In August, we brought you FBR’s sunny outlook on ENSCO International (ESV), an international offshore contract drilling company whose stock price had been clobbered by the oil price decline. FBR talked about a rig shortage that would send ENSCO’s day rates to the stars.
Well, JP Morgan isn’t buying it. The firm has downgraded ESV to UNDERWEIGHT and sees few positive catalysts against a backdrop of growing pressure on international jackup rates and peaking US Gulf rates.
Also, ESV is likely to use its significant free cash flow for a share repurchase, but JPM actually thinks this is a bad idea.
In our view, the use of excess cash each quarter to repurchase shares is questionable as (1) we find it unlikely that the company has a better long-term view of the [offshore rig] market than investors, (2) using peak cash flows to repurchase shares does not favour the long-term shareholder, and (3) dividends paid can’t be taken back (but an aggressive stock compensation plan can dilute the repurchase).
The bottom line is ESV trades in line with its peers according to JPM’s ’09 and ’10 estimates. With the highest exposure to rig price-pressure and few visible catalysts, JPM thinks a discount is appropriate.
JP Morgan downgrades ENSCO International (ESV) from Neutral to UNDERWEIGHT.
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