Ensco (IL/A): Regaining momentum following recent stock price underperformance - Goldman Sachs - September 20, 2005
After underperforming the peer group in early Sept, ESV has outperformed by 3% over the last week and momentum is likely to continue driven, in our view, given continued strength in the global jackup mkts + potential for further upward EPS revisions. We are raising our 06/07 EPS estimates for ESV to $3.40/$4.25 (~10% above consensus) from $2.91/$3.40 and our fair value to $51 (8.5x 2006E EBITDA) from $47 (9x) = +28% upside potential. ESV and RDC are both expected to derive 55% of 06E revenue from the US Gulf + N. Sea jackup markets, where the prevalence of short-term contracts provides continuous leverage to rising spot dayrates. An announcement by ESV of a newbuild deepwater rig remains a possibility. Maintain IL/A.
VALUATION.
ESV trades at 6.7x our new 2006E EBITDA, an 11% discount to the peer group and a 1% premium to closest peer RDC. On EV/DACF, ESV trades at 8.6x, a 7% discount to the peer group and an 8% discount to RDC. YTD, ESV shares are +26% vs +48% for the peer group. We have lowered our fair value multiple to 8.5x from 9x, as we continue to take a cyclical view of sector valuations, believing that returns and multiples are inversely related.
POTENTIAL FOR SIGNIFICANT EPS REVISIONS REMAINS
The magnitude of upward EPS revisions for ESV since early September has been at the low end of the peer group, as shown in Exhibit 2 below. However, our new 2006E EPS of $3.40 is 10% above consensus, and we believe the potential for further upward earnings revisions remains strong.
FOLLOWING RIG MOBILIZATIONS, ENSCO + ROWAN LEVERAGE TO US GULF IS MORE SIMILAR
Following the mobilization of 5 jackups to the Middle East, RDC is no longer the near pure play to the US Gulf jackup market it once was. For 2006, RDC is expected to generate 40% of sales from the US Gulf vs. 33% for ESV, with approximately the same number of rigs in the region. As shown in Exhibit 3, we now expect RDC and ESV to each generate approximately 55% of total revenues from the US Gulf and N. Sea jackup markets. Accordingly, the two companies have approximately the same EPS leverage to changes in dayrates, with each $5,000 increase in US Gulf and N. Sea dayrates translating to +$0.20 incremental EPS for RDC (vs. +$0.25 before the Saudi Arabia mobilizations) and +$0.19 for ESV.
KEY DRIVERS OF ESTIMATE REVISION.
Changes to 2006E EPS are driven primarily by (1) +17% increase in average US Gulf of Mexico jackup dayrates (+$0.31 positive impact) (2) +8% increase in average Europe/Africa jackup dayrates (+$0.13) and (3) +7% increase in average Asia Pacific jackup dayrates (+$0.06). Our changes to 2007E EPS were driven by increased dayrate assumptions across all regions, especially the US Gulf (+24%) and the North Sea (+13%).
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Jason Gilbert; Terry Darling.
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ENSCO (IL/A): Jackup market shifting into higher gear Goldman Sachs July 26, 2005
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