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You Should be Picking up What First Pacific Advisors Drops

April 24, 2014 | About:
The offshore segment for the oil & gas industry suffered a great activity slowdown after the Deepwater Horizon incident. A fear for inadequate safety measures and changing government regulation, scared investors away while putting several businesses on the brink of bankruptcy. Of course the consequences had different impacts over the companies involved. British Petroleum (BP), the platform operator, paid a bigger price than Transocean (RIG), the equipment provider, in the market. Differences aside, the incident negatively affected the whole industry. And the most noticeable indicator was a steep drop on stock face value. However, a stiffer consequence was a lesser interest on the industry from potential investors. As those fear dissipate, Ensco (ESV) appears as an interesting prospect investment. Let us see why.

New business strategy and repercussions

The business strategy laid out by Ensco for the upcoming years entails a renewal of several key equipment. Evidence of the ongoing plan can be found on the sale of two jackup rigs, built in 1976 and said to be worth $33 million. “This sale is part of Ensco’s ongoing strategy of high-grading our fleet by divesting older, less-capable assets and reinvesting in advanced-technology rigs,” Executive Vice President and Chief Financial Officer Jay Swent said. The net gain reported for the transaction, which will be included in the report for 2014, is close to $24 million, adding to the 13 rigs already sold.



Selling old rigs, however, is one side of the equation. Ensco is also purchasing replacement for the equipment sold. Half way through April, has ordered two high-specification jackups. The new jackups will include design specifications necessary to fully comply with the vast majority of regulatory and customer requirements in the Middle East, the primary target market for ENSCO 140 and ENSCO 141. Integrated technology will improve operational costs for clients, while at the same time improving safety nets.

Another important good news for potential investors is Ensco’s rewarding plan. The company continues to increment quarterly dividend payments. With the latest increment of $0.25, cash dividend reached $0.75 per share, representing an annual yield of 4.99%. Most importantly, stock face value entered a declining trend, closing in to the 52-weel low. However, financial institutions have not recommended selling the stock, although target price has been adjusted around the current face value.

Successful strategy continued

When looking at Ensco’s performance throughout 2013, overall improvements are evident. Revenues, net income, diluted earnings per share, and total assets have greatly offset the small decline on cash flow from continuing operations when compared year-over-year. Part of these results are a direct consequence of the company’s strive for zero incidents, allowing to reach on 2013 lowest-ever total recordable incident rate. A policy that management has made clear it will continue in 2014, with the goal of lowering the industry safety metric of 0.39 recorded for 2013.

When looking ahead, Ensco holds a high quality fleet, manageable replacement program and impressive execution to benefit from the recent strength in the offshore market. Most important, international presence has spanned across the fastest growing markets of the world, including Southeast Asia and West Africa. Additional upsides to a long-term investment on the firm are financial discipline and organically developed asset base. On the opposite, downtime has been the greatest challenge to operations, but as mentioned before, the issue continues to addressed and improving.

Currently trading at 8.2 times its trailing earnings, Ensco trades with a 30% discount to the industry average. The company however, scores above industry average for most performance indicators. Also, when looking at Peter Lynch’s earnings line, another argument for timely purchase is added. And, FPA Capital Fund (Trades, Portfolio), the largest shareholder has resumed his optimistic long-term position with new purchases. Hence, the company is a recommended for investors looking into avoiding the risks associated with short selling.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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