Ensco plc (NYSE:ESV) — One Very Unpopular Energy Stock
Ensco (NYSE:ESV), the Dallas-based offshore drilling company, has been beaten down because of the BP oil spill in the Gulf. There could be an opportunity to pick it up at a discount thanks to its current lack of appeal. Here to explain the offshore energy landscape is Chris Mayer, editor of the Capital & Crisis newsletter.
From Mayer’s latest update:
“Another cheap energy stock to think about is Ensco (NYSE:ESV), which has been battered because of the Gulf oil spill. This is another high-quality business facing a weak near-term environment.
“Ensco is mostly a shallow-water driller. However, in recent years, it expanded its deep-water drilling dramatically. In the first quarter of 2010, deep-water operations accounted for about 40% of operating income for the quarter.
“Ensco is another business that has had great results and gushed cash. This next table, prepared by the folks who produce The Manual of Ideas, gives you a look at the history:
“Check out that free cash flow line. More than a billion dollars in free cash flow in each of the last three years for a stock that currently has a market cap of $5.4 billion. That’s cheap.
“The expansion capex line shows investments the company made. Most of the dollars have gone toward deep-water rigs, which are only now starting to earn cash.
“But the market worries about Ensco’s Gulf exposure. This table, also from The Manual of Ideas, which favorably reviewed Ensco recently, shows you Ensco’s Gulf exposure:
“The semi-submersibles are deep-water rigs. The jack-ups are shallow-water rigs. All told, Ensco earns about $1 billion a day in sales from the Gulf, or about 18% of total revenues.
“Here is a quote from The Manual of Ideas’ research team:
‘Under a worst-case scenario for deep water, the force majeure clauses in Ensco’s contracts may be activated and the company may lose the anticipated revenues from Ensco 8500, 8501 and 8502. However, the company’s extensive global operations make it highly probable that these rigs will be redeployed elsewhere within a reasonable time frame. In a recent conference call, Ensco chairman and CEO Dan Rabun stated that the Ensco 8500 series is perfect for Brazil, Gulf of Mexico and West Africa and Asia. Furthermore, since most contracts call for Ensco’s customers to pay mobilization costs for rigs, it is possible that the rigs could be redeployed elsewhere without Ensco paying for substantial transportation costs.'”
Chris Mayer mentions it’s easy to pay too much for an optimistic consensus opinion, while a good bargain is harder to find. At the right price, Ensco, along with along with several other select stocks, could prove to be good investments in the year ahead. You can visit the Agora Financial research page to learn more about his specific recommendations for readers of Capital & Crisis.
Lastly, keep in mind Mayer will be speaking in person live at the Agora Financial Investment Symposium in Vancouver. You can register for the upcoming late-July event here.
[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.]