Ensco International - Assessment
- Ensco International research report written 11/13/2007
- Risk Detail
- Possible Upside
- Competitor Review
- Valuation and Assessment
- Management & Performance Targets
** Incomplete: Daniel Rabun, CEO:
Rabun took over the helm recently from co-founder Larry Thorne earlier this year. Rabun is a lawyer and officially joined the firm not so long ago in 2006, though he did serve as outside counsel for 15 years. I expect Rabun to rely on his operations team to continue Ensco's pattern of solid margins, high returns and general excellence. The company is in the process of porting their cost-efficient shallow water strategy to the deepwater market. Rabun will be expected to execute successfully.
** Past Performance: B
Ensco has delivered positive net income and operating cash flow for each of the last 10 years, including the brutal downturn in the late 90s. Historically, the company has delivered high margins and for the last few years, considerable free cash flow. The company has developed a reputation for efficiency.
Risked Outcome Probabilities
- Doubles to $110: 5%
- Oil majors ramp up exploration in response to peak oil, market absorbs new rig supply and then some.
- 2.76
- Reaches our intrinsic valuation to $84: 27%
- Market absorbs new rig supply, GOM stabilizes, new leasehold exploration in GOM, Brazil, North Sea, Asian demand continues strong
- 7.86
- Appreciates to ~$69: 25
- Drilling market plateaus, company marginally increases or maintains OCF and hits capex, GOM stays weak
- 3.46
- Floats around entry price: 15% (due to opportunity cost, time loss of money, we penalize a flat result)
- North Sea market starts to slip, GOM still weak, dayrates decrease marginally or flatten, costs start to rise at increased pace
- -0.81
- Drops by 20% to $44: 15%
- Dayrates start to roll over in most regions, some new markets don't come off (Saudi Arabia, Pemex, etc.), companies prefer higher-tech deepwater rigs over ENSCO 8500 cost-efficient rigs
- -1.64
- Slides 40% to $33: 10%
- Global recession, oil price sustained decline, exploration companies cut drill spending, jackup rigs stacked in all regions
- -2.19
- Goes to zero - 3%
- Fiscal disaster and fraud
- -1.65
Total Score: 3.47
Certainty Rating: A-
As my risk projections show, Ensco's top-class operational performance and cheap valuation combined with a secular bull market for energy makes this investment very attractive.
My main concern is still the US currency. While the company is levered to the price of oil, I'm a bit concerned that ESV may leave us too exposed to the US dollar. However, a study of the 1970s showed that oil-service companies did just as well (if not better) than the oils themselves in a period of high inflation.
- Performance Measurements:
- Maintain or increase OCF/FCF levels.
- Keep timeline on the ENSCO 8500 rigs: E8500 in 2Q 08, E8501 in 1Q 09, 8502 in 4Q 09, E8503 in 3Q 10
- Generate top+bottom line growth of at least 10%.
- Continue growing backlog YOY.
- Keep expenses in check (contract drilling expense in 4Q 07 expected @ +1%)
- Continue entry into new markets (Pemex, Saudi Arabia, Tunisia)
- Keep shipyard days to minimum (~45 days expected in 08)
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