Ensco PLC Class A Continues to Grow

November 28th, 2013 Posted by Investment Valuation No Comment yet

Ensco PLC Class A (ESV) Investment Valuation.

Ensco PLC Class A

About Ensco

Ensco PLC Class A (ESV) is the leader in customer satisfaction and the second largest offshore drilling company. The company started trading as Energy Services Company, Inc. (formerly Blocker Energy Corporation) and the company’s growth increased through the acquisition of Penrod Drilling (1993) and Dual Drilling (1996). The company raised capital through public offerings to purchase and refurbish equipment. The company expanded from the contract drilling business into various associated businesses including a tool and supply company, engineering services and the marine transportation business. Ensco focuses solely on offshore drilling with a premium fleet, they divested marine vessels, platform rigs and the majority of barge rigs. Through new construction and acquisitions, the company grew their jack-up rig fleet and entered the developing ultra-deepwater market.

Ensco Company History

The Gulf of Mexico.2009Ensco’s deepwater strategy became a reality with the first two ENSCO 8500 Series® ultra-deepwater rigs successfully commencing operations in the U.S.

Ensco high graded its fleet by acquiring ENSCO 109, a Mod V Super B high-spec jack-up built in 2008 and divesting four backups.2010Two more ENSCO 8500 Series® rigs were delivered.

1995 The company changed their name to ENSCO International Incorporated and listed their shares on the New York Stock Exchange under symbol ESV.
2000 The ENSCO 7500 was the company’s first ultra-deepwater semisubmersible was delivered and was followed by a multi-billion dollar capital commitment to eventually construct seven ENSCO 8500 Series® ultra-deepwater rigs.
Late 2009 The company redomiciled to the United Kingdom and opened a new global headquarters in London in early 2010.
May 2011 Ensco acquired Pride International to create the second largest offshore driller in the world with operations spanning six continents.

How does Ensco Plc make money? 

Ensco plc (NYSE: ESV) is a global provider of offshore drilling services to the petroleum industry. ESV is operating the world’s newest ultra-deepwater fleet and largest fleet of active premium jack-ups.

ESV pics

The company is operating on six continents, their high-quality fleet includes:
  • 10 drillships,
  • 13 dynamically-positioned semisubmersibles,
  • 6 moored semisubmersibles and
  • 46 premium jack-ups.

ESV provide drilling management for three customer-owned deepwater rigs. Their rigs have drilled some of the most complex wells in virtually every major offshore basin around the globe. Ensco’s customers are multinational integrated energy companies, national oil companies, and independent operators.

Who is Running the Business? 

Daniel W. Rabun Chairman, President, and Chief Executive Officer   

ESV CEO Daniel Rabun

Daniel W. Rabun joined Ensco in March 2006 as President and as a member of the Board of Directors. Mr. Rabun was appointed to serve as our Chief Executive Officer effective January 1, 2007, and elected Chairman of the Board of Directors in May 2007. Prior to joining Ensco, Mr. Rabun was a partner at the international law firm of Baker & McKenzie LLP where he had practiced law since 1986, except for one year when he served as Vice President, General Counsel and Secretary of a company in Dallas, Texas.

Further, Mr. Rabun provided legal advice and counsel to us for over fifteen years before joining Ensco and served as one of our directors during 2001. He has been a Certified Public Accountant since 1976 and a member of the Texas Bar since 1983. Furthermore, Mr. Rabun holds a Bachelor of Business Administration Degree in Accounting from the University of Houston and a Juris Doctorate Degree from Southern Methodist University. He served as Chairman of the International Association of Drilling Contractors in 2012.

Jay W. Swent Executive Vice President and Chief Financial Officer   

   ESV CFO Jay W. Swent

James W. Swent III joined Ensco in July 2003 and was elected Executive Vice President and Chief Financial Officer in July 2012. Prior to his current position, Mr. Swent served as Senior Vice President—Chief Financial Officer. Prior to joining Ensco, Mr. Swent served as Co-Founder and Managing Director of Amrita Holdings, LLC since 2001. Mr. Swent previously held various financial executive positions in the information technology, telecommunications, and manufacturing industries, including positions with Memorex Corporation and Nortel Networks.

Further,

Mr. Swent served as Chief Financial Officer and Chief Executive Officer of Cyrix Corporation from 1996 to 1997 and Chief Financial Officer and Chief Executive Officer of American Pad and Paper Company from 1998 to 2000. Mr. Swent holds a Bachelor of Science Degree in Finance and a Master Degree in Business Administration from the University of California at Berkeley.

