Morningstar:
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
...
Valuation
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
$113.
...
