This Company is Drilling Money

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Thanks to the rebound in oil prices, oil exploration companies are trading at much higher valuations now. Profit margin per barrel has significantly increased, which is enticing oil refiners to explore for more oil. Now for oil exploration, offshore drilling services are required, which brings companies like Ensco (NYSE: ESV) business. Now, higher valuations don’t necessarily mean expensive valuations. The shares of the company trade at a forward P/E of 7.8x and a PEG ratio of 0.8x. Here are a few reasons to be bullish about the company.

Ensco is an offshore drilling company which provides drilling services to oil and gas companies around the globe. The company owns and operates the world’s second largest offshore drilling fleet. The company is geographically well diversified with its presence in 6 continents. The deep water and ultra-deep water fleet boast of the latest technology in the market. The advanced technology prevents oil spills and gives the customer more information regarding the drilling rigs. The fleet consists of 9 drillships and 47 premium jacks, and is adding to the fleet 7 drillships that are under development.

It is due to the increasing Brent crude and natural gas prices that oil and gas companies are looking to explore in new areas, ramping up their production levels. Offshore drilling is rapidly catching up in Mexico, Southeast Asia, West Africa, Brazil and other developing areas. In a bid to meet the increased offshore drilling demand, the company ordered two new drillships in the previous quarter.

Besides earning revenues from offshore drilling, Ensco also makes money by leasing its drillships and premium jacks under long term contracts with the rentals exceeding $500,000 per day. This ensures stable revenues, even when the order book of the company is not full. It is due to this reason that the overall deep water drilling fleet achieved 91% utilization.

In the recent earnings release, the company reported revenues of $1.072 billion, which were 90% up from last year’s quarter. Net income stood at $341.3 million, which surged 234.9% from the same period last year. EPS stood at $1.41, which beat the street’s estimates of $1.25. The staggering increase was partially due to the acquisition of Price International earlier this year.

The company shares its market space with Noble Corp (NYSE: NE), Transocean (NYSE: RIG) and SeaDrill (NYSE: SDRL).

Company

Trailing P/E

PEG

Debt/Equity

Net Profit Margin

Ensco PLC

12.27x

0.79x

43%

26.06%

Transocean

-NA-

-NA-

82%

-67.32%

Noble Corp.

16.90x

1.34x

59%

17.17%

SeaDrill

20.82x

1.03x

170%

23.67%

Ensco has the lowest debt to equity levels among its peers. The company also enjoys the highest net profit margins, and the metrics indicate that the stock is the most undervalued investment option among its peers. The stock yields 2.72%, a modest 32.63% payout ratio.

On taking a look at the stock performance of the mentioned companies YTD, we can see that Ensco is up 18.42%.

ESV data by YCharts

In summary, Ensco reported stellar financial performance. With 7 drillships under development, the company could catch up with any increase in the demand for offshore drilling. Additionally the company has the most advanced technology in its drilling fleet, which would attract more customers over the time. Ensco has a good mix of fundamentals, backed with solid stock performance YTD. In my opinion, crude prices are heading north and the demand for offshore drilling is only going to increase, which makes Ensco a great long term investment choice.


PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Transocean and Seadrill. Motley Fool newsletter services recommend Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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