by Steve McDonald, Bond Strategist, The Oxford Club
Friday, January 18, 2013
In focus this week; the number two deep-water driller, Amazon in the cloud and the sitfa
Deep-water drillers have to go farther and farther offshore for new fields, but they are finding bigger and better reserves, and, according to a recent Barron’s article, that’s good news for the number two driller, Good news for Ensco.
Ensco (NYSE:ESV), a former Houston based driller, made a shift to the deep-water arena in 2009 when it moved to Britain and purchased Pride Petroleum, one of the most technologically advanced offshore drillers.
Since the Pride purchase offshore drilling accounted for 56% of ESV’s revenues and earnings this year are expected to jump 30%.
Brad Handler, an analyst at Jeffries expects ESV to double its dividend in four years.
ESV has the newest, safest and most technologically advanced fleet of deep water rigs, and that means less down time and faster safety certification. All of that adds up to very big savings for its customers.
ESV’s operation is so advanced they can show a profit on oil as low as $70 per barrel and they currently have $9 billion backlog of orders.
The daily drilling bill from ESV to its customers is up 50% in the past two years, from $400,000 to $600,000, and it is trading at a cheap forward P/E of about 8.
Deep-water drilling has been overshadowed by all the fracking news in the United States. But oil sells for three and four times natural gas, deep water is where it can be found and ESV is who can get it.
Amazon (Nasdaq: AMZN): “Hey You! Get off My Cloud”
Next up, Amazon (Nasdaq: AMZN) is doing to the cloud what they did to retail.
According to a recent Wall Street Journal article cloud-based computing is the fastest expanding business at Amazon. They call it AWS (Amazon Web Services).
Amazon doesn’t break out separate numbers for their AWS but Macquarie estimates revenues at $2.1 billion this year and is expecting an 81% increase year over year. 81%!
And by the end of the decade, Macquarie’s estimates revenues in the $15 to $20 billion range by the end of the decade.
Amazon’s CEO said in the Journal article that AWS is still in its infancy but he expects it to be at least as big as the company’s retail numbers.
That doesn’t mean much until you understand that the retail portion does 20 times as much in revenues as the AWS. 20 times!
That makes even the generous Macquarie estimates look to be off by as much as half.
But the best part of this story is that Amazon is undercutting its cloud competition in the same way it does its retail; razor thin margins.
Google shows a 32% margin and Rack Space 12% while AWS’s margin is 1.8%. And AWS has cut prices 23 times since its roll out and expects more price cuts as the technology evolves.
I’m glad I don’t have to compete with this type of pricing pressure. There is no one who can wage a price war like Amazon. Expect AWS to be a huge producer.
SITFA: “Legalize It” Edition
And finally, the sitfa
This week the sitfa goes to the authors of an article that appeared in the Journal a few weeks ago claiming the war on drugs is a failure and using and selling drugs of all types Drugs should be legalized.
I don’t know if this war is working or not, but the authors’ reasons for legalizing drug use and sales were so full of holes my guess is they were high when they wrote it?
They made the usual points that our prison population is exploding due to drug convictions, the cost of housing the druggies is astronomical. But they made one point that was so ridiculous it really earned this week’s sitfa.
They claim more inner city kids will finish high school if drugs are decriminalized.
You heard me right; a lower dropout rate with more drugs?
I have news for authors of this piece! The dropout rate has nothing to do with drug use or sales. It has to do with the fact that school is work and more difficult than playing video games and sleeping late.
If kids don’t have someone keeping them on the straight and narrow they always look for what seems like the easy way out. They’re kids.
Reduce the dropout rate by legalizing drugs. How do they guys get published?
SteveEnsco (NYSE: ESV): Dividend Doubling Within Four Years?,