being a good value investment. Thus, in a span of 2-3 years investors are likely to benefit with increasing cash inflows which would result in increased dividend payout and stock price appreciation.
