Offshore Drilling Is the Way To Go: ENSCO PLC (ESV)

Brent crude is priced over the $115 mark again due to Iranian crude import cuts by India and China. Saudi Arabia had promised to ramp up its crude production to meet the shortfall of Iranian crude, but recently cut its production by 700,000 bpd. Moreover, crude demand is expected to grow between 6%-8% annually, and the depleting hydrocarbon resources are putting upward pressure on the commodity.

Oil companies have already begun exploring for new hydrocarbon reserves, and 36 companies including BP plc (ADR) (NYSE:BP) and Exxon Mobil Corporation (NYSE:XOM) are actively pursuing the oil E&P opportunities arising in the Barents and Norwegian Seas. This presents a bullish case for deep sea drilling companies, like Transocean LTD (NYSE:RIG), Seadrill Ltd (NYSE:SDRL) and ENSCO PLC (NYSE:ESV).

Reasons to Buy Ensco

Ensco is the world’s second largest offshore driller, with 70 operational rigs and 6 rigs under development. The company has the world’s most advanced drilling fleet, which not only reduces operational risks, but also saves time and money. Moreover, the company was able to achieve a massive 92% utilization rate of its operational jackups in the recent quarter.

Driven by increased offshore drilling activity, the average day rates of its premium jackups are in excess of $100,000 per day. Its management expects higher average day rates in 2013, especially since its fleet in the Gulf of Mexico and Middle East already have a 100% and 95% utilization rate, respectively. Naturally, leasing its equipment to other drillers creates a parallel stream of income.

Ensco had acquired Pride Equipment, which had been the root of its problems. Its crew lacked experience and was poorly trained, which caused downtime and hampered Ensco’s bottom-line. But the management was tactful to overcome the problems, and the company managed to expand its revenue backlog to $9 billion, with a modest 42% debt/equity ratio.

Reasons To Miss The Peers

But strong catalysts do not necessitate a long position. Taking a look at the financial metrics is important, which are crucial gauges of a company’s financial health. Additionally, we get an insight on a company’s operations as compared to the industry.

From the table above,  we can see that Ensco enjoys the highest net margin. At the current price, its shares appear to be most undervalued with respect to earnings and its growth prospects. Moreover, the high debt/equity ratios of Transocean and Seadrill are somewhat discouraging for investors. Even though Seadrill appears to be undervalued and carries a lucrative yield, I’d advise investors to curb their temptations.