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Gold/Mining/Energy : Ensco International Inc. (ESV) -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (1935)	2/25/2006 9:38:13 AM
From: Dennis Roth	Read Replies (1) \| Respond to of 2005

Ensco International (IL/A): Attractive valuation and upside to estimates - Goldman Sachs - February 24, 2006 We are raising our 2006/07 EPS to $5.01/$6.70 from $4.38/$5.40 based on higher jackup dayrate and utilization assumptions. Ensco is a prime beneficiary (2nd most leverage in the group) of surging dayrates in key foreign markets, particularly S.E. Asia (26% of 2007 revenue; +$0.08 EPS per $5k dayrate increase) and the N. Sea (18%; +$0.06). Recent leading edge dayrates announced by GSF, including a 300' standard N. Sea jackup at $220/day vs. our model avg at ~$170k and a 300' S.E. Asia jackup at $195k vs. our $160k - combined with ESV's ~30% contract coverage in 2007 - suggests upside potential to our revised ests. Furthermore, even on estimates that we view to be conservative, ESV's relative valuation has increasingly become attractive at an 18% discount. Our fair value of $60 (5.5x 2007E EBITDA) implies 32% upside. Maintain IL/A. Valuation On 2007E EV/EBITDA, ESV currently trades at 4.4x, an 18% discount to the peer group. While we believe that Ensco merits some discount to the mean given its below-average deepwater exposure, we believe that the current discount is greater than is deserved. YTD, ESV shares are +2% versus +8% for the peer group. 4Q05 results ahead of expectations Ensco recurring 4Q05 EPS of $0.67 was above our $0.54 estimate and consensus $0.59 with contract drilling revenues/EBITDA 13%/11% above our estimates (+$0.09 EPS variance). Tax rate was lower than expected (+$0.04) with depreciation and S,G&A expense essentially in line. Ensco's average 4Q jackup utilization of 87% and dayrate of $85.8k were 5% and 8%, respectively, above our estimates. What to watch for: (1) 2006 general cost increases expected to be in the 5% range, significantly below the 10+% cost increases estimated by peers. (2) Tax rate at approx. 28% in 2006. (3) Capex guidance at $462mm, half of which is expected to be spent in 1Q06, with $317mm of total capex relating to newbuild spending. (4) Currently focused on building deepwater fleet; addition of speculative jackups is not a priority for the company at this point. (5) Dividend/share buyback will not be necessary until 2Q/3Q 2006 when the company sees a meaningful cash buildup. (6) Full year impact of option expense estimated at $19mm in 2006. (7) Mgt expects reduction in shipyard related downtime to approximately 360 days in 2006 vs. 1,600 in 2005. Implications for the industry: (1) Jackup market remains tight with demand exceeding supply. Mgt sees outstanding requirements for 20-40 jackup rigs over 2006. (2) Mgt does not expect rig supply additions to pressure day rates for the foreseeable future. (3) Operators are beginning to focus on securing rigs in the N. Sea for 2008 programs. (4) Mgt expects a jackup shortage in the M.E. and India by the end of 2006 as 15-22 additional rigs may be needed. (5) Mgt has not seen a weakening in demand for GOM rigs given the decline in natural gas prices. (6) W. Africa jackup market remains undersupplied despite mobilization of 5 incremental rigs to the region. Summary of changes to 2006E EPS: Our revision to 2006 EPS was driven primarily by: (1) 19% and 8% dayrate increases for N.A. and Europe/W. Africa jackups, respectively (+$0.81 EPS impact); (2) a slight decrease in depreciation (+$0.03) and partially offset by (3) increased SG&A and interest expense (-$0.03) as well as a higher tax rate assumption (-$0.14). See Exhibit 1 for more detail. Summary of changes to 2007E EPS: Our revision to 2007 EPS was driven primarily by (1) a 32% dayrate increase for N.A. Jackups, a 31% dayrate increase for Asia Pacific jackups and a 16% dayrate increase for semisubmersibles (+$1.37 EPS impact); (2) a decrease in depreciation (+$0.04) and partially offset by (4) increased SG&A and interest expense (-$0.04). See Exhibit 1 for more detail. 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.