Ensco International - Possible Upside

Ensco International research report

Ensco's margins and returns on capital compare favorably to most of its peers.
The company has ~$3.4B backlog for FY 2008 and beyond, including $1.5B for deepwater rigs and nearly $2B for its jackup fleet.
They have generated considerable free cash flow the last 2 years despite heavy expenditure with 4 deepwater rigs under construction. If rates hold up, this FCF trend should continue.
Their recently completed $1.3B jackup enhancement program gives Ensco one of the premier jackup fleets in the business with an average rig life of 7 years (compared to 25 yr industry avg). This should lead to less shipyard days and enhanced marketability. If rigs are being stacked up, the premium quality of Ensco's fleet will compare favorable to others (for example, all but one of the jackup rigs are equipped with cantilevers).
Ensco operates on a "day rate" contract basis only. The company does not work on a turnkey basis, in which the drillers are exposed to the risk of delays and cost overruns.
Recently began work for PEMEX, which offers another avenue for idling Gulf of Mexico (GOM) rigs in case that market weakens further.
The company's unique deepwater rig specifications allow it to build new units at lower cost than competitors and with lower operating expense. For instance, their ENSCO 8500 series are non-self-propelled, meaning they need to be towed from and to locations. While this may seem inconvenient, it removes the need for mandatory shipping crews, thus reducing labor costs.
Good visibility for future demand due to new leases available in North Sea, Brazil and Gulf of Mexico. Additionally, demand is strong in Asian and Saudi Arabia markets.
75% of the international fleet is contracted out with cost adjustment provisions allowing Ensco to recover increased operating expense.
Only 40-45 shipyard days anticipated for routine maintenance in 2008.
Transocean/GlobalSantaFe merger may put pressure on other deepwater drillers, leading to further industry consolidation. At some point, it may be cheaper for a company looking to expand their fleet to buyout a competitor rather than wait 3 years per rig construction.
Very little debt on the balance sheet. Ensco finances their capex mainly through operating cash.
Majority of operations and revenue is outside the US. For the 9 months 2007 period, only 25% of revenues were from operations in the Americas.

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The Enlightened American

Ensco International - Possible Upside