Friday, 18 April 2014

Comments on ESV

As I promised I will look at other companies that are in the sector " Oil and Gas drilling and exploration" .

This time I will look at Ensco plc (ticker ESV) . The market cap. is 11B and is relatively a large company for its industry. However, its drilling locations are quite disperse around the world and it exports for a lot of other contries. Its headquarters are in the United Kingdom. According to the company's official site ESV is the second largest offshore drilling company . I will give a world map with the destinations the company has invested in  but clearly ESV is operating almost everywhere there is key drilling place on Earth.:





There are other drilling offshore places as well , which are not specified at the official site of the Ensco plc . Obviously, this company is well-known around the world . 

Let's look at the share price movements for the last several months:


Those support and resistance lines are there to show you how it has been moving overall for a specific period of time. What is interesting here is that I could not say at first whether this company's share is a divident yielder or a growth stock.( and of course it could be both) .Looking at the annual price changes, it has been moving just like Hercules Offshore (HERO) for the time before 2009 recession . But there are differences that could be spotted for the period after 2009 , HERO has a straight horiztal line ,whereas, ESV- upward moving . You can always compare the overall performance of two or more than two companies on finance.yahoo.com by putting the company that you are interested in and after that you click on the graph of the company and after that you click "Compare" and you put the ticker of the other company that you are interested in . I will show you what I come up with , when I compared HERO and ESV:




You should note that some of the movements of the two companies conside , this is not some kind of "miracle" pattern , but there could be for a lot reasons e.g. because of price movements in the oil and gas - this will most certainly affect both company's performance.

We may proceeed with the ratios and the indicators. The P/E ratio is 8,21 with is low , for the whole industry. Also, the PEG ratio is below 1 , which could be a sign of undervalued stock as well . Both P/S and P/B shows undervaluation . But , Price to cash ratio is above 50 , which most probably mean that they do not have a lot of current assets , in other words , they do not have a lot of liquidity , they may have invested all their money .The Current and Quick ratio tell another story (Current ratio 1,5 and Quick ratio 1,2)-They have enough money to e.g. sustain their debt but they do not hold cash. They may have deposited their money and they may hold a lot of inventory ( which could be a sign of future expansion of the drilling sides).
Wrong!!! You cannot make conclusions just by numbers , instead you could make possible scenarios. I looked by their balance sheet in advance, so I know the is truth behind the numbers. The truth is that ESV has a lot of Net Receivables , aboout 70% of the current assets is Net Receivables(this is their customers owe them money , they have used the products but they have not paid yet) .All EPS numbers show growth - perhaps slow and sustainable because the numbers are not that impressive ( except the EPS Q/Q which is 50% , really good number for a company as big as ESV).The Net Profit Margin is not just positive but it is 28,5% , the last two numbers show sings for growth (actually growth , but you will see that when we get to the financial statements) . The Insider trans is positive - the insiders believe in their company- Good!
There is one more important thing to note is the volume . The shares of ESV are not that heavily traded i.e. people are neither selling nor buying a lot ( RELATIVE to the size and industry of the company ) , this could be a sign that if there is growth , it is not going to be fast , but steady and secure .

The overall opinion of rating agencies is negative not just on ESV but on the whole sector:




Analysists are doubtful about the oil price in the next few years . Technically speaking , it is generally believe that the oil price will fall in time of recession and vice verse in time of economic growth the oil price rise up
(Link: http://seekingalpha.com/article/2135933-ensco-plc-is-a-6-percent-yield-enough-to-overcome-the-risks-involved-in-holding-the-shares ) . The author of the article Alexander J.Poulos is making predictions that the price of oil will increase in the next two years. He also says that in general , the drilling offshore companies have increased their divident yield rate and ESV is not making an exclusion . A divident yield of 6% sounds attractive for investors .The last 8-K that ESV have reported this month shows that they have new rigs , in particular in gulf of Mexico,Brazil,Malta,Singapore,Malaysia,South Korea,Denmark, Netherland ,UK,India,Saudi Arabiaand Indonesia ->you can see from the report(the link is at the bottom) that ESV is not just drilling offshore but also they reach depth of 10000 in Angola(the latest project finished in 2013) to 250 in Guilf of Mexico, which means that they are quite diverse in their explorations. I read many other articles that I posted below  but I would say that the analysist's opinion is really divided, mostly because some are afraid that the price of the oil will go down. However, there is one more thing that we have to include before going to financial statements and this is the main competitors:


