Ensco: 2 Offerings Make A Right

| About: Ensco PLC (ESV)

Summary

Ensco completed a surprise secondary, sending the stock down sharply.

The offshore driller continues to easily surpass estimates due to strong operations during the severe downturn.

The company has improved the balance sheet after completing a below-market debt offering making the stock trading far below book value appealing to new investors.

In an interesting move, Ensco (NYSE:ESV) placed a secondary offering to raise cash to cover corporate needs during this downturn in offshore drilling. The offering is somewhat peculiar considering analysts forecast the company remaining profitable even in 2017, but the news follows a similar amount spent to repurchase debt at a large discount.

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Naturally, the stock took a hit from the pricing below the previous close despite releasing solid preliminary Q1 numbers. With a 52-week high three times the current level, should investors buy the secondary induced dip in the stock?

Secondary Details

Prior to the open on Friday, Ensco priced an upsized secondary of 57.0 million shares at $9.25 per share. The amount was a big 12.5% discount from the previous close of $10.59. The stock traded as low as $9.45 before providing new investors a solid bounce to the $9.90 close.

The offering includes the typical option to purchase additional shares in the amount of 8.55 million bringing the total offering to 65.55 million shares. Ensco will net close to $600 million on the deal.

The offering isn't a big shock considering analysts like Seaport Global had placed Ensco on the list of offshore drillers with uncertain liquidity. Though at the same time, the company is highly profitable still so one has to wonder if the company needed an offering equivalent to 25% of the float, especially with the stock trading far below book value.

The key detail is that Ensco completed a tender offering for approximately $860.7 million of Notes for a purchase price of only $622.3 million. The company was able to purchase the notes for an average discount of 28%.

In the process, Ensco reduced the debt level to $5.0 billion while reducing the cash and short-term investments total to only $750 million prior to the secondary. The total cash position is now back to $1.35 billion.

Implications

The implications of these deals really depends on where an investors sat before the deal. The sizable offering is very dilutive for existing shareholders. The improved liquidity is a big positive for any new investor and likely why the deal was eagerly snapped up to the tune of 7.0 million additional shares.

Even after massive Q4 impairment charges totaling $2.9 billion, Ensco ended 2015 with a equity value of $6.5 billion. After the offerings and some positive cash flow during Q1, the company has a book value of around $7.4 billion with around 300 million shares outstanding. The book value per share sits up around $24.67 with the stock closing below $10.

With the disclosed Q1 results, the company along with the industry continues to prove that the ability to survive the downturn far exceeds the market mindset. The primary key being that Ensco was able to reduce contract drilling expense to below $366 million from an expected level of $385 million.

Takeaway

The secondary offering was undoubtedly painful to shareholders watching the stock price drop 6.5% on Friday. The sell off provides an opportunity for new investors as the company has used the offerings to reduce debt levels by $861 million while maintaining book value far above the current stock price.

The picture is far from perfect for the offshore drillers like Ensco, but the company is now in a better situation to survive and eventually thrive.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ESV over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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