- CDS markets are grossly overstating credit risk with a CDS of 551bps relative to an Intrinsic CDS of 285bps, while cash bond markets are overstating credit risk with a cash bond YTW of 5.674% relative to an Intrinsic YTW of 4.494%. Additionally, Moody's is overstating ESV's fundamental credit risk, viewing the firm as a highly speculative, high-yield B2 credit that is three notches wider than Valens' HY1 (Ba2) rating
- Incentives Dictate Behavior™ analysis highlights that ESV management's compensation framework should focus management on driving growth while improving both margins and asset utilization, positives for credit investors. Also, management's limited change-in-control compensation lowers event risk - Earnings Call Forensics™ of the firm's Q2 2017 earnings call (7/27) highlights that management generated an excitement marker when talking about the high levels of operational performance that Atwood's semisubmersibles have delivered to customers. Additionally, they are confident about the value of Atwood's semisubmersibles and the strength of their balance sheet
- ESV currently trades well below the value of their UAFRS-based (Uniform) Assets, with a 0.4x Uniform P/B. Market expectations are for Uniform ROA to remain below cost-of-capital levels going forward, which appears fairly bearish even in the context of challenging macroeconomic conditions, indicating that equity is likely undervalued. Moreover, should credit concerns about the firm ease, equity upside could be material, even without Uniform ROA improvement
Ensco is an offshore contract drilling company engaged in providing offshore contract drilling services to the international oil and gas industry. As of Dec 31 2017, Co. owned and operated an offshore drilling rig fleet of 62 rigs. Co.'s rig fleet includes 12 drillships, 11 semisubmersible rigs, four moored semisubmersible rigs and 38 jackup rigs, including rigs under construction. Co.'s business consists of three operating segments: floaters, which includes its drillships and semisubmersible rigs; jackups; and other, which consists of management services on rigs owned by third-parties. Co.'s two reportable segments, floaters and jackups, provide one service, contract drilling.
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