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

To: Chuzzlewit who wrote (958)	3/30/1998 5:08:00 PM
From: Czechsinthemail	Read Replies (2) \| Respond to of 2005

Paul, Most of the price action seems to be tracking oil prices. Given the oil producers agreement that will take a lot of oil out of the system and should provide a floor for oil prices, I think we are back to a more comfortable assumption of a continuing 100% utilization scenario. According to GLM's CEO Luigs they've been seeing continuing dayrates during the 1Q even with the oil price scare. According to the HMAR press release, Gulf dayrates for boats are continuing strong as well. So all indications are that we should be going into the 1Q earnings announcement with pretty much everything -- except perhaps the stock price -- looking good. I don't think the cumulative market is generally looking at these companies with as much sophistication as intuition. I think much more of it is projected inferences like "weak oil prices means drilling cutbacks" or "drillers crashed after a boom in the 80's so they'll probably crash now". The evaluation of drilling companies seems to be happening more by gut feeling than by clear thinking. So while the possibility of rig overbuilding is the most likely cause of things unraveling for the drillers, the likelihood of that possibility happening any time soon seems pretty remote. There simply isn't enough new building going on. What new building is happening is almost all targeted to deep and harsh environment drilling. New building just isn't happening in the jackup market, and most of the shipyards are busy trying to keep existing rigs afloat or upgrade them. Perhaps there is some concern that the large influx of cash will go into a building frenzy, but so far there is limited evidence of that. More common has been debt reduction and share buybacks. And given the long lead times for rig construction, even massive new building commitments won't significantly add to fleet size for at least 2 or 3 years. Also, there is the matter of scale. The current worldwide rig fleet even with all the in-process and projected building is pretty small. Given the need to replace reserves to offset oil consumption that is growing at perhaps 3% annually, you either expand the worldwide drilling fleet or face a more acute supply shortage. I think the moment of awakening is likely to be the earnings announcement. At that point you will see dramatic growth among the drillers in contrast with largely mediocre results for other companies. I think we'll also see a bunch of new earnings revisions and upgrades reflecting a greater level of comfort around driller prospects in a stronger oil price environment. If ESV makes the $0.59 First Call estimate for the quarter (and it has beaten it every quarter for as long as I can remember), it will show 20% cumulative earnings growth. Its trailing earnings will jump from $1.64 to $1.97. Forget for a moment that that is more growth than most companies in the S&P 500 will see for the year, and consider that if you buy it anywhere around its current price you will be holding stock with a trailing PE under 15x. That discounts a lot of potential negatives -- real or imaginary. Getting to buy the stock as if it were at a cycle top when there is no sign that the party is near over is a gift. I think those with the bucks and the spheres to buy more ESV shares now will be very happy three weeks from now. Baird