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.

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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.

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