Tuesday, 23 December 2014

Ensco PLC – Cycle-Low Valuations

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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