I’ve also looked at Diamond Offshore recently and there is a fairly large valuation gap between the two companies. Here are the numbers:
Diamond Offshore - Cash flow after maintenance capex $1.1bil.
Ensco – Cash flow after maintenance capex $1bil
Diamond Offshore Enterprise Value - $9bil
Ensco Enterprise Value - $4.6bil
That is a pretty striking difference. Cash flow from each business is roughly the same. But Ensco is basically half as expensive as Diamond Offshore.
And interestingly Ensco is sitting with $900 million dollars of net cash on it’s balance sheet while Diamond Offshore has net debt of rougly $700mil.
I’m not saying Diamond Offshore is expensive, but rather that Ensco is exceptionally cheap especially given that it has a much better balance sheet.
Here is what David Einhorn said recently in his quarterly letter about his new position in Ensco:
“ Ensco plc (ESV) in an offshore contract oil drilling company operating a large fleet of shallow-water jack-up rigs and a small but new fleet of deep water rigs. The Deepwater Horizon oil spill and resulting 6month drilling moratorium in the Gulf of Mexico caused significant share price declines throughout the sector. ESV was not involved in the horrible accident, which should not materially impact the company’s long-term potential. ESV has approximately $7 per share in net cash and a tangible book value of $37.50 per share. The shallow water drilling business, which is unaffected by the drilling moratorium, generates $4.00 per share in en-levered mid-cycle earnings and $8.00 per share in peak earnings. At the Partnership’s average cost of $39.41 per share, we appear to be getting the shallow water fleet at a low value and the deepwater fleet (in which ESV has thus far invested over $15 per share to build and should add $2.00 and $4.00 to mid-cycle and peak EPS respectively) for free. ESV shares ended the quarter at $39.28 each.”
With the BP Macondo well now seemingly under control the fog may be starting to clear from around Ensco, Diamond Offshore and other drilling related companies. Friday the House of Representatives voted in favor of ending the drilling moratorium. And the signs of the oil spill in the Gulf of Mexico are already disappearing. The world and the United States in particular will need as much oil as possible over the next ten years. The rigs of Ensco and Diamond Offshore are going to be in great demand as we push forward into the Deepwater as one of the last sources of new oil. With Ensco’s balance sheet there doesn’t seem to be much risk at a $40 stock price and there certainly seems to be a great deal of upside.