Ensco: Attractive, For the Patient

Includes: BP, DO, ESV, HAWKQ, NBL, RIG
by: Devon Shire

I've been attracted to the carnage in the offshore oil industry brought on by the BP disaster and the recent stock market decline.

I'm interested in Ensco (NYSE:ESV) and have initiated a small position.

I'll run the numbers quickly to show why I'm interested and then follow up later with more detail.

Current market cap is $5.6 bil (this is at $40 per share).

Average cash flow from ops over the past 3 years is $1.2bil (this actually won't decrease going forward as new high rate ultra deepwater rigs have been added to the fleet and aren't picked up in much of this number).

Maintenance capex is $200mil (vast majority of recent capex has related to building out ultra deepwater fleet).

Free cash flow is therefore $1.2bil - $200mil = $1bil.

$1bil of free cash flow / $5.6bil mkt cap = 17.85% free cash flow yield

However this ignores the fact that Ensco has $1bil of net cash on it's balance sheet.

So enterprise value is actually $5.6bil - $1bil = $4.6bil

Free cash flow yield on enterprice value is $1bil / $4.6bil = 21% plus.

Some other considerations:

1) Drilling Moratorium

Ensco fleet is

8 jackups in the GOM (these service less than 500 feet so not subject to moratorium issues)
3 Deepwater semis (these could be impacted by moratorium)
5 Mexico jackups
8 Europe jackups
2 Mediterrean jackups
8 Middle East and India jackups
8 Asia Pacific jackups
1 Asia Pacific Deepwater Semi
1 Asia Pacific Barge Rig
4 Deepwater semis under construction

So the 3 deepwater semis could have issues once their contracts expire, but can be moved elsewhere in the world.

Be sure to note that there are 4 additional deepwater rigs coming on in the next few years. These will have the most modern safety measures, will attract very high rates, and will add to the cash flow figure I've used in this analysis.

2) Shareholder friendly

Current dividend yield of 3.5%

Repurchaser of shares

3) Recently moved to the UK

Will lower effective tax rate to 17% which is not modelled in my cash flow figures

I started in at $35 and was hoping for continued selling. I think it is still a very attractive buy and will add to my position if it sells down again. I'm determined to be patient.

Disclosure: Long starter position in Ensco

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