Column1 ESV DO NBR RIG Industry
Market Cap: 11.67B 6.73B 7.36B 14.65B 1.48B
Employees: 9000 5500 258500 151000 6000
Qtrly Rev Growth (yoy): 0,16 -0,04 0,02 0 0,63
Revenue (ttm): 4.92B 2.84B 6.15B 9.48B 485.49M
Gross Margin (ttm): 0,51 0,45 0,35 0,4 0,65
EBITDA (ttm): 2.35B 1.19B 1.68B 3.51B 258.91M
Operating Margin (ttm): 0,36 0,28 0,09 0,25 -0,27
Net Income (ttm): 1.41B 548.69M 149.88M 1.39B N/A
EPS (ttm): 6,07 3,95 0,47 3,87 -0,62
P/E (ttm): 8,24 N/A N/A N/A N/A
PEG (5 yr expected): 0,81 0,82 0,44 0,49 7,35
P/S (ttm): 2,37 2,31 1,16 1,54 3,06

I made this table ( source: finance.yahoo.com ) to show you that every single factor used for the comparison of ESV  is better than the other direct competitors. (excluding the revenue where RIG has more revenue relative to its market cap.(Look at the graph of NBR : it made a return of 39% for the last 4 months) .

The first financial statement that we will look at is the income statement .There is not many things that you can conclude because there are not many changes on it .


I can always put those financial statements here but the point is that you should be able to read it and understand it . In our case with ESV there is not much that you can see that has change quarterly (even annually) .There is only one one thing to note from the balance sheet is that ESV is not holding a lot of liquidity, the have invested 14 billion dollars in Plant and Equipment, and that they have nearly 5 billion in long term debt ( which could be a problem , depeding on how they handle it )

If there is not enough information that you can abstract from financial statements , you should look up the
10-K reports that can be found on the official websites of the company that you are researching. The report of ESV is 200 pages , which provides you with a lot information. If you want to make good investment , you need to read to whole report and making points about it. One example with what I found in the report:


They past information about changes in water platforms , but they also provide you with projected information about the future . The funny thing is that you can become a professional in some areas just by reading report . For example , if you research several companies in Oil and Gas drilling and exploration , at some point will know a lot about it. You may have to learn the actual method of extraction , also you may have to study geography to familiarize yourself of the main oil drilling place , etc. This is experiece that you can use e.g. for applying for a job.

Going back to 10-K , the fillings show that EVS revenue has changed a lot between 2011 and 2012 but we cannot say the same for the last year .Obviosly , they are looking to attract investors because they have increased their divident yield a lot . They have new plants . They have new employees making it to 9000 . The report looks really positive on all future prospects.

In conclusion I would say that this company gives you stability and real divident with perspective to future growth . It would be nice to see how it gets to top positions in our competition.
Next time I one of the other three companies in the sector .

Thank you for reading !

Links:
1.Article: http://seekingalpha.com/article/2135933-ensco-plc-is-a-6-percent-yield-enough-to-overcome-the-risks-involved-in-holding-the-shares
2. Investor's information: http://www.enscoplc.com/Global-Operations/default.aspx
3. Article: http://seekingalpha.com/article/2082103-is-ensco-a-good-stock-to-buy
4. Article: http://seekingalpha.com/article/2076753-ensco-a-great-buying-opportunity-in-a-high-yielding-stock
5.Latest 8-K report from April 2014 : http://www.enscoplc.com/Investors/SEC-Filings/default.aspx
6.Latest 10-K report from February 2014 : http://ensco.q4cdn.com/f97564d5-7dfc-4ef6-a33f-39266b5bece8.pdf?noexit=true


Chief editor: Plamen Filipov
Surrey Investing Society 2014 

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