Great Time To Be an Offshore Oil Driller: ENSCO International (ESV) To Soar

ENSCO International (ESV) is an international offshore contract drilling company that, as of late, can’t lose. Friedman Billings remains bullish on the stock, maintaining their OUTPERFORM rating and raising their target:

We are raising our price target from $74 to $86, introducing our 2010 EPS estimate of $10.25, which is 11% higher than consensus’ 2010 estimate of $9.20, and introducing our discretionary cash flow yield metric.

ENSCO’s proprietary deepwater newbuild design enables the company to reinvest its 42%-48% net income margin for 18%-24% returns as we outline in our enclosed IRR analysis. Shares of ESV are an attractive value due to overly pessimistic sentiment about the impact of newbuild jackups. ESV is trading at a discretionary cash flow yield of 11% and 13% and an EV/EBITDA of 6.6x and 6.2x for 2008 and 2009, respectively.

Soaring oil prices equal more demand for offshore drillers? Forthcoming estimate increases to drive stock higher? That logic we can understand. When analysts start creating new valuation metrics like “discretionary cash flow yield,” however, we break into a cold sweat.

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