First look at Ensco (ESV)

Morningstar’s take: Ensco’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. In contrast, Pride has one of the industry’s worst cost structures, with gross margins typically 20 points lower than Ensco’s. In addition, Pride’s administrative costs run around 7% of revenue, versus Ensco’s more svelte 3%. We think Ensco has significant cost-cutting opportunities available, which could lead to substantial value creation. We’ve already seen positive early results, as recently Ensco doubled its anticipated 2012 savings estimate to $100 million from $50 million and introduced a post-2012 target of $150 million in annual savings, made up of both capital expenditure and expense savings.


Ensco owns one of the newest jackup fleets in the contract drilling industry, which drills for oil and natural gas globally. The firm has been acquiring jackups since the early 1990s and has recently expanded its fleet to include four semisubmersibles. It has several additional semisubmersibles under construction. After the merger with Pride is completed, Ensco will own one of the industry’s largest and youngest deep-water fleets.

DIVIDEND RECORD – Ensco has been paying dividends since at least 1997.  It payed $0.03 per share for years and then jumped to $0.35 per share in 2Q 2010.


Dividend: $0.35 per quarter

Dividend yield: 2.96%

Dividend payout ratio: 49.4% ($1.40 annual DIV / $2.83 recent Google Finance EPS) or 40% ($1.40 / $3.50 average adjusted EPS)

EARNING POWER – Six year average adjusted earning power of $3.50 per share at 230.67 million shares

(earnings adjusted for changes in capitalization – Ensco has near doubled the number of shares outstanding in 2011)

                        EPS                   Net inc.             Shares               Adj EPS

2006                 $5.04                $757 M              153 M                $3.28

2007                 $6.73                $967 M              147 M                $4.19

2008                 $8.02                $1,151 M           142 M                $4.99

2009                 $5.48                $779 M              141 M                $3.38

2010                 $4.06                $580 M              141 M                $2.51

2011 E              $2.99                $613.5 M E        230.67 M           $2.66


2011 Q1            $0.45                $63.6 M             141.4 M             $0.28

2011 Q2            $0.59                $100.9 M           170.2 M             $0.44

2011 Q3            $0.88                $202.2 M           228.60 M           $0.88

2011 Q4            $1.07 E             $246.8 M E        230.67 M E        $1.07 E

Estimates for 2011 Q4 are from consensus estimate.

Six year average adjusted earnings are $3.50 per share @ 230.67 million shares

Consider contrarian buying at $28.00 (8 times average adj EPS)

Consider value buying at $42.00 (12 times average adj EPS)

Consider speculative selling at $70 (20 times average adj EPS)

Ensco is trading at 13.5 times average adjusted earnings.  This is priced for investment.

BALANCE SHEET – That is a nice look balance sheet.


Book value per share: $46.43

Price to book value ratio: 1.02 (good)

Current ratio: 1.21 latest quarter (okay; over 2.0 is good)

Quick ratio: 0.90 latest quarter (okay; over 1.0 is good)

Debt/equity ratio: 0.46 (not bad)

CONCLUSION – Ensco (ESV) looks like a well run company with a modest dividend.  It is price just barely above value territory right now at 13.5 times average adjusted earnings.  However, I think you will have your chance to buy this stock much cheaper as the world’s stock markets drop due to worldwide recession.  The sovereign debt crisis will suck up capital that could be use to fuel real economic growth.  Take a look at how Ensco performed during the Panic of 2008 to see what might happen to the stock price in the event of another recession worse than the one in 2008.  It hit a high near $80.74 in June 2008, then it dropped 69.5% down to near $24.58 in February 2009.  I believe that the world’s economic problems will drop the price of oil and Ensco down to those levels again.  Ensco would yield 5.6% if it returned to its February 2009 lows and kept its current quarterly dividend of $0.35 per share.  That is getting very close to the kind of high dividend stock I like.  Wait for this one to come to you.


DISCLOSURE – I don’t own Ensco (ESV).

P.S. I’ve written about SeaDrill before.  Check out my SeaDrill analysis here:

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Published in: on December 15, 2011 at 10:42 am  Leave a Comment  

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