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Ensco: Good Short In A Weak Rate Market

|Includes:Ensco PLC (ESV)

Ensco plc (NYSE:ESV)

Summary

  1. 2nd largest global offshore contract drilling company
  2. 2 main business segments:
  3. Floaters (63% of sales) - 10 drillships, 19 semisubs; dayrates under pressure
  4. Jackups (35% of sales) - 45 jackups; dayrates holding up for the meantime
  5. Financials:
  6. Sales: $4,920mm; EBITDA: $2,373mm (48% margin); FCF: $227mm; ROE: 12.1%
  7. Market Cap: $12,659mm; Enterprise Value: $17,235mm; Debt: $4,751mm
  8. Consensus: 2015E EV / EBITDA: 6.7x; P/E: 9.1x

Investment Thesis

Current price: $53.76; 1-year Target price: $39.00; 28% upside

Target Multiples: 2015E EV / EBITDA: 6.0x; P/E: 8.3x

  1. Deepwater contract renewals to get squeezed even further to sub $400k/d due to excess supply
  2. Newbuilds to sub $500k/d
  3. 30+ floaters expected to deliver in 2014, currently ~50% uncontracted
  4. Jackup market to experience downturn in the next 6 months due to excess supply
  5. ~35 jackups expected to be delivered in 2014, 70%+ uncontracted
  6. Market underestimating this factor in ESV's valuation
  7. Higher operating costs due to Macondo-related regulations - BOP, drill pipe etc. regulations
  8. Customer concentration - 5 customers accounted for 45% of 2013 revenues; Petrobras 17%
  9. Ex-CEO for 8 years, current chairman, Dan Rabun (age 59) has reduced his holdings by ~55% since Nov 2013; has a knack of selling at or near the peak
  10. Dividend increased 50% to $3.00 on Nov 5, 2013
  11. Announced decision to retire on 13 Nov 2013, sold 100,000 shares ~@$62.00 over the next week, stock has not touched that price since
  12. Sold ~122,000 shares ~@$52.00 between 22 May and 2 June, 2014
  13. Previously, sold 32,616 shares on 16 May, 2008 ~@$73.00, stock hit high of $80.68 on June 27, 2008 before crashing

Catalysts

  1. Below-consensus Q2/Q3 results
  2. News of falling dayrates from ESV or competitors
  3. Lack of news on rig contracts over the next ~3 months
  4. Will indicate IOC's still holding out for lower dayrates

Risks

  1. Dayrates hold up even in the face of excess supply
  2. Shipyard delays cause limited supply
  3. Geopolitical risks cause a spike in oil prices and market sentiment temporarily pushes up ESV stock

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: ESV