S&P's Outlook on ENSCO

07/18/2003 12:00 am EST


Each week, Standard & Poor's, in its newsletter The Outlook, offers a Pick of the Week. The latest such recommendation is an oil and gas driller. The stock, ENSCO International, earns S&P's highest 5-star rating for expected performance. Here's the service's review.

"We expect domestic oil and gas contract-drilling outfits to enjoy a good second half in 2003, especially in light of lofty prices for natural gas. And we believe ENSCO International (ESV NYSE), with one the largest fleets of premium drilling rigs in the Gulf of Mexico, is particularly well-positioned to benefit from the improving conditions. With natural gas prices remaining at historically high levels, and with gas inventories about 20% below their five-year average, we expect offshore drilling activity to accelerate. ENSCO's fleet consists almost entirely of so-called jackup rigs, most of them premium rigs capable of drilling in depths of more than 300 feet of water. In addition, ENSCO's fleet of rigs is one of the industry's youngest.

"We believe ENSCO's premium rig fleet deserves a premium valuation, which has been historically the case. Our target price of $35 is based on our expectations of ENSCO achieving an enterprise value of about 13 times our 2004 EBITDA estimate, which represents a slight premium to our peer group average estimate of 12 times. Although we see risks in our forecasts, including the timing and magnitude of any significant recovery in the Gulf of Mexico drilling activity as well as the sustainability of the current high oil and natural gas prices, we believe that the risk-reward ratio is favorable, and we see ENSCO's shares significantly outperforming the market. It carries our highest investment recommendation of 5 STARS, or strong buy. Given today's natural gas shortage and ENSCO's fleet of premium rigs, S&P sees plenty of heat under these shares."

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