Sector: 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% -40% 3.0% 2.5% 2.0% 15% 10% 5% 0% -5% -10% -15% -20% 30% 25% 20% 15% 10% 5% 0% $2,000 $1,500

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1 Applied Portfolio Management ESV Analysts: Jordan Crowell & Kevin Parhomek Ensco plc BUY Energy Sector: Report Date: Market Cap (mm) Return on Capital EPS (ttm) Current Price 12-mo. Target Price $13, % $6.08 $57.18 $55.00 Annual Dividend Dividend Yield Price/Earnings (ttm) Economic Value-Added (ttm) Free Cash Flow Margin $ % 9.4 $ % Business Description Ensco plc provides offshore contract drilling services to the oil and gas industry worldwide. The company operates through three segments: Floaters, Jackups, and Other. The company owns and operates an offshore drilling rig fleet of approximately 74 rigs, including 10 drill ships, 13 dynamically positioned semisubmersible rigs, 6 moored semisubmersible rigs, and 45 jackup rigs. Its drilling rigs are located in the North and South America, the Middle East and Africa, the Asia Pacific rim, and Europe and Mediterranean regions. The company also offers management services on rigs owned by third-parties. It serves Investment Thesis Ensco has positioned itself as a market leader in the offshore drilling industry. The company has been able to expand its rig fleet and enter into the highly profitable ultra deepwater market. Due to our optimism about the macro economy in the coming 6-9 months, we have chosen to overweight the energy sector of the Student Investment Fund. Ensco gives the fund some diversity within the sector, and provides the benefit of increased dividend yield and low P/E. The company has been able to grow its total revenue, EBIT and NOPAT in each of the past 3 years. Using conservative forecasts, we view the company as a longterm (3-5) year investment because of its high dividend yield and potential capital gains if the market corrects its current 18.83% undervaluation. 2-Yr Beta (S&P 500 Index) Annualized Alpha Institutional Ownership Short Interest (% of Shares) Days to Cover Short % 11.2% 4.9% 4.0 ESV 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% -40% Compared With: Transocean Ltd. Diamond Offshore Drilling, Inc. and the S&P 500 Index RIG NYSE:DO ESV 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% 5/11/2014 ^SPX ROA ROE ROIC 30% 25% ANNUALIZED 3-YEAR CAGR 20% Total Revenue EBIT NOPAT Earnings Per Share Dividends Per Share 43.2% 40.4% 41.1% 14.4% 27.9% Margins and Yields 2009 Operating Margin Free Cash Flow Margin Earnings Yield Dividend Yield 49.0% 19.5% 13.7% 0.3% Free Cash Flow Total Invested Capital Total Assets Economic Value-Added Market Value-Added % -3.4% 7.6% 2.0% % 0.1% 6.6% 3.0% 46.9% 34.4% 40.3% 121.7% -36.0% % 10% 5% 0% % 8.9% 8.5% 2.5% 35.7% 4.1% 10.6% 3.9% 2010 EBIT Net Operating Profit After Tax $2,000 $1,500 $1, Per Share Metrics (0.69) Earnings Dividends NOPAT Free Cash Flow Economic Value-Added (32.40) $2,000 $1,500 $1,000 $500 -$500 -$1,000 -$1,500 -$2,000 -$2,500 $600 $400 $200 -$200 -$400 -$600 Datasource: Capital IQ Market Valued-Added $ $ Price/Earnings Price/Free Cash Flow 3,000 2,500 2,000 1,500 1,

2 Analysts: Jordan Crowell & Kevin Parhomek Student Investment Fund Portfolio Recommendation: BUY Market Cap: $13.2 billion Current Price: $57.18 Sector: Energy Dividend Yield: 3.9% 12-month target price: $55 Sub-Sector: Oil, Gas & Coal P/E Ratio: 9.4 Beta: 1.33 Highlights Ensco plc. is the world s second largest offshore drilling company, and operates in a multitude of worldwide markets. ESV has focused on expanding its fleet in order to better compete in the ultra deepwater (UDW) market. ESV has been rated #1 in overall customer satisfaction for four consecutive years by EnergyPoint Research. Ensco has continued to grow revenues, EBIT, NOPAT, and Dividends over the past three years, while simultaneously expanding and modernizing its fleet. Business Summary Ensco plc provides offshore contract drilling services to the oil and gas industry worldwide. The company operates through three segments: Floaters, Jackups, and Other. The company owns and operates an offshore drilling rig fleet of approximately 74 rigs, including 10 drill ships, 13 dynamically positioned semisubmersible rigs, 6 moored semisubmersible rigs, and 45 jackup rigs. Its drilling rigs are located in the North and South America, the Middle East and Africa, the Asia Pacific rim, and Europe and Mediterranean regions. The company also offers management services on rigs owned by third-parties. It serves government-owned and independent oil and gas companies.

