Value Investing in Europe with Ensco (NYSE: ESV)

Matthew Carr
by Matthew Carr, Emerging Trends Strategist, The Oxford Club

Value Investing in Europe

No one is really sold on Europe at the moment. And that’s okay.

I think European companies offer some intriguing opportunities right now. Particularly in the energy sector.

We always stress that investors should have a portion of their portfolios allocated in international stocks. To build this, you don’t necessarily want to go with more risky micro-cap companies. You want to first add strong companies with great growth prospects at a value.

Since the start of the year, I’ve written about Eni S.p.A. (NYSE: E) and Total S.A. (NYSE: TOT), both of which have considerably outperformed their North American counterparts Exxon Mobil (NYSE: XOM), ConocoPhillips (NYSE: COP) and Chevron (NYSE: CVX) so far.

We can all generally agree that the six survivors of the original Seven Sisters (the supermajors), Exxon, Conoco, Chevron, Total, Royal Dutch Shell (NYSE: RDS), BP plc (NYSE: BP) – or the one sister that denied an invitation to the club, Eni – aren’t going to earn you a quick double overnight. That’s why we’re always looking to buy those on dips.

They’re going to keep chugging along, spinning off dividend payments, and they’re good cornerstones to build up the energy portions of our portfolios.

So, today, let’s stick with Europe. Like Alexander Green recently wrote, there’s a lot of value there. But let’s talk about a company sitting below its 52-week high. It’s not a supermajor, but its customer base includes five of the six supermajors. And it made some major moves last year to become one of the largest in its industry.

A Quick Jump From #4 to #2

The lifeblood of the planet is oil. There’s no denying it. Every country needs it. Every country has to have access to it. And that means companies that develop this resource are essential.

Last year, London-based offshore driller Ensco (NYSE: ESV) laid out $7.3 billion for industry rival, Pride International. Shares of Ensco tumbled more than 4% on the original announcement. But here we are several months later, and we can clearly see the positive impacts being made.

In the fourth quarter, Ensco’s deepwater segment revenue jumped 355%, from $113 million in 2010 to $514 million. More than 80% of that increase was due to the Pride merger.

The same was true in its midwater segment. Almost 100% of the revenue increase in the fourth quarter for this segment was due to the addition of Pride International. That’s because Ensco didn’t have any midwater rigs prior to that.

Its jack-up segment also saw nearly half of its increase in revenue due to the merger.

We can see the move paid off.

Ensco became the second-largest offshore oil driller with 74 rigs in 25 countries, including 21 ultra-deepwater and deepwater rigs. It now has the largest fleet of active premium jack-ups. And even better – especially in light of the Macondo rig disaster – its rig fleet is now the second newest in the world, with an average age of seven years.

More importantly, its ultra-deepwater fleet is now the most modern in the industry. And more modern rigs demand higher day rates.

The Shortage Driving Up Prices

So, 2011 was a big leap forward for Ensco. Its full-year revenue increased from $1.6 billion in 2010 to $2.84 billion… A little more than $1 billion of that total coming in the fourth quarter.

This is all money that comes back into the pockets of investors. On Tuesday, Ensco announced it’s increasing its annual dividend from $1.40 to $1.50.

But this is really just the start. Ensco believes revenue from its deepwater segment alone will double in 2012.

In the first quarter, the company had an 8% increase in revenue over the fourth quarter, with a 15% increase in its deepwater segment.

At the end of January, Ensco announced a two-and-a-half year ultra-deepwater contract with Anadarko Petroleum (NYSE: APC). The day rate for this will be $530,000 – an increase of 43% over its average deepwater day rate in the fourth quarter. Plus, it adds to its backlog of $9.7 billion.

With oil prices high, and likely staying high into 2013, companies continue to ramp up their crude drilling programs. We’re actually looking like we’re in line for a rig shortage.

Through the merger, it not only inherited Pride’s rigs under construction, but Ensco has three more ultra-deepwater rigs under construction and adding two much-needed harsh environment jack-up rigs. As more companies race to drill in the North Sea fields, these harsh environment jack-ups are vital.

In the last few years, deepwater discoveries have more than doubled. West Africa, South America, Indonesia, Norway’s Barents Sea, Australia and the Gulf of Mexico are creating major opportunities for international oil companies. And as the price of crude remains high, offshore drillers see their own commodity – rigs – increase substantially in value.

Good Investing,

Matthew Carr

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