Ensco (ESV)

Discussion in 'Stocks' started by aresky, Apr 30, 2008.

  1. aresky


  2. aresky


    Thesis 04-28-08
    Ensco International's strategy is a breath of fresh air in a
    contract drilling industry where differentiation is hard to
    come by. Its cost-efficient approach results in
    industry-leading operating margins and strong short-term
    returns. ...nsco International is a global contract oil and natural-gas
    driller with a fleet of 46 mostly premium jack-ups and a
    small but growing semisubmersible fleet. Strategically,
    we think the firm is among the savviest in the industry for
    several reasons. First, it astutely acquired most of its fleet
    at depressed prices from 1993 to 2002. Second, the firm
    had the foresight to engage in a risky $1.3 billion 10-year
    fleet upgrade program beginning in 1996, when few
    expected the current lucrative boom. The program has
    given Ensco one of the industry's youngest fleets at an
    average age of seven years--a third of the industry
    average. Ensco had near-perfect timing, with demand for
    offshore drilling rising due to higher commodity prices and
    large discoveries offshore. Although the company now
    benefits from minimal downtime, its peers are facing
    increased repair costs and lengthy downtimes, resulting in
    painful lost opportunity costs because day rates are
    significantly higher than just a few years ago. Third, the
    firm is building cost-efficient deep-water rigs by focusing
    on meeting mass-market drilling requirements rather than
    addressing the ultra-deep-water market with its
    specialized and expensive equipment. This segmentation
    allows the firm to build rigs 30% to 45% cheaper than its
    peers while still achieving competitive day rates. In our
    view, Ensco only needs to continue to execute its
    successful strategy, which should lead to improved day
    rates and fleet utilization in the next few years

    We are raising our fair value estimate to $85 per share
    from $70. We are not seeing any evidence of a slowdown
    in demand for deep-water rigs. As a result, we expect
    Ensco's deep-water rigs to generate higher day rates and
    operating margins than previously thought. Over the next
    few years, we expect day rates to expand because of
    higher newly contracted rates and old contracts expiring,
    letting the firm obtain much higher market rates.
    Utilization levels should also increase until about 2009
    because of less downtime incurred due to the upgrade
    program. However, we expect significant declines in both
    utilization and day rates from 2010 to 2012 when the first
    of the most-likely delayed jack-ups will be arriving in the
    market. Our fair value estimate is sensitive to our
    long-term day rate assumption. A 20% decline in our
    long-term day rate assumption would decrease our fair
    value estimate to $57, whereas a 20% boost in our day
    rate assumption would boost our fair value estimate to