Backlogs
Furthermore, cracks start to show when examining Ensco’s backlog and current fleet commitments. Ensco has an order backlog of $11 billion, locking in two-and-a-half years of revenue; based on the company first half revenue figure of $2.3 billion. In addition, Ensco’s fleet is currently assigned to many independent oil & gas producers, which to some extent exposes the company to both credit and liquidity risk .
On the other hand, Seadrill Ltd (NYSE:SDRL)’s current backlog is worth 25 quarters of revenue, based on Q2 figures. In my opinion, Seadrill’s larger order backlog, coupled with its large fleet expansion coming online during the next few years justify the company’s valuation premium when compared to Ensco. Additionally, Seadrill’s customers are mostly large multi-nationals so there is less customer credit and liquidity risk than Ensco is exposed to .
Fracking revolution
Meanwhile, an alternative to the off-shore drillers would be Noble Energy, Inc. (NYSE:NBL), which is highly active in the fracking and specialist oil and gas extraction industries. This is key for the future as companies and countries seek to unlock inaccessible hydrocarbon reserves through fracking, a method that was previously too expensive but is now worth the reward thanks to new technologies.
Fracking and the experience that Noble Energy, Inc. (NYSE:NBL) has in the industry could be key for Mexico, which has huge sales deposits but not the experience to extract them. Mexico’s state monopoly Pemex runs the oil and gas sector accounting for one third of Mexico’s revenue but production is declining, hitting 2.94 million barrels per day during 2011 from 3.59 million during 2002. Noble Energy, Inc. (NYSE:NBL)’s fracking experience could be invaluable in unlocking Mexico’s reserves, yet another huge opportunity for the company. More information on Noble Energy, Inc. (NYSE:NBL) and Mexico’s oil boom here.
Foolish summary
All in all, despite being the world’s second largest drilling company, Ensco’s growth and backlog is lagging behind that of its peers. In addition, while the company flounders and loses investor support, its competitor, Seadrill is surging ahead and the fracking revolution has resulted in boom in profits for the onshore drillers.
The article Does Ensco Deserve Its Low Valuation? originally appeared on Fool.com and is written by Rupert Hargreaves.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill.
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