Sunday, September 27, 2009

Spotlight On: Ensco International Inc...

Spotlight On: Ensco International Inc. (ESV)

Company Profile: From Reuters - "ENSCO International Incorporated is an international offshore contract drilling company. The Company engages in the drilling of offshore oil and gas wells in domestic and international markets by providing its drilling rigs and crews under contracts with major international, government-owned, and independent oil and gas companies. As of February 17, 2009, the Company’s offshore rig fleet included 43 jackup rigs, two ultra-deepwater semisubmersible rigs and one barge rig. In addition, it has six ultra-deepwater semisubmersible rigs under construction. The Company is a provider of offshore contract drilling services to the international oil and gas industry. Its operations are concentrated in the geographic regions of Asia Pacific (which includes Asia, the Middle East, Australia and New Zealand), Europe/Africa, and North and South America.

Of the Company’s 43 jackup rigs, 19 are located in the Asia Pacific region, 10 are located in the Europe/Africa region and 14 are located in the North and South America region. The Company’s business consists of four operating segments: Deepwater, Asia Pacific, Europe/Africa and North and South America. Each of its four operating segments provide one service, contract drilling. The Company has contracted Keppel FELS Limited (KFELS) to construct seven ultra-deepwater semisubmersible rigs (the ENSCO 8500 Series).


The Company provides drilling services on a day rate contract basis. Under day rate contracts, it provides the drilling rig and rig crews, and receives a fixed amount per day for drilling the well. Its customers bear substantially all of the ancillary costs of constructing the well and supporting drilling operations. In addition, its customers may pay all or a portion of the cost of moving the Company’s equipment and personnel to and from the well site. The Company does not provide turnkey or other risk-based drilling services."


Analysis: The following schedules present a comparative ratio analysis of Ensco International and firms operating in the same industry. Four categories of ratios (profitability, liquidity, debt management and asset management) have been used to compare Ensco with that of the industry. ESV has been compared to the industry median for the oil well services and equipment industry.



Ensco International Inc.
Ratio Analysis and Comparison to Industry



ESV (TTM)Industry
Median (TTM)
Variance
PROFITABILITY


Gross Profit67.40%34.8%32.60
Operating Margin56.50%8.40%48.10
Net Profit Margin44.00%4.90%39.10
Return on Equity21.00%11.50%9.50
Return on Assets16.90%2.50%14.40

    
LIQUIDITY


Quick Ratio3.401.501.90
Current Ratio3.402.001.40
Payout Ratio1.400.001.40
Times Interest Earned60.604.3056.30

DEBT MANAGEMENT


Total Liabilities to Total Assets19.3050.40(31.10)
Long-Term Debt to Equity 5.2030.40(25.20)
Long-Term Debt to Capital4.9025.10(20.20)

ASSET MANAGEMENT


Receivables Turnover4.605.20(0.60)
Asset Turnover0.400.60(0.20)
Inventory Turnsn/a9.50n/a

The profitability ratios measure management's effectiveness in overseeing the business's resources. Compared to the industry median, ESV is more effective than the industry in producing earnings from its assets.

The liquidity ratios give an indication of ESV's ability to meet its current obligations related to interest bearing debt. As shown in the comparative ratio analysis, because of the company's high profitability and low level of debt, it has a more than adequate cushion to meet its debt obligations. In fact, these ratios indicate that ESV may have the ability to increase its debt load.

The debt management ratios indicate the extent to which ESV's assets are funded by debt. As shown in the schedule, ESV has very little debt and a much smaller debt to equity ratio than the industry median. Taken together, ESV is less leveraged than the industry.

The asset management ratios indicate that ESV manages its assets approximately the same as its industry group.

Summary: Based on this analysis of Ensco International, the business appears to be in a strong financial position. During the past five years, revenues have increased from $731.3 million (FYE 12/2004) to $2,278.8 million (TTM) and net income has increased from $93.0 million (FYE 12/2004) to $1,003.1 million (TTM). The company's equity position has increased, as well. in addition, compared to the industry, ESV has more liquidity, less leverage, and operates more profitably. 

Conclusion: We see price appreciation potential to $70.00 per share.

Disclosure: Author has a long position in ESV.



Seeking Alpha Certified