ESV - Valens Credit Report - 2017 10 13
- 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.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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