Ensco (IL/A): Jackup market shifting into higher gear
Goldman Sachs July 26, 2005
We are raising our 2006 EPS estimate for ESV to $2.91 from $2.85 on continued strength in global jackup rig rates. ESV 102 was contracted in the $150s vs. our previous estimate of $102k = a new high rate for this class. In W. Africa, ESV 100 is expected to recontract at $120k/day vs. our $85k previous estimate. Given the arb between US Gulf ($80k/ day) and foreign ($100+k/ day) jackup rates, we think another uptick in US Gulf jackup rates above expectations is likely near-term given outlook for more supply to leave the region. This could be a near-term catalyst for RDC, ESV, THE, NE, GSF, DO. We continue to prefer deepwater exposure, but more positive near-term news flow makes the jackup-oriented stocks - RDC, ESV + THE - attractive trading opportunities, in our view. We maintain our IL/A rating on ESV, but are bumping our fair value to $47 (9x 2006E EBITDA) from $45 = +20% potential.
JACKUP DRILLERS MAY HAVE SHORT-TERM CATALYSTS
While we continue to believe that the deepwater drillers offer superior long term returns, we believe that near-term news flow in the shallow water drillers has the potential to be more robust. Imminently, we expect near-term announcements from Rowan and/or Ensco with respect to movement of premium jackups out of the US Gulf to higher dayrates in foreign markets. As shown in Exhibit 1 below, the deepwater-focused names have significantly higher contract coverage than either the hybrid or shallow water-focused names. Although we believe that operators are concerned about rig availability in 2007 and beyond, we think the torrid pace of new contract announcements for deepwater may slow slightly in the near term merely as a function of lack of rig availability. As investors begin to look out to 2007 in six to nine months, however, the level of unbooked rig time (and potential estimate revisions and news flow) will likely even out again and the level of jackup newbuilding-there are now 37 jackups on order versus 6 semisubmersibles-will likely become a greater potential risk. For this reason, we view the earnings stream of jackup rigs as deserving of lower multiples relative to deepwater at this point in the cycle, and our fair value estimates assume 8.3x 2006E EV/EBITDA on average for RDC, ESV and THE versus 10.8x for DO and RIG. This does not mean that strong earnings estimate revisions cannot drive the jackup stocks higher. In fact, this is exactly what we expect will occur over the next three to nine months. Supply leaving the US Gulf jackup mkt should drive rates higher again After leading the charge in 2004, US Gulf dayrate increases have lagged those of most international markets, especially the North Sea and West Africa, during 2005. Dayrate spreads between the US Gulf and the North Sea/West Africa markets have accordingly widened, as shown in Exhibits 2 and 3 below. We believe that the current spreads of roughly $25k/day are sufficient to support mobilizations with six- to nine-month payback horizons, suggesting one or two things will occur: (1) Ensco, Rowan, and others will move premium jackups out of the US Gulf and/or (2) US Gulf jackup dayrates will rise to a point that the arbitrage opportunity between markets is extinguished. The current top 350'C jackup dayrate in the US Gulf is just under $90k, with the leading edge bid rate in the mid $90s. We believe these dayrates will have to move to the $100k mark, bullish for all US Gulf jackup players, especially THE (+$0.37 EPS leverage for every $5,000 increase in jackup dayrates), RDC (+0.22 leverage) and ESV (+$0.15).
I, Terry Darling, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. |
