Ensco Plc (NYSE:ESV) is, based on the number of the company's offshore rigs (~75), the world's second largest provider of offshore drilling services. With presence in the most valuable offshore basins across six continents, it follows behind Transocean (NYSE:RIG). The company operates in the offshore services industry and over the years, has recorded a phenomenal increase in revenues and income. In a survey carried out by a research firm, Ensco was rated No. 1 in customer satisfaction, a rating it has maintained for three years now.
Another very interesting thing about Ensco is the fact that it offers conservative yield at approximately 35% payout ratio. This indicates that there is enough room for periodic dividend increases in the long term, based mainly on the company remaining profitable.
The company's fundamental strengths
There are several activities and trends that have contributed immensely in making Ensco a fundamentally strong company. They include:
· Shareholder friendly: Ensco has been returning money to shareholders through its dividend payments. In the current fiscal year 2013, it raised its quarterly dividend to $0.50, up from the previous $0.375. It also announced share buyback authorization valued at approximately $2 billion.
· Phenomenally increasing revenue: Between fiscal year 2010 and 2013, the company's trailing revenues has increased 179.90% from $1.697 billion in 2010 to $4.750 billion in 2013.
· Continuous stream of quarterly income: Ensco has over the years, continuously increased its distribution annually.
· Strong cash position: The company's trailing cash and cash equivalent is valued at approximately $325 million.
· Profit margin above that of its peers: The company presently maintains a trailing profit margin of 26.87%, which is above the average of its peers in the industry.
· Significant operating margin: Ensco's trailing operating margin is 35.64% and significantly above that of its comparable peers.
· Innovation: Throughout the company's history, it has proven to be very innovative as it continues to make capital investments in new drilling equipment in order to further penetrate the markets it operates in and grow as a result.
· Integration of competitors: This is another unique strength of Ensco. A good example is the 2011 acquisition of a rival company, Pride International, in a deal valued at approximately $7 billion. With this acquisition, Ensco has been able to stamp its feet in lucrative markets like West Africa and Brazil.
Comparing Ensco to its peers
There are several big time players in the offshore services industry, making the space highly competitive. The market can even be said to be nearing saturation considering the intensive capital investments being made by the companies operating in the industry. Available report shows that global supply of offshore rigs has increased 4.59% from 784 in 2012 to 820, with market utilization of the supplied rigs at approximately 95.2%.
The giant among these players is Transocean with its fleet made up of approximately 95 offshore rigs, with Ensco ranking as No. 2 with approximately 75 offshore rigs. Ensco's closest competitor is Noble Corporation (NYSE:NE). One distinctive characteristic that sets Ensco apart from its competitors is that it operates with a relatively new fleet in comparison to the competition. The table below compares Ensco's performances with a couple of its industry peers.
Trailing Profit Margin
Trailing Operating Margin
Catalysts to fuel further growth
There are several catalysts that will further impact on Ensco's growth strategies and they include:
- Continued capital investment in new and innovative drilling equipment.
- Its position as the industry leader in customer satisfaction will positively impact on retaining existing customers and gaining new ones.
- Increasing demand for ultra-deepwater semi-submersible drilling rigs.
- Right mix of assets that in turn will maximize profitability.
- Strong financial position that will support further investments and growth.
- Capable and disciplined management that is prudent in both investments and capital allocation.
There is hardly any investment without is fair share of risks and Ensco is not an exception. Some of the risks of this investment include:
- Offshore operating hazards which if encountered could negatively impact on the company's revenues and cash.
- Near-term saturation of the market which could cause a decline in Ensco's market share.
- Shortage of fully trained and competent personnel for operating newbuilds .
- Regulatory uncertainty in terms of BOP.
- Future decline in demand for offshore drilling rigs in the petroleum industry.
The rate at which offshore services companies are carrying out intensive capital investments is an indication of huge future growth in the industry. As the second largest player in the market, Ensco is positioned to make the most of this expected growth. Even though there are chances of the industry being oversupplied with equipment, Ensco is still positioned to remain a profitable and shareholder-friendly company with its fairly strong cash position and conservative payout ratio.