Ensco Liquidity and Solvency 

ESV liquidity

The table above shows the liquidity ratios which is the current ratio and the quick ratio is averaging 2.57 and 2.25, respectively. The rule of thumb is 2.0 and 1.0 for current and quick ratio, respectively. The results of the ratio mean, that Ensco PLC Class A has the ability to pay its short-term debt using its current assets. .On the other hand, the solvency ratio was averaging 2.05 or 205 percent. Solvency ratio is calculated on total net income plus depreciation over total debt (short term and long term debt).

Explanation

It indicates that the company has 205 percent net revenue against its total debt. The ratio was decreasing from 2008 to 2011 because the company experiences a  145 percent drop in its net revenue. However, managed an increase in the succeeding years at a rate of 44 and 8 percent, respectively. Moreover, the leverage ratio was averaging 0.18 or 18 percent, this is the percent of the total debt against the total shareholders’ equity. In 2011, the ratio increased by 86 percent but nevertheless, the ratio is only a quarter of the shareholders’ equity. To sum all the results of the company’s solvency, it indicates that Ensco PLC Class A is capable of paying its long-term financial debt and it tells us that the company is financially healthy.

Ensco Profitability 

ESV Profitability

The gross margin ratio was averaging 56.18 percent while the net margins were averaging 32.85 percent. It indicates that Ensco PLC Class A was efficient in generating revenue for its business operations. The company is profitable and financially healthy.

Ensco Cash Flow Statement 

ESV CF

Ensco PLC Class A has an average 0.46 or 46 percent cash flow margins.  Cash flow margins are cash from operating activities as a percent of gross revenue. It indicates that the company has sound cash that was left for future investments and for paying dividends. The company has also a free cash flow of $267.33 million cash for this purpose.

The Relative Valuation Method 

ESV Relative

Going forward, the book value per share was averaging $44.21. If you will notice the book value was increasing yearly from 2008 to trailing twelve months at an average 10.4 percent and this is a good sign of the company’s profitability.  On the other hand, the price to earnings and the earnings per share was averaging $10.35 and $5.22, respectively. Moreover, the Price to earnings is the price that the investors are willing to pay for the company’s earnings while the EPS represents the company’s net earnings allocated to each share of common stock. Another, the return on equity was averaging 13.52 percent, it represents the percentage of profit that the company generates for the investment that the investors have put into the company.

The Discounted Cash Flow (DCF) Method 

ESV DCF

By using the discounted cash flow spreadsheet based on the 5 years financial data, the get the present value of $88.26 per share or a total value of $20.3 billion. Moreover, the future value was $177.53 per share and with a total value of $40.8 billion. In other words, if you were to invest $88.26 today at a rate of 11.49 percent, you will have $177.53 at the end of five times period.

In addition, the future value of $177.53 is equal to the present value of $88.26. Accepting an amount higher than $88.26 today and taking $177.53 at the end of 5 years, you would have taken the money today. By doing this, you will be able to invest at a higher amount at 11.49 percent equal to five years period. This will end up giving you higher than $177.53.  Furthermore, the calculated net income at year five was $19.64 with a total value of $4.5 billion.

Summary of the calculation

Growth 10.33%
Yield 3.07%
Value of appreciation $35.31
Value dividend $36.65
Total value $71.95
Market price $59.69
Price investors are willing to pay $197.93

The growth of book value was 10.33 percent and the yield was 3.07 percent. The calculated value of appreciation was $35.31, this is equivalent to the margin of safety, the Buffett style. In addition, the calculated value dividend was $36.65.  On the other hand, adding value dividend and the value of appreciation will give us a total value of $71.95.  Ensco PLC Class A stock has a total value higher than the current market price. Therefore, the stock is trading at an undervalued price. The price that the investors are willing to pay was $197.93 per share.

Conclusion

Finally, Ensco PLC Class A has a good business history from the beginning and continue to show its profitable progression. Further, the company’s CEO and CFO have done a satisfactory performance in the company from the time they joined ESV. Further, with regards to the fundamentals, it shows that the company was financially healthy and with little debt. The company is capable of generating cash that can be utilized for future expansion and for paying dividends. The Benjamin Graham method tells us that the stock is trading at a discount and undervalued. In addition, the Warren Buffett method of valuing stock shows that the stock of ESV was undervalued. Therefore, I recommend a BUY on the stock of Ensco PLC Class A.

CITATION 

Researched and written by Criselda

Twitter: criseldarome

 

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