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I have been bullish on Ensco (ESV), the owner of the second large offshore drilling fleet in the world, for quite some time. The stock seems to be gaining momentum, and it still has significant upside even after rising about 30% since my original recommendation in late September.

Key Recent Events

  • Ensco contracted an ultra-deepwater drillship to BP (BP) for five years, putting another $1B into its revenue backlog.
  • Drilling is coming back in the Gulf of Mexico. Demand is greater than at any time since the BP spill.
  • The company has enough confidence in demand to order additional drillships, including a $645mm behemoth that can reach 12,000 feet underwater.

Ensco plc provides offshore contract drilling services to the oil and gas industry worldwide. It owns and operates an offshore drilling rig fleet of approximately 77 rigs, including 7 drill ships, 13 dynamically positioned semisubmersible rigs, 7 moored semisubmersible rigs, 49 jack up rigs, and 1 barge rig used to drill and complete oil and natural gas wells. (Business Description from Yahoo Finance)

4 reasons Ensco is has significant upside from $52 a share:

  • Earnings are spiking up. ESV made $3.07 in FY2011, and analysts expect $5.38 a share in earnings in FY2012 and $6.71 in FY2012.
  • It has a low five year projected PEG (.59), yields 2.9% and sells for just 10% above book value.
  • It has easily beat earnings estimates the last three quarters, estimates have gone up for FY2013 over last two months and it sells for just 8 times forward earnings.
  • ESV is below analysts' price targets. The median analysts' price target on Ensco by the 29 analysts that cover the stock is $67. Credit Suisse has an "outperform" rating and a price target of $71 on the stock.

Disclosure: I am long ESV.

Source: Deepwater Driller Ensco Has Momentum And Substantial Upside