3 Ensco Plc. Investment Thesis With the modern world s heavy dependence on oil as a source of energy, ESV has positioned itself to benefit greatly from this demand in the future. With projected future economic growth, it is advantageous to include stocks with higher betas into the portfolio in order to capitalize on better overall market performance. ESV meets many of the criteria displayed in the SIF Investment Policy Statement; including paying above average dividends, having a modest ROIC-WACC spread, and is currently trading at a price significantly below its intrinsic value based on conservative but realistic forecasts. ESV has made competitive moves to better compete in the offshore drilling industry, which include increasing dividends even with declining EPS in 2010 &2011, purchasing Pride International in 2011 in order to increase the company s drilling fleet and access to human capital, and aggressively pursuing newer rigs while dispatching older ones in order to modernize the fleet for future market supremacy. Macroeconomic Thesis After analyzing the Conference Board s Economic Indicators, our team has projected a period of economic growth in the coming six to nine months. This period of increases economic activity means that companies will likely want to expand their business operations, and the demand for energy will be farther heightened. With the world s energy needs growing by the day, crude oil has continued to rise in price over the past five years after the recession. The combination of increased economic activity and therefore demand for oil makes Ensco Plc. an attractive investment option.

4 Historical Analysis Ensco Plc. has proven to be a financially sound company throughout the past five years. The company has been able to grow revenues and net income substantially for three consecutive years, and has also been committed to paying and growing their dividend. Even with declining EPS in 2010 & 2011, ESV was determined to return capital to its investors by growing dividends 975% in 2010 and 30% in In addition, the company has made significant competitive moves in recent years, including a $7.3 billion purchase of Pride International that allowed the company to increase its fleet size by 26 rigs. While Ensco s CEO Dan Rabun explained the move by saying It s easy to order rigs; it s little tougher to contract them and operate them this is clearly about access to assets, access to people and access to markets and customers, which just ordering and new-building does not necessarily give you. While the acquisition did allow Ensco to approach Transocean as far as number of rigs, the company sees this move as one that will provide long-term gains. ESV has also begun modernizing its fleet by selling off older jackup rigs and ordering new ultra deepwater (UDW) rigs. These rigs are able to drill at over 7,500 feet below sea level. Because of this ability, the UDW rigs are able to demand a much larger dayrate than other rigs.

5 For investors attempting to accurately project a company s future trajectory and value it accordingly, NOPAT and free cash flow play a major role in their valuation. As shown above, ESV has been able to increase its NOPAT for the past three years, but this success is not always mirrored in their free cash flow. As noted earlier, Ensco made a $7.3 billion acquisition in 2011, which caused free cash flow to be negative for that year. While some investors may see this large, negative free cash flow value as a red flag, our research shows that it has actually helped the company tremendously. It is worth noting that this sharp decline does not have an effect on the company s steadily rising NOPAT or free cash flow growth in the following years. In addition to a large, negative 2011 free cash flow value, the acquisition of Pride provided a large increase in ESV s total invested capital and net fixed assets. While Ensco was able to double its total invested capital in one year, the company also experienced a significant decline in its return on invested capital in This metric, along with ESV s return on assets and return on equity, has rebounded nicely since the acquisition, and ROE & ROIC have surpassed their pre-acquisition levels.

