The Rude Awakening
Wall Street, New York
Monday, September 18, 2006 ------------------------- - Time to make a strategic jump onto the energy train,
- Jacking up your profit potential with jacked-up rigs,
- Oil and Rainwater do mix, the week in the markets and
more...
------------------------- Eric Fry, still in Baltimore, reports... Houston, 1986. Oil prices are tumbling, real estate prices
are crashing, banks are going belly-up and no one wants
anything to do the oil business...Well, almost no one. At this very moment, Richard Rainwater decides to start
buying oil-drilling rigs on the cheap. He arranges a clever
deal with Texas banks to snag 65% of the nearly bankrupt
Blocker Energy. Shortly thereafter, he scoops up Penrod
Drilling, the large offshore drilling rig company owned by
the infamous Hunt brothers of Dallas. After Rainwater merges these two companies in the early
nineties, he finds himself atop one of the world's largest
drilling companies – the company we now call ENSCO
International (NYSE: ESV). Unfortunately, by the late
1990s, the oil sector's fortunes had failed to improve and
Rainwater's foray into oil-drilling begins to appear more
foolhardy than brilliant. "Rainwater's empire is a mess," a 1998 issue of Business
Week declared. "His huge bets on three sectors - energy,
real estate investment trusts, and health care — 'are all
in the crapper at the same time,' says pal Henry R.
Silverman, chairman and CEO of Cendant Corp., though he
feels that Rainwater's bets will eventually pay off." Eight years later, it's clear that Rainwater's "energy
bets" are paying off nicely. In an era of rising demand for
oil-drilling rigs, ENSCO International is flourishing.
Individual investors cannot duplicate Rainwater's gutsy
investment in the oil-drilling industry, but they can do
the next best thing...as Dan Amoss explains in today's
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By Dan Amoss "The essence of good business is knowing when to step on a
train and when to step off," billionaire investor, Richard
Rainwater, once explained. Over the last few weeks, many
panicked investors have been jumping from the runaway
energy stock train as it hurtled toward a seemingly certain
crash. But we think it's time to board this train for the
long-haul, and to find a seat in the boxcar that Rainwater
controls: ENSCO International (NYSE: ESV) The recent, ferocious selloff in the energy sector has
punished the shares of many superb oil companies. But we
think ENSCO is better bought than sold at current levels. ENSCO is among the cheapest stocks in the oil field
services industry. At $41 per share, the stock trades for 8
times estimated 2006 earnings. Even more amazing is the
fact that ENSCO's enterprise value (EV) is only 4.5 times
estimated 2006 EBITDA (earnings before interest, taxes,
depreciation, and amortization). "Enterprise value,"
because it includes both debt and stock, is the price you
would have to pay to acquire the entire company at its
current quoted price. An EV multiple of 4.5 times estimated 2006 EBITDA is very,
very cheap. It is what you would expect to pay for a
rapidly decaying business, not a company like ENSCO with a
very bullish long-term outlook. Furthermore, shipyard
maintenance on its young fleet is not going to be a big
cash drain — a concern with other drillers. Therefore, an
EV/EBITDA multiple of 8–10 times would be more appropriate
for ENSCO. Sustained high oil prices can be thought of as the most
important long-term factor when examining the state of the
contract oil drilling industry. But in the near term, a
more important factor for the health of the drilling
business is growth in capital spending at major national
and international oil and gas companies. After all, high
oil prices don't automatically lead these risk-averse
organizations to initiate new capital spending programs. 
Major oil companies only recently become more convinced of
the high return on investment offered by long-cycle
exploration and drilling projects. The chart above
illustrates the recent growth of "upstream" capital
expenditure – i.e. exploration and drilling projects. Not
surprisingly, this boom in upstream cap-ex has produced a
sharp rise in drilling rates. ENSCO specializes in jack-up
rigs, a type of offshore rig that is enjoying very brisk
demand. 
Jack-up rigs stand on the ocean floor with their hull and
drilling equipment elevated above the water on connected
leg supports. These rigs are the preferred rig types in
water depths of 400 feet or less, mainly because they
provide a more stable drilling platform with above-water
blowout prevention equipment. A key advantage this type of
rig has over fixed platforms is that they can be "packed
up" and towed to the next job fairly easily. Premium jack-up rigs are generally defined as rigs capable
of drilling in water depths of 250 feet and greater (up to
approximately 400 feet) and of independent-leg design. All
of ENSCO's jack-up rigs are considered premium jack-ups.
The jack-up rig hull supports the drilling equipment,
jacking system, crew quarters, storage and loading
facilities, and a helicopter landing pad. The reason that ENSCO remains the best-positioned jack-up
drilling rig contractor is due to management's contrarian
decision to aggressively expand and refurbish its fleet
during the industry downturn, when shipyard costs were far
lower than they are currently. The recently completed fleet enhancement included $1.3
billion in capital investments over several years. This
investment effort left ENSCO in an enviable position; its
average fleet age is about six years, compared with an
industry average of over 20 years. As a result, ENSCO will
continue to command leading jack-up day rates and will
generate proportionally higher levels of free cash flow
than competitors. Looking ahead, ENSCO is using some of its ample cash flow
to diversify further into deep-water drilling. The company
has commissioned the construction of two deep-water
submersibles. These two big rigs, the 8500 and the 8501,
are both under construction in Singapore shipyards. ENSCO 8500 and 8501 are both rated for 8,500 feet of water
depth and 35,000 feet of drilling depth. The first few
years of work for these deep-water rigs are already under
contract at high day rates. These contracts are so
attractive that the total revenue generated by these rigs
in the first 3–4 years will be greater than the entire cost
of building them). ENSCO's current list of contracts covering its drill-rig
fleet will provide very high cash flows over the next few
years. But the stock's depressed price seems to overlook
this likelihood. Plunging oil and gas prices, coupled with
a slight dip in jack-up day rates, has really spooked
drilling stock investors. That's why ENSCO has declined
from a high of $58 to the $40 range. You could join the swarms of panicked sellers...or you
could step on board the ENSCO train. What would Richard Rainwater do? --- Energy Special --- Your Chance to See Profits up to 257% - Or Your Money Back! Discover a seldom-used method to grab some gold at around
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