Last week, we reported that David Einhorn’s Greenlight Capital took a large position in Ensco plc during the second quarter.  Ensco was profiled in an article on The Rational Walk in early June and the company is scheduled to report second quarter earnings on Thursday, July 22.  Here is what Mr. Einhorn had to say about the Ensco purchase in his letter to shareholders (pdf) dated July 16:

Ensco plc (ESV) is an offshore contract oil drilling company operating a large fleet of shallow water jack-up rigs and a small but new fleet of deep water rigs.  The Deepwater Horizon oil spill and resulting 6-month drilling moratorium in the Gulf of Mexico caused significant share price declines throughout the sector.  ESV was not involved in the horrible accident, which should not materially impact the company’s long-term potential.  ESV has approximately $7 per share in net cash and a tangible book value of $37.50 per share.  The shallow water drilling business, which is unaffected by the drilling moratorium, generates $4.00 per share in unlevered mid-cycle earnings and $8.00 per share in peak earnings.  At the Partnerships’ average cost of $39.41 per share, we appear to be getting the shallow water fleet at a low value and the deepwater fleet (in which ESV has thus far invested over $15 per share to build and should add $2.00 and $4.00 to mid-cycle and peak EPS respectively) for free.  ESV shares ended the quarter at $39.28 each.

As we noted in the Ensco profile last month, sometimes the market can overreact to developments that are broadly impact an industry but have relatively less impact on specific companies within the sector.  The offshore contract drillers, as a group, are still recording attractive profits despite significant headwinds caused by the uncertain regulatory climate as well as oil prices that are far lower than at the 2008 peak and have negatively impacted contracted dayrates.  In the long run, the price of oil in a world of increasingly scarce traditional oil deposits will have far more of an impact on companies like Ensco compared to the transitory effect of regulatory changes in response to Deepwater Horizon.

Disclosure:  No position in Ensco.

Einhorn Comments on Ensco Position in Q2 Letter
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5 thoughts on “Einhorn Comments on Ensco Position in Q2 Letter

  • July 20, 2010 at 8:54 pm

    I would like to here Einhorn’s thoughts on Noble Corp. (NE) and Diamond Offshore (DO) vs. his chosen Ensco plc (ESV). I understand that Diamond Offshore has a lot more debt than its other two peers, which also pushed me a little away from DO and RIG. However, pending the lift on the offshore oil ban, Ensco’s competitors will have much more to gain as their exposure to deeper-water drilling is much higher. So when stacking up ESV against its competitors, even for those who dislike the offshores who took on a lot of debt, I would like to hear the rationale for picking Ensco plc over Noble Corp. Before Noble’s current purchase of Frontier Drilling, the company sported a debt to equity ratio of only .09. Additionally, the Frontier deal, combined with the new Royal Dutch Shell agreements, appears to make absolute sence even for the $2.16 billion purchase price. The timing of the deal and lack of stock use for the deal shows managment’s excellent ability for creating long-term shareholder value. I would love to here and thoughts and comments regarding this rationale, especially from those who believe that ESV, or any other drillers would be a better buy!

  • July 20, 2010 at 8:57 pm

    Agreed, it would be great to hear more from Einhorn on his rationale for picking Ensco vs. one of the others (or using a basket approach). I decided to buy Noble rather than Ensco because I wanted the greater perceived upside of the global deepwater fleet. However, Ensco is probably the more risk averse choice in the event of a prolonged moratorium given its concentration in shallower waters. However, the flip side is the dayrates for jackups are under significant pressure and this may continue for some time.

    • July 20, 2010 at 9:32 pm

      Believe me, I am always looking to play devil’s advocate in these mattes. Ensco had lower returns in the past (during times of normalcy for the industry), but did sport the lower debt-to-equity position and larger cash warchest. However, the point you noted about the jackup dayrates is what lead me away from ESV. I believe you wrote about the large amount of jackups coming online because of the great explosion of exploration frenzy in 2007 and 2008. Personally, I feel that the companies pushing into the deepwater space are the ones to own. DO has much higher debt than NE, and I’m afraid of what the administration might to do industry titan RIG, so Noble seemed like the logical choice from there. Obviously we agree on NE, so it would be neat to hear Einhorn refute this.

  • July 20, 2010 at 9:59 pm

    Yes, the jackup market is in terrible shape at the moment. I just posted my take on Noble’s Q2 results – it is very obvious how jackups have declined vs. more advanced and deepwater capable rigs.

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