The stock of ENSCO International (ESV), an international offshore contract drilling company, peaked with oil back in July and has subsequently taken a tumble. But that doesn’t mean their best days are behind it, says FBR:
Rig shortage means day-rate increases possible:
Our [research] indicates there should be a pro forma average shortage of six rigs over the next nine months, up from three last month. This could put upward pressure on day rates if some outstanding tenders are left waiting on a rig. A $10,000 increase in day rates would increase ENSCO’s EPS to 12% above consensus in 2010.
Proprietary design enables superior returns:
On the deepwater side of the company, ENSCO’s proprietary deepwater new-build design enables the company to reinvest its 42%-48% net income margin for industry-leading 18%-24% returns, as we outline in our IRR analysis. Shares of ESV are an attractive value due to overly pessimistic sentiment about the impact of new-build jackups. ESV is trading at a discretionary cash flow yield of 13% and 16% and an EV/EBITDA of 5.5x and 5.1x for 2008 and 2009, respectively. Our $86, DCF-derived price target represents a 6.9x 2009 EV/EBITDA multiple.
FBR reiterates OUTPERFORM on ENSCO (ESV), target $86.
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