Consolidation Likely Amongst Oil Drillers – Bargains Available in the Sector
Transocean (RIG) is up almost 7% today on the news that Norway’s John Fredriksen who is the billionaire owner of Seadrill Ltd is interested in purchasing the company.
I’ve been looking at this sector closely since the BP spill in April. And my favorite investment opportunity is not Transocean, but rather Ensco (ESV). Ensco has an unbelievable balance sheet and rapid growth ahead as it receives delivery of Ultra-Deepwater rigs that it ordered years ago and which are largely paid for. Here was my original article on Ensco:
Fredriksen was quoted as saying “We’re looking at everything that is reasonable…Transocean is reasonable these days. We’re looking at companies that are cheap and that have good equipment.”
Transocean actually wouldn’t even be my second favorite company in the sector. Diamond Offshore which is run by the Tisch family through Loews is an exceptionally well managed company and is also priced attractively. At $60 a share Diamond has not had much of a rebound since early July even though it becomes more apparent every day that drilling is going to continue in the Gulf of Mexico. I also wrote earlier about Diamond Offshore, although I would recommend Ensco first given the strength of balance sheet:
Both Ensco and Diamond are free of any potential liabilities that Transocean may have related to the BP spill. Both are well managed, have good balance sheets, pay a nice dividend and intelligently buy back stock. The large oil discoveries of the future which the world is going to badly need will be in the deeper waters and more remote places in the world. Therefore demand for and rates paid for the rigs that these companies supply will only increase. BP has given us a chance to buy this future growth at extremely depressed prices.
Noted value investor David Einhorn of Greenlight Capital took a fairly large position in Ensco in Q2 and had this to say in his quarterly letter:
“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.”
Perhaps the most intelligent way to play this is to buy a basket of these companies as they almost all look attractive. With consolidation seemingly likely, you could get a quick premium on a buyout for a couple of them.
For other investment ideas: