Ensco Intl (IL/A): Raising estimates and fair value to $66 - Goldman sachs - April 25, 2006
We have raised our 2007E EPS for Ensco (ESV) to $7.35 from $7.16 driven primarily by reduced tax rate and non-operating items. We continue to believe that international jackup markets are poised for the next "leg up" in pricing, and ESV should benefit from significant N. Sea and SE Asia exposure. In the N. Sea, ESV has $0.05 2007E EPS leverage to every $5k change in rates, which we believe are poised to move through $200k for 2007 jobs vs. approximately $170k assumed by consensus. We also lowered our 2006E EPS to $5.16 from $5.24 based on higher expense assumptions, and are introducing 2008E EPS of $8.75. We are raising our fair value to $66 (7.5x 2007E DACF) from $61 (18% upside). The key read across to other companies is that ESV is the second driller to guide towards higher than expected operating costs in 2006 due to labor and insurance inflation. Maintain IL/A.
VALUATION On 2007E EV/DACF, ESV currently trades at 6.6x, a 13% discount to the peer group vs. a 9% historical upcycle premium. While we believe that Ensco merits some discount given its below-average deepwater exposure, we believe that the current discount is greater than is deserved. For instance, compared to closest peer Rowan (RDC), ESV trades at a 9% discount. We have increased our fair value to $66 from $61, driven in part by an increase in our fair value multiple to 7.5x 2007E EV/DACF from 7.0x based on our belief that international jackup exposure deserves a slight multiple premium to domestic. ESV YTD performance of +27% is in-line with its peer group.
1Q06 RESULTS EXCEEDED STREET EXPECTATIONS Net of an insurance gain, Ensco "clean" 1Q06 EPS of $0.94 was above consensus $0.89 and below our Street-high $1.03. Ensco's realized average jackup dayrate of $103k was 3% below our estimated $106k, and utilization of 90% was essentially in-line with our estimates. Despite the shortfall relative to our own estimates, we view this as a clean beat of Street expectations for ESV, which has not missed consensus since 1999. See Exhibit 2.
WHAT TO WATCH FOR
(1) Drilling expense expected to increase 20%-22% Y/Y driven by higher utilization and increased labor, insurance and other costs.
(2) SG&A to remain flat at Q1 levels; depreciation is projected to increase by $1.5mm per quarter.
(3) Tax rate at approx 27%.
(4) 2006 capex guidance unchanged at $462mm, roughly $85mm of which is on enhancement projects, $60mm on maintenance and the remainder on newbuilds.
(4) Potential to move at least 1 incremental jackup out of the US Gulf in 2006.
(5) Potential for additional deepwater newbuilds.
(6) Continued share repurchase under $500mm authorization, of which roughly $490mm is still outstanding.
IMPLICATIONS FOR THE INDUSTRY
(1) Mgt believes eight additional jackups could depart from GOM over the coming months.
(2) In 2007, a shortage of 5-7 jackups is expected in the N. Sea, 2-3 expected in W. Africa, 20-30 rigs in the Middle East, and approx. 9 expected in S.E. Asia.
(3) Mgt's estimate of 2006 leading-edge rates for N. Sea jackups at mid to high $160s is below 2007 bid rates at approx. $200k.
(4) In the face of a tight supply in the GOM, mgt sees additional pressure from operators in the region on securing longer term fixtures.
(5) Delay of equipment delivery and cost overruns are expected to some degree due to capacity constraints.
WE HAVE LOWERED OUR 2006E EPS TO $5.16 FROM $5.24 ON HIGHER EXPENSE ASSUMPTIONS Key drivers for the reduction of 2006E EPS include: (1) increased contract drilling expenses (-$0.20); (2) increased S,G&A and depreciation (-$0.04); and offset by (3) lower net interest expense/higher capitalized interest (+$0.07); (4) reduced tax rate (+$0.07); and (5) reduced share count assumption (+$0.01). See Exhibit 1.
WE HAVE RAISED OUR 2007E EPS TO $7.35 FROM $7.16 ON HIGHER NON-OPERATING ITEMS Key drivers for the increase in 2007E EPS include: (1) lower net interest expense/higher capitalized interest (+$0.14); (2) reduced tax rate (+$0.10); (3) reduced share count assumption (+$0.01); and offset by (4) increased S,G&A and depreciation (-$0.05); and (5) increased contract drilling expense assumptions (-$0.01). See Exhibit 1.
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, Daniel Henriques.
============
Ensco Intl (IL/A): First Take - Clean beat of consensus expectations April 25, 2006
Net of an insurance gain, Ensco (ESV) "clean" 1Q06 EPS of $0.94 was above consensus $0.89 and below our street-high $1.03. Ensco's realized average jackup dayrate of $103k was 3% below our estimated $106k, and utilization of 90% was essentially in-line with our estimates. Despite the shortfall relative to our own estimates, we view this as a clean beat of street expectations for ESV, which has not missed consensus expectations since 1999. Contract renewals in the global jackup rig drilling market over the past few weeks confirm our view that dayrates are continuing to rise faster than consensus assumes, and we see upside to consensus estimates. ESV and THE (IL/A) remain our favorite jackup names. Maintain IL/A and $61 fair value.
KEY TOPICS FOR THE CALL INCLUDE:
(1) Uses of excess cash.
(2) Potential for additional rig movements outside the US Gulf.
(3) Update on spot dayrates in the US Gulf and international jackup markets.
(4) Outlook for standard N. Sea jackup dayrates.
(5) Outlook for offshore operating cost inflation, particularly insurance.
CONFERENCE CALL INFORMATION: Today, Tuesday, April 24 at 11am. Dial-in (719) 457-2727.
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, Daniel Henriques. |
