Today's Hot Topics   ▲  |  ▼

Ensco has a decent yield and an aggressive strategy that should pay its weight in black gold as the market turns around, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

AllianceBernstein upgraded a bushel of energy stocks this morning.

Halliburton (HAL) went to outperform from market perform. Talisman Energy (TLM) went to outperform from market perform. Anadarko Petroleum (APC) went to outperform from market perform. SeaDrill (SDRL) went to market perform from underperform. And Ensco (ESV) went to outperform from market perform. (AllianceBernstein did downgrade Weatherford to market perform from outperform.)

The one I’d like to highlight from that list is Ensco.

I understand the upgrades—since my Jubak’s Picks portfolio is already long energy with positions in Schlumberger (SLB), Statoil (STO), SeaDrill (SDRL), and Western Gas Partners (WES). The energy sector is cheap right now, and these stocks are a good long-term investment if you think the global economy will ever pick up and lead to stronger demand for oil.

But I also understand that the timing of that turn in demand is very unclear, and the sector has been pounded in the last year—Schlumberger, for example, is down 25.5% in the last 12 months—and could get pounded some more on fears that the economies of China and the United States are slowing.

That’s why I’ve favored energy stocks with dividends—with the exception of Schlumberger, which yields just 1.8%, all the energy stocks in Jubak’s Picks yield more than 4%. You get paid a good yield while you wait.

On a dividend basis, Ensco is more aggressive than most of the AllianceBernstein picks, since its dividend is a relatively low 3.4%. But I like the way that the company has continued to pursue its strategy even through the downturn in the sector.

On June 26, Ensco announced that it would buy an additional advanced ultra-deepwater drillship from Samsung, because of stronger than expected demand from oil companies for the most advanced deepwater drilling platforms.

Ensco’s strategy has been to build the youngest deepwater fleet in the sector, and to, as much as possible, standardize that fleet. As oil companies push into more hostile but environmentally sensitive frontiers with more difficult geologies, Ensco has bet, they will be willing to pay more for the newest technologies. (Ensco’s fleet averages just ten years in age, about one-third of the average across the industry.)

That has turned out to be true, with day rates for the newest deepwater drill ships rising faster than rates have been rising across the industry.

Standardizing the fleet and operations promises to reduce costs. The company bought Pride International in a deal that closed in May 2011. That acquisition gave Ensco an immediate presence in the fast-growing deepwater markets off Brazil and West Africa. And the opportunity to realize big savings by bringing Pride’s operations up to Enso’s standards.

For example, administration costs at Pride before the deal ran at about 7% of revenue, versus just 3% at Ensco. The company has recently increased its projections for savings during 2012 from the deal to $100 million, from the earlier estimate of $50 million.

The stock currently trades at 12 times trailing 12-month earnings, and at 8.4 times projected 2012 earnings. The stock’s five-year average price-to-earnings ratio is 16. I calculate a one-year target price of $67 a share.

I’d be surprised if the shares dropped much below $40, but that would be a 10% decline from today’s price just north of $44. Cautious investors might like to wait for some of the summer volatility to dissipate. Put it on your watch list (I am for a month or three.)