Einhorn Comments on Ensco Position in Q2 Letter

Published on July 20, 2010

Last week, we reported that David Einhorn’s Greenlight Capital took a large position in Ensco plc during the second quarter.  Ensco was profiled in an article on The Rational Walk in early June and the company is scheduled to report second quarter earnings on Thursday, July 22.  Here is what Mr. Einhorn had to say about the Ensco purchase in his letter to shareholders (pdf) dated July 16:

Ensco plc (ESV) is an offshore contract oil drilling company operating a large fleet of shallow water jack-up rigs and a small but new fleet of deep water rigs.  The Deepwater Horizon oil spill and resulting 6-month drilling moratorium in the Gulf of Mexico caused significant share price declines throughout the sector.  ESV was not involved in the horrible accident, which should not materially impact the company’s long-term potential.  ESV has approximately $7 per share in net cash and a tangible book value of $37.50 per share.  The shallow water drilling business, which is unaffected by the drilling moratorium, generates $4.00 per share in unlevered mid-cycle earnings and $8.00 per share in peak earnings.  At the Partnerships’ average cost of $39.41 per share, we appear to be getting the shallow water fleet at a low value and the deepwater fleet (in which ESV has thus far invested over $15 per share to build and should add $2.00 and $4.00 to mid-cycle and peak EPS respectively) for free.  ESV shares ended the quarter at $39.28 each.

As we noted in the Ensco profile last month, sometimes the market can overreact to developments that are broadly impact an industry but have relatively less impact on specific companies within the sector.  The offshore contract drillers, as a group, are still recording attractive profits despite significant headwinds caused by the uncertain regulatory climate as well as oil prices that are far lower than at the 2008 peak and have negatively impacted contracted dayrates.  In the long run, the price of oil in a world of increasingly scarce traditional oil deposits will have far more of an impact on companies like Ensco compared to the transitory effect of regulatory changes in response to Deepwater Horizon.

Disclosure:  No position in Ensco.

Einhorn Comments on Ensco Position in Q2 Letter
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