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Why One Brilliant Investor Just Went Long Offshore Drilling

By Matt Badiali, editor, S&A Resource Report
Wednesday, July 21, 2010

David Einhorn just gave you one more reason to be interested in offshore drilling stocks...
 
Einhorn doesn't command mainstream attention like Warren Buffett or George Soros. But he should. Einhorn is a brilliant investor who famously shorted Allied Capital in 2002 and Lehman Brothers in 2006, with enormous success.
 
He started his hedge fund, Greenlight Capital, in 1996 with just $1 million. He was 28 years old. Today, Greenlight has over $3 billion under management. It generated 25% annualized net returns for its partners over its lifetime. That's an astronomical return... and it makes him one of the handful of money managers worth following.
 
That's why it's interesting to note Einhorn is buying offshore drilling. The sector was hammered recently in response to the Deepwater Horizon fiasco.
 
Einhorn used the selloff to acquire a 5.2% interest in Ensco (ESV). Ensco is a London-based offshore driller whose American Depository Receipts (ADRs) trade in the U.S. (An ADR is a common way for a foreign company to trade on U.S. exchanges without the difficulties of cross-listing. A depository bank will issue the ADRs, which can equal a share, multiple shares, or even fractions of a share of the company.)
 
It's pretty easy to see what Einhorn likes in Ensco. The $5.8 billion company has nearly $1 billion cash above its long-term debt. That's about 15% of its market cap in extra cash in the bank. It also generates about 20% of its market cap in operating cash flow every year.
 
That tells us this is a good business. It has one of the highest profit margins in the industry. It's trading for around book value and under six times cash flow. A few other statistics tell us the management is top-notch, too. Here's how they spent the company's capital budget this year.
 
  • $2 billion to build new high-end deepwater ships
  • $800 million to build and upgrade the jackup fleet
  • $900 million to buy back shares
  • $200 million to pay off debt
 
That $900 million in share buybacks is like a synthetic 15.5% dividend for shareholders. Instead of giving you the cash, the company retired shares, which makes existing shares more valuable.
 
I also like this company's diversity. It has a worldwide drilling fleet of 43 rigs (with four operating deepwater rigs). About 25% operate in the Gulf of Mexico, 20% in the Asia/Pacific region, 19% in Europe, 19% in the Middle East, and 12% in Mexico. That's important. Companies solely focused on the Gulf of Mexico will struggle this year with the drilling moratorium. But Ensco will continue to generate solid earnings elsewhere in the world.
 
In addition, the company's rigs are in demand. It currently has a $2.8 billion backlog of work. That's a nice view looking out into the future.
 
I'm always interested when a well-known, successful investor buys a resource stock. In this case, I think Einhorn identified a great company with great fundamentals... and the publicity around his purchase should drive shares higher.
 
Good investing,
 
Matt Badiali




In The Daily Crux
Market Notes
Euro acts "toppy"... pushes over $1.30 Tuesday morning before quickly dropping back.
 
Whirlpool plummets on disappointing earnings reports.
 
Jack Daniel's maker Brown-Forman hits new 52-week high.
 
Earnings today... Coca-Cola (soft drinks), Abbott Labs (health care), Morgan Stanley (investment bank), Altria (Marlboros), Baidu (China's Google).
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1069.59 -1.3% +12.1%
Oil 34.20 -1.8% -2.1%
Gold 115.85 -0.7% +24.4%
Silver 17.31 -0.1% +29.9%
US-Dollar 83.24 +0.6% +5.7%
Euro 1.28 -1.0% -10.2%
Volatility 25.64 +7.2% +7.4%
Gold Stocks 440.70 -1.0% +23.1%
10-Year Yield 2.89 -1.4% -17.0%

World ETFs
Symbol Price
Change
52-Wk
USA 107.07 -1.3% +12.0%
Canada 25.65 -1.6% +12.3%
Russia 17.70 +1.6% -10.2%
India 30.93 -0.8% +4.3%
Israel 14.10 +0.6% +19.5%
Japan 9.27 -1.8% -2.1%
Singapore 11.76 -2.7% +21.6%
Taiwan 12.04 -1.8% +8.4%
S. Korea 47.45 -0.8% +21.4%
S. Africa 57.11 -0.2% +14.7%
China 40.02 -0.3% -1.7%
Lat.America 44.58 0.0% +21.9%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 104.06 -2.2% +0.5%
Big Pharma 59.69 -1.2% -2.8%
Internet 51.26 -3.3% +12.1%
Semis 12.90 -1.7% +10.3%
Utilities 29.95 -1.6% +5.1%
Defense 16.49 -0.5% +15.1%
Nanotech 8.42 -1.3% -5.6%
Alt. Energy 8.85 -1.1% -11.1%
Water 15.42 -0.8% +2.6%
Insurance 14.54 +0.4% +21.2%
Biotech 17.08 -1.0% +11.3%
Retail 15.90 -1.0% +8.4%
Software 20.86 -1.5% +19.1%
Big Tech 44.64 -1.4% +16.9%
Construction 11.46 -0.4% +0.9%
Media 11.49 -2.1% +27.5%
Consumer Svcs 55.47 -1.8% +20.3%
Financials 50.41 -1.7% +16.2%
Health Care 58.16 -1.5% +5.7%
Industrials 53.34 -0.5% +23.1%
Basic Mat 56.99 -0.3% +23.0%
Real Estate 48.38 -1.9% +46.1%
Transportation 74.78 -1.5% +24.2%
Telecom 19.37 -0.8% +9.4%

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