What's in Store for Ensco?

As many investors know, world oil consumption continues to climb. As the price of oil increases and the number of easy-to-reach oil fields decreases, producers have had to go deeper and deeper to find oil, both onshore and offshore. Ensco (NYSE: ESV  ) is one company benefiting from the steady increase in deepwater drilling.

Company snapshot

Market Cap $11.7 billion
Net Debt $4.6 billion
Operating Cash Flow (TTM) $720 million
Capital Expenditures (TTM) $636 million
Price-to-OCF Ratio 16.3
Forward P/E 8.7
Recent Price $51.28
Dividend Yield 2.7%

Source: S&P Capital IQ. TTM = trailing 12 months.

In the first half of last year, Ensco acquired Pride International, making its offshore rig fleet the second-biggest, behind Transocean's (NYSE: RIG  ) . Ensco benefited from cost synergies in 2011 thanks to the acquisition and expects this to continue, with $100 million in forecast expense synergies in 2012 and $150 million in expense synergies starting in 2013 and beyond.

In the deepwater space, Ensco enjoys the second-newest deepwater fleet and the newest ultra-deepwater fleet in its peer group, with average ages of 7 years and 2 years, respectively. Also, Ensco owns the largest active premium jackup fleet. The company is expecting two semisubmersible newbuild deliveries in 2012, the ENSCO 8505 and the ENSCO 8506. This should afford Ensco an edge as the world continues to move deeper out to explore for oil.

Operational excellence
One of Ensco's strengths is its safe operating history. From 2005 to 2011, the company averaged an industry-beating incident rate, and was the industry leader in customer satisfaction in 2010. It was rated first in total satisfaction, health and safety, performance and reliability, and many other aspects. That type of recognition for things like safety and reliability is likely to bode well in a world where safety concerns have been elevated.

Overall, Ensco sees robust demand for drilling rigs. The jackup segment for the company's legacy fleet is likely to rise to clock in at 90% for the fourth quarter, and the jackup fleet in Asia is likely to be fully utilized in 2012. There's also reason to believe that deepwater permits in the Gulf of Mexico are picking up, and Petrobras has outstanding tenders for multiple rigs for three- to five-year contracts in Brazil, where the company already has six deepwater rigs operating.

Foolish bottom line
All in all, Ensco has a contracted revenue backlog of $9 billion, which compares favorably to trailing-12-month revenue of $2.2 billion. Deepwater rig utilization remains robust and Ensco's young fleet should enjoy strong demand going forward. Ensco believes that its safety and reliability track record, possession of a large fleet with many new deepwater assets, and upcoming newbuilds will help the company compete effectively, continuing the strong performance of recent years.

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Paul Chi is an analyst on the Fool's Alpha and Duke Street services. You can follow him on Twitter to stay up-to-date on his latest market commentary. Paul and Matt Argersinger co-manage the Street Fighter portfolio, where they look for cheap, unloved stocks with home run potential. Paul owns long-term call options on Transocean. The Motley Fool owns shares of Ensco and Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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