Seadrill Ltd (SDRL), Noble Energy, Inc. (NBL): Does ENSCO PLC (ESV) Deserve Its Low Valuation?

The world’s second largest offshore oil and gas drilling company, ENSCO PLC (NYSE:ESV) has had a poor year. Well the company hasn’t, but the stock has; down 5.5% year to date, despite analysts expecting the company to report earnings per share of $6.5 for the full year, up 25% compared to last year.

What’s more, the company trades at a significant discount to sector peer and world’s largest offshore driller by market capitalization, Seadrill Ltd (NYSE:SDRL). On a forward price-to-earnings multiple of 7.5 and price-to-sales ratio of 2.8, ENSCO PLC (NYSE:ESV)’s valuation is lower than that of Seadrill Ltd (NYSE:SDRL), which trades at ratios of 12.2 and 4.4 respectively. Having said that, Seadrill does offer an 8% dividend yield, which I discuss in detail here.

More than just the valuation
However, I believe the key to ENSCO PLC (NYSE:ESV)’s low valuation lies in the company’s fleet and outlook rather than its historic growth and strength. First, the fleet: 60% of Ensco’s is jack-up rigs, the rest of the fleet is composed of drill ships and semisubmersible rigs ( floaters). In fact, ENSCO PLC (NYSE:ESV)’s floater fleet is the newest floater fleet in the business, well placed to capitalize on the rising demand for new, high-spec drilling systems.

Having said all of that, analysts at Goldman Sachs expect that the day rates for the global jack-up rig fleet are set to decline over the next few years as, due to orders already placed with shipyards, the global jack-up fleet is expected to expand 15% by the end of 2014 . It is likely that ENSCO PLC (NYSE:ESV) could note a fall in revenue do to this oversupply.

In comparison, Seadrill Ltd (NYSE:SDRL)’s fleet is equally weighted (including rigs under construction) between jack-ups (50% of fleet) and floaters (50% of fleet) so, the company is unlikely to note as much of a depression in revenue from the decline in jack-up rates .

However, in comparison to ENSCO PLC (NYSE:ESV), Seadrill Ltd (NYSE:SDRL) is investing heavily for future growth. Currently, according to Seadrill’s 28^th August fleet status report, the company had 12 floaters under construction and 10 jack-ups, which is set increase the company’s fleet by around 50% during the next few years. Ensco’s in comparison only has four new drill ships and four jack-ups on order; an 11% increase to its current fleet. Investors examining this point will need to rely on their expectations for the offshore markets future. If the market becomes over-saturated, Seadrill Ltd (NYSE:SDRL)’s expansion plans could place its debt level and dividend in a precarious position.