Saturday, September 12, 2009

RRSP Addition: ENSCO

A couple of weeks ago (during my vacations), I made another purchase in my RRSP account - ENSCO (NYSE: ESV).

ENSCO International Incorporated is an international offshore contract drilling company. As of February 17, 2009, its offshore rig fleet included 43 jackup rigs, two ultra-deepwater semisubmersible rigs and one barge rig. The company also has six ultra-deepwater semisubmersible rigs under construction.

The financial situation of the company is quite good. Long-term debt stands at $274 M, for a company with a book value of $4 677 M, operating cash flow of $1 140 M and net income of $1 151 in 2008.

Of course, the drilling industry is being severely affected by the recession, and ENSCO is no exception. Compared to earnings per share of $8.17 in 2008, the estimates for 2009 and 2010 are about $5.40 and $4.10, respectively.

The company's shares were trading at about $39 when I made my purchase. Using Benjamin Graham's formula to determine its fair value gave me a fair value between $63 (based on 2009 estimated earnings and current book value of $32.95) and $55 (using 2010 EPS estimates). That's a margin of safety of 30 to 40%. The company has been buying back shares in the last couple of years, reducing the number of shares from 152 millins in 2006 to 141 millions in 2008.

Considering that offshore drilling is not about to go away, I am fairly confident that over the mid- to long-term, the company will do well. Its small debt load and hefty cash flow will allow it to easily survive the recession. The company has been around for a while, and has valuable expertise in offshore drilling, including ultra-deepwater drilling. It seems unevitable that the price of oil will climb back above $100 per barrell once the recession is over. This means a resumption of offshore drilling.

The company also pays out a minuscule dividend of $0.025 per quarter, for an annual yield of %. The dividend is so small that it was completely irrelevant to my decision to buy this company.

I consider the company a value investment for the medium term (about 5 years). As such, I only established a small position in the company (50 shares).

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