Monday, September 25, 2017

Adding Ensco (ESV) to Portfolio

I wrote a post yesterday concerning my view that oil prices may have found a bottom. I think that increased demand is running into tightening supply.

Recent market sentiment towards oil prices is that we are in a permananet glut and that oil prices will stay low or even move back down in price.

My view is that low prices are the cure for low prices. As I explained yesterday , low oil prices have led to lower investment which will lead to supply challenges. I think we are there.

As I am looking for contrarian plays for the Couch Potato Contrarian portfolio I think there is an excellent opporotunity in offshore drilling company Ensco.

The offshore drilling industry has been hit paerticualry hard during the oil price bear market. Several offshore drillers have went bankrupt and others have entered into mergers with others.

In fact, Ensco is in the process of aquiring Atwood Oceanics. Here is a link to the presentation that outlines the merits of the aquisition. The presentation also discusses why the industry is currently bottoming.

I am investing in Ensco because I beleive that oil prices are going up and that investment in offshore oil drilling will increase. I also beleive that Ensco will be one of the Tier 1 best of class drillers and will outperform during the recovery.

One interesting piece of news is that UBS came out today and upgraded the drillers.

(snip)

UBS raised its price targets for offshore drilling equipment providers, pointing to signs of improving demand for oil rigs and stabilization in the sector. The bank's view that oil prices will normalize in 2020 and 2021, as well as measures taken to push out debt payments, bolsters the case for the companies, analysts said in a research note released on Monday.

(snip)

Steady utilization rates and growing rig demand for existing wells are offsetting the expiration of long-term contracts, the bank said.


"However, for the sector to truly tighten exploration (or greenfield) drilling would need to return which would only begin to occur with oil prices in the high-$50 to low-$60s," the analysts wrote.

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