Ensco Sell-Off Offers Opportunities for Investors

Investors should celebrate when stocks decline since declines often present opportunities to make outsized returns or collect outsized dividend yields. Here is one such opportunity.

Jul 15, 2014 at 3:22PM

Investors should not always become disheartened when a stock declines in price. This is because a decline in price can often present an opportunity to get into or increase your position in an investment for cheaper than you could previously. A decline in price carries a second benefit for an investor looking for income: a higher yield. Since a company's dividend (or distribution) yield is a percentage of the stock's price, if the stock price goes down then the yield will go up if the company doesn't cut its dividend. Thus, by buying into a dividend paying stock after its price falls, an investor can generate a higher income off of the same amount of money.

Look at offshore drilling companies
One sector that is worth looking at in order to take advantage of an opportunity like this is the offshore drilling sector. Many of the stocks in this sector have been beaten down due to concerns about short-term oversupply. However, the business model that is used by companies in the industry ensures that there are some companies that will be completely unaffected by this supply glut. Their stocks have also been beaten down and this presents an opportunity for investors to jump in at a low price and collect a sizable dividend yield at the same time.

Ensco offers opportunities
The first opportunity that we will discuss here is in the second largest company in the industry, Ensco plc (NYSE:ESV). Ensco owns and operates a fleet of 77 offshore drilling rigs which include both ultra-deepwater and shallow-water units. The company's ultra-deepwater fleet is one of the most modern in the industry and Ensco is the top rated firm for customer satisfaction in the industry. This should give it an advantage over its peers in competing for the few contracts that are still being awarded by exploration and production companies.

Strong contract coverage to ride through industry weakness
However, Ensco does not need to compete especially hard to acquire contracts because the majority of the company's rigs are already under long-term contracts that should allow the company's fleet to continue to generate strong cash flows through the current industry downturn until it begins to recover. In fact, Ensco already has contractual guarantees for more than 90% of its 2014 revenue guidance of $5.273 billion. This should provide assurance to investors that the company will continue to generate solid revenues regardless of what is going on in the industry.

Strong year-over-year growth likely to continue
Ensco has also shown admirable growth in the face of industry weakness over the past year. In the first quarter of 2014, Ensco reported an operating cash flow of $416.6 million compared to $342.1 million in the first quarter of 2013. The company's revenues also increased by 3% over the same period. The company's diluted earnings per share did fall somewhat, from $1.36 in the first quarter 2013 to $1.25 in the first quarter 2014, but this was mostly due to higher taxes and higher depreciation from a growing fleet and is therefore nothing to worry about.

Ensco also has forward growth prospects due to its large number of newbuild rigs that are scheduled to come online over the next few years. Ensco currently has eight offshore drilling rigs under construction, consisting of three ultra-deepwater drillships and five shallow water jack-ups. Two of the drillships have already secured contracts and will start working in 2015. In addition, one of the jack-up rigs has also secured a contract and will begin working in the fourth quarter of 2014. As these rigs leave the shipyard and begin working, Ensco will see its revenues and cash flows grow as these previously inactive rigs begin to earn money.

...yet the stock is falling
Despite the rather strong performance of the company and its forward growth prospects, Ensco's stock has not performed particularly well over the past year.

ESV Chart

ESV data by YCharts

As you can see from the above chart, Ensco's stock has gotten pushed down rather heavily over the past year. This provides an opportunity for investors to jump in and collect the high dividend while waiting for the price to recover. Ensco currently yields 5.40%.

Other high-yielding, solid drillers
Ensco is not the only solid offshore drilling company that has seen a decline in its stock price that has resulted in a yield which opportunistic investors can exploit. Another industry giant, Noble Corp. (NYSE:NE), currently yields 4.40%. The industry's dividend titan, Seadrill Ltd. (NYSE:SDRL), currently yields 10.63%. Each of these companies also has strong forward growth potential and the strong contact coverage needed to ride through the current short-term weakness.

Foolish Takeaways
In conclusion, a Foolish investor should celebrate, rather than panic, when a stock declines in price since it oftentimes presents opportunities to make outsized profits. Ensco and its peers in the offshore drilling industry could be one such opportunity.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Daniel Gibbs has a long position in Seadrill. His research firm, Powerhedge LLC, has a business relationship with a registered investment advisor whose clients may have positions in any of the stocks mentioned. Powerhedge LLC has no position in any stocks mentioned and is not a registered investment advisor. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers