In this article let's take a look at Ensco PLC (ESV, Financial), the international offshore oil and gas contract drilling company that is the world's second-largest offshore drilling rig fleet among competitive rigs with an ultra-deepwater fleet, the newest in the industry.
Larger fleet
For more than 25 years, the company has focused on operating safely and going beyond customer expectations. Its primary focus is on premium jackup and ultra-deepwater semisubmersible rig operations.
The company has a presence in the most strategic offshore basins across six continents, but new multiyear projects in West Africa, Brazil, Southeast Asia and the Mediterranean are gaining importance. Further, due to deepwater discoveries, it is far better positioned in Asia and Australia where we think it can exploit its business in the near future.
Ensco's main industry peers are Noble Corporation (NE) and Seadrill (SDRL). Both peers are making investments to improve their fleets.
Acquisition and divestitures
Over the past years, Ensco has divested assets which considered being 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 for $7.2 billionin 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 and 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 the company's report, dividends have been paid since 1997 and with a current dividend yield of almost 8%, 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.
Revenues, margins and profitability
Looking at profitability, revenues grew by 6.43%, but earnings per share decreased in the most recent quarter compared to the same quarter a year ago (-$2.69 vs $1.48).
The gross profit margin is considered high at 52.12%, and the net profit margin of -97.48% is below that of the industry average.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| ESV | Ensco | -1.13 |
| DO | Diamond Offshore Drilling | 9.15 |
| NBR | Nabors Industries Ltd | 2.68 |
| RIG | Transocean Ltd | 10.92 |
| Ă‚ | Industry Median | 2.68 |
The company has a negative current ROE of 1.13% which is lower than the industry median and all of its peers: Diamond Offshore Drilling (DO, Financial), Nabors Industries (NBR, Financial) and Transocean Ltd. (RIG, Financial).
In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So this company satisfies those levels. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative valuation and price performance
In terms of valuation, the stock sells at a P/B of 0.8x, trading at a discount compared to an average of 1.01x for the industry. To use another metric, its price-to-sales ratio of 1.80x is below the industry average of 1.81x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $9,166, which represents a negative 8.34% compound annual growth rate (CAGR).
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; because we expect to continue this trend in the future, I would recommend investors consider adding the stock to their long-term portfolios because it has good upside potential, itis one of the most profitable drillers, and it is trading nearly its 52-week low.
Hedge fund gurus have also been active in the company in the second quarter of 2014. Arnold Van Den Berg (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and John Buckingham (Trades, Portfolio), as well as FPA Capital Fund (Trades, Portfolio) and First Pacific Advisors (Trades, Portfolio) have taken long positions.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
