ENSCO PLC (NYSE:ESV) --- How the BP Leak Affects This Offshore Driller

Ensco (NYSE:ESV), the Dallas-based offshore drilling company, has taken a hit in its share price, both alongside BP and with the new moratorium on deep-water drilling in the Gulf of Mexico. Fortunately, Chris Mayer, editor of Agora Financial’s Capital & Crisis newsletter, is looking ahead with his analysis to see what we may be able to expect from Ensco in the future.

From Mayer’s recent update:

“Suffice it say, this affects a bunch of companies operating in the Gulf — in particular the offshore drillers. They won’t die, because there is a vibrant global market for their services overseas, in places like West Africa, Brazil and Australasia. But business won’t be as good as it was, at least for a while as the market adjusts.

“Ensco (NYSE:ESV), for example, is a top-notch outfit, thoughtfully run and very profitable. It recently moved to Geneva to lessen the tax impact of having so many dollars coming in the door. It’s also in the process of picking up some cheap new rigs through an acquisition. The price Ensco is paying comes to about $170 million a rig. This is less than the $200 million or so of the replacement value of the rigs (which are new high-quality rigs and worthy additions to Ensco’s fleet). Although given the fact that Ensco’s own stock trades at a 50%-plus discount to replacement value, one might wish that Ensco bought its own stock instead.

“In any event, Ensco joins a handful of deep-water drillers with varying exposures to the Gulf. Ensco has three deep-water rigs in the Gulf, but they generate quite a bit of revenue. And a good part of the backlog is in the Gulf as well. Worse-case scenario — Ensco’s customers successfully invoke force majuere, allowing them to slip out of existing contracts. That would shave maybe 20% off Ensco’s earnings, assuming the rigs go completely idle. This is not likely. Ensco is still so cheap that a 20% haircut in earnings doesn’t change its merit.

“It will have a bigger impact in 2011. Most expected Ensco to earn north of $6 per share in 2011. Now we can expect a 30% hit or so and see earnings of $4 per share, give or take 50 cents, next year.”

As Chris Mayer points out, Ensco still has world-class assets to support its robust net asset value. It also continues to offer a decent dividend of $1.40 per share. He’s going to study the ongoing uncertainty and will explain how he sees things developing for readers of Capital & Crisis.

You can visit the Agora Financial research page to learn more about his newsletter and to sign up for his most up-to-date insights.

Lastly, don’t forget that Mayer will be speaking live, in person, at the Agora Financial Investment Symposium in Vancouver. You can register for the July event here.


Rocky Vega,
The Daily Reckoning

[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]