Operators are also contracting high-end jackups for longer
- The company also hit the lowest bid for 2 jackups for PEMEX and awaiting word on that tender.
On the conference call, management reminded analysts that 2009 would
see a substantial increase in deepwater rig revenues as the 8500 and
8501 come online at dayrates $275k & $355k while the ENSCO 7500
resets to $550k per day. Rabun also shed some light on details of the
company's deepwater strategy. While the company will look at
acquisition opportunities presented by the credit crunch, ENSCO
strongly prefers building out their deepwater segment for various
reasons. Their rigs are custom spec (for example, they are
non-propelled and need to be towed to location which reduces headcount
during the span of the contract) and operations are more efficient if
they only have to worry about one spec in the fleet. Their contracts
with the shipyard are non-cancellable so the 3 remaining rigs without a
contract will be built regardless of what happens in the markets.
Management was somewhat coy but it sounded to me as if they would
prefer to take advantage to move up the timeline on the builds rather
than look at buying assets.
The market slaughtered ESV along with nearly every other stock but
in my view, it's overdone. The visibility into 2009 earnings is
strong, especially with the deepwater segment more than tripling
revenues by my quick math. The company releases a monthly rig report
so if markets soften considerably, investors will know sooner than the
next earnings report.
It's possible that the market will revalue everything with lower
multiples but I value companies based on the future value of free cash
flows, not on what P/E multiple I think the market will pay. From this
standpoint, deflation only makes ESV more valuable as future cash is
discounted at a lower risk rate. I should also point out that ESV is
in the middle of a massive $3B deepwater rig capital build and related
outlays should decrease gradually from here. Management projects
maintenance capex to be around $150M annually. Compare that to $743M
OCF through the 9 months of 2008 and it's obvious that ESV is a cash
cow now and especially once the capex program normalizes but with the
added earnings power in the deepwater segment. Combined with its solid
balance sheet, it would take one hell of a global depression to
significantly threaten the company. If we get inflation instead, I'd
expect to see higher commodity prices and a good environment for ESV.
My only complaint is the company's paltry dividend and their
buy-high stock repurchase program (seems like many companies buy high
and stop buying when the shares are discounted). If the markets are
repricing risk, it'd be nice to see management take more forceful
action to reward shareholders, perhaps along the lines of special
dividend payments like Diamond Offshore (DO).
I've already established a full position in ESV but if I got to do it over again, I would probably look first at long-dated call spreads at these levels instead of buying the stock due to its lousy dividend.
- Q4 revenues -3% from Q3
- Contract drilling expense up 4% from Q3
- Full year effective tax rate 18-19%
- CapEx: $820M, $166M in Q4 ($670M in new deepwater rig builds, $40M rig enhancements, $110M sustaining projects)
Performance Measurements :
- Hit guidance — especially on contract drilling expense and shipyard days.
- Manage revenue stream in energy market downturn.
- Maintain backlog near current levels ($3.8B as of YE 2007).
- OCF run rate to revert back to 2007 levels (~40-50% of revenues, 9 months 2008: 41%) .
- Uncertain Asia-Pacific market, strong in North Sea, stabilization in GOM and new entries into Iran, UAE, PEMEX, etc.
- Hold the line on 8500 series roll-out.