Dain on ESV:
ESV:SB-Avg;ENSCO INTERNATIONAL REPORTS STRONGER-THAN-EXPECTED 4Q00 RESULTS
Operating earnings were in line with our expectations. The reported
result of $0.31 beat our estimate due to a one-time insurance settlement that
added approximately $0.02 to the quarter. Higher utilization accounted for
the remainder of the increased earnings.
We had anticipated much of the recovery in the GOM... ESV operates 22
jackups in the GOM. ESV's GOM jackups saw dayrates increase approximately
$6,500 in Q4, which is in line with our expectations. Dayrates are continuing
to strengthen in Q1, with new fixtures for 250 feet ILC's in the upper
$40,000 range, the upper $50,000's for 300 feet ILC's and the mid-$50,000's
to mid-$60,000's for 350 feet and 400 feet rigs. Additionally, the quarter
benefited from approximately 25 days of the new semisubmersible ENSCO 7500.
Dayrates for PSV's and AHTS also improved during the quarter. New work for
standard PSV's is in the $6,500-$7,500 per day range. The stretched PSV's are
commanding rates of $7,900 to $8,500 per day and the next one due out in
March should command a rate near $9,000 per day. The AHTS market is similarly
strong.
...but the North Sea is recovering faster and harder than we had
anticipated. ESV operates a fleet of eight jackups in the North Sea,
including two harsh environment rigs. The Company recently purchased a 25%
interest in a harsh environment jackup currently under construction and due
out early 2002. We believe the North Sea is a likely market for this rig.
We had expected a seasonal slowdown in winter in the North Sea to put
pressure on new fixtures in the short term. A major recovery was anticipated
in spring as the work program filled out. We had assumed that standard
jackups could see dayrates in the low $70,000 range by late year as the
market appeared undersupplied. Recent fixtures indicate that operators have
begun to notice the mid-year rig shortage and are currently bidding up
equipment. ESV received a contract on the ENSCO 80 for approximately $65,000
per day, which is comparable to recent fixtures in Holland in late December
and much greater than the $50,000s in the United Kingdom. The harsh
environment ENSCO 101 (in the shipyard for leg repairs) recently received a
contract at approximately $100,000, where similar rigs have been working at
standard jackup rates. While the ENSCO 100 is committed at a lower rate (in
the low $40,000 range), it is an old fixture for work that a standard jackup
could do.
The North Sea jackup market has five to six less rigs than at the peak of
1997-1998 as many rigs left the region for more lucrative markets. Inquiries
are robust. Shell apparently is looking for as many as five additional
jackups. There are only four jackups idle, all are currently in the shipyard
and one has not worked since late 1998. Standard jackups moved into the high
$90,000 range last cycle when the shortage hit, and commodity prices were not
this high. Many of the rigs qualified to work in the North Sea are commanding
attractive cash flows in other markets. As a result, it will take much higher
cash flow potentials to bring them back. With fewer rigs and a looming
shortage across the Atlantic basin, the chance to hit or exceed the rates of
last cycle appears good. Each incremental $10,000 of average dayrates in the
North Sea adds $0.14 to ESV's annual EPS.
Other international markets have yet to see the same supply concerns.
ESV operates rigs in Venezuela, the Middle East, and Southeast Asia. While
there are early signs that PDVSA (Venezuela's state oil company) is beginning
to increase its budget, ESV does not expect a material upturn for its barge
rigs in that market until the second half. Three of its nine units are
currently working. ESV's seven jackups in Southeast Asia and the Middle East
are seeing signs of firming demand, but again, it appears that the real
leverage is likely to be later this year. The 300 foot ILC ENSCO 52 in
Southeast Asia is expected to be down for much of early 2001.
ESV has a large upgrade program planned for 2001 with a capital budget
of $125 million earmarked for enhancing the capabilities of a number of its
rigs. This will cause slightly more downtime in the fleet than we had
previously estimated in 2001. These upgrades account for most of our $0.05
decrease to our 2001 estimate but have added most of the $0.10 increase to
our 2002 forecast.
The balance sheet remains pristine with debt/total cap at a
conservative 20%. We believe ESV is well positioned to continue to grow its
earnings power through acquisitions, upgrades and select newbuilds.
Stock Opinion
During the last cycle (1996 through early 1998), most of the offshore
drillers traded to 7.5x replacement cycle EBITDA as the global shortage of
drilling equipment became apparent to investors. We believe the shortage
could be worse this time around due to tighter commodity markets. With the
West African, GOM, and North Sea jackup markets all apparently headed to full
capacity this year, we believe investors will once again begin to discount
replacement economics in the valuations of these companies. Due to a
predominantly short-term contract structure, we believe ESV is one of the
companies best positioned to demonstrate the earnings leverage as dayrates
reflect the market tightness. Our replacement cycle EBITDA estimate for ESV
is $1037.1 million, equating to a potential value of $54 for the stock. This
is equivalent about 16x estimated 2002 EPS, and our 2002 EPS is still a ways
from replacement levels.
Company Description
ESV is one of the world's largest jackup drilling contractors, with a fleet
of 37 jackups in the GOM, North Sea, Middle East and Southeast Asia. The
Company also has a fleet of nine barge rigs in Venezuela, seven platform
drilling rigs, one deepwater semisubmersible and a large fleet of PSV's and
AHTS's supporting offshore operations. |
