Following
my previous article on some possible investment ideas
in the Energy sector, this article focuses on ESV. Apologies for the delay – been too busy to do
focus pieces like this.
Investment Thesis
- I can do no better than point you to Rupert Hargreaves’ article
- Strong cash generating company.
- One of strongest balance sheet in industry provides flexibility
- Undemanding valuations – priced at 2009 levels
- ESV should be viewed as a 5 year holding as the industry supply and demand is not expected to reach
Overview and Business
- Plenty of newbuilds will increase supply in the next few years (See Diagram 1)
- Dayrates and utilization expected to decrease
- Ensco currently has 64 Rigs – 26 floaters and 38 jackups
- Five floaters reclassified as held-for-sale / cold stacked
- 7 Rigs under Construction – major capex in 2015 (see Diagram 2)
- Includes 3 ultra deepwater
[Diagram 1
- Global Offshore Drilling Fleet]
Source: Oct
14 Presentation
[Diagram 2
- Capex]
Source: Oct
14 Presentation
Financials
- Solid balance sheet amongst peers (See Diagram 3)
- Further, Company has backlog of $11 billion – to put this into perspective, this is more than 2 times 2013 revenue
- Recent actions by management has increased financial flexibility
- In Sep 14 - issued $625.0 million aggregate principal amount of unsecured 4.50% senior notes due 2024 and $625.0 million aggregate principal amount of unsecured 5.75% senior notes due 2044 – Company gains long-term capital at very attractive interest rates
- In Sep 14 - Extended Five-Year Credit Facility maturity date from May 7, 2018 to September 30, 2019; commitment increased from $2 bil to $2.5 bil – Facility is currently unused
- Company has funded capex through operating cash flow (See Diagram 4)
- Negative cash flow in 2011 due to acquisition of Pride International, Inc for consideration of $7.4 billion, including $2.8 billion of cash
- High capex of $2 bil (See Diagram 2) can probably be funded almost exclusively with cash flow
- However, if dividends are maintained, this will require an additional cash outlay of $527 mil which will probably have to be funded with debt
- View any price weakness on dividend cut as a great opportunity to add shares
- Dividend cut will also strengthen the Company’s balance sheet
- Looking out for capex numbers in 2016 and 2017 – want to see free cash flow sufficient to cover any dividends paid
[Diagram 3 –
Leverage Ratios]
Source: Oct
14 Presentation
[Diagram 4 –
Financials]
Source: Company
Filings
Valuations
- Current P/B of 0.63 reflects 2009 low valuations
- Forward P/E of about 6.2
- Target Prices – $57.50 (mid-cycle at 1X 2014e book value) and $74.80 (top of cycle at 1.3X 2014e book value)
[Diagram 5
- Valuation]
Source: Reuters
[Diagram 6 –
P/B]
Risks
Further
short term fall in share price is possible – oil price could drop further;
dividend cut - opportunity to add more shares
Further
debt could be taken on to fund capex and dividends – but company has sufficient
financial flexibility for now
Disclosure: I am long ESV. This article should
not be construed as investment advice. Investors are encouraged to do their own
due diligence and research.
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