6 SWOT Analysis Strengths One of the main strengths of Ensco is their high commitment to customer service. Ensco has been rated #1 overall in customer satisfaction in the offshore drilling industry for four straight years. The acquisition of rival company Pride International in 2011 was due in large part to the expansion of customer service possibilities the acquisition would provide to Ensco. In addition to the #1 overall rating in customer satisfaction, Ensco was rated #1 in eight out of fourteen categories in their independent customer survey. The eight categories they were rated #1 in were total satisfaction, performance and reliability, deepwater drilling, shelf drilling, technology, horizontal and directional wells, special applications, and North Sea. In addition to their strength in customer satisfaction, Ensco also shows strength in the size of their oil rig fleet. Ensco has the second largest fleet collection among oil drillers with a total of 74 rigs, including 46 jackup rigs and 19 ultra deepwater rigs. The large fleet Ensco possesses also provides them with additional strength in the form of allowing their fleet to be dispersed globally. Having their fleet dispersed globally means that Ensco won t be affected as much as other competitors if production slows in any particular geographic region since they can make up for the slow in production in other locations. Weaknesses The main weakness of Ensco is the bargaining power of customers. There are only a handful of large customers that Ensco and other oil drilling companies must rely on for their revenue incomes. Ensco s top five customers accounted for 45% of their total revenue in 2013, and their top customer accounted for 17% alone. This inequality between buyers and sellers gives a large amount of power to the buyers which the buyers can use to their advantage. Another weakness of Ensco is the high cost of stacking when demand weakens. Stacking can be equated to putting an oil rig into storage, with warm stacking (when the crew remains on the rig and are standing by to start working) being similar to a short-term storage and cold stacking (when the rig is shut down completely and the entire crew is removed) being similar to long-term storage. Due to the high costs involved with reactivating a cold stacked unit, most rigs will normally be held in the warm stacking state unless the company does not expect to obtain a contract anytime in the near future.

7 Finally, Ensco also shows a weakness in the fact that the personnel required to operate ultra deepwater rigs is in very short demand during both poor and favorable economic conditions. The short supply of personnel with the knowledge needed to operate these rigs was one of the main factors in the buyout of rival company Pride International. Even with this acquisition though, Ensco still has a limited number of personnel that are capable of running ultra deepwater rigs, and must manage those personnel accordingly to gain the maximum amount of revenue possible. Opportunities All of the opportunities for Ensco are intertwined between each other. For starters, the continued expansion of their fleet size (especially ultra deepwater rigs) in the coming years allows them opportunity to grow and continue to increase profits. This growth and increase in profits from the increased fleet size is partially due to an increase in demand for oil from customers as the price of oil continues to rise. As long as oil prices are rising it will give Ensco the reason and opportunity it needs to continue increasing its fleet size while simultaneously increasing profits as well. This of course is all reliant on Ensco being able to predict where to place their new rigs as they become operational to match the areas where new drilling will take place in the coming years. The portion of growth they can capture in the industry is directly correlated to how well they can predict where to place their new rigs as they become operational. Threats The biggest threat to Ensco is the threat of alternative fuel sources becoming more viable. Fortunately for Ensco and others, this threat is a very long term threat and not something that has any real possibility of impacting Ensco in the near future. Although it is also an opportunity, the possibility of having an oversupply of new drilling rigs. If economic conditions take a downturn the new rigs being produced by Ensco could end up being stacked, due to the decreased demand for oil worldwide. This would end up costing Ensco money since they wouldn t be able to put their new rigs into use immediately, and would have to stack even more rigs than they have been stacking thanks to the new rigs being completed. This should not be a threat that Ensco has to worry about as long as conditions are continuing like they are now though.

8 Finally, the possibility of new regulations within the oil and natural gas industry is a threat that can never be overlooked. The Macondo oil spill in 2010 caused many new regulations to be created for the oil and natural gas industry; including separating the duties of the Bureau of Ocean Energy, Management, Regulation and Enforcement into two new separate organizations. The operating expenses of Ensco increased as a result of these new regulations so that they would be able to adhere to the new regulations effectively. Additional new regulations being added to the industry could happen at any time, and with these regulations would come even higher operating expenses for Ensco. The Deepwater Horizon disaster caused the largest oil spill in U.S. history, forever changing the public s view of the offshore drilling industry.

9 Porter s Five Forces Ensco Plc. has positioned itself within a very competitive industry that is comprised of many different suppliers of oil. By evaluating this market using Porter s five forces, we can determine the level of competitive rivalry within the offshore drilling industry. Bargaining Power of Suppliers: Low Ensco relies on suppliers for oilfield services & rig construction. Ensco is able to maintain bargaining power over its suppliers because there are so many oilfield service companies who bid on jobs. The company also has the ability to maintain bargaining power over its suppliers of new rigs because these companies rely heavily on a few large firms for their revenue. The capital intensive and specialized industry does not allow rig manufacturers to gain bargaining power over their customers. It is for these reasons that we give this force a rating of low. Bargaining Power of Customers: High Ensco, along with many other offshore drillers, relies on contracts from only a select few large customers for their revenue. This imbalance between the low number of customers and high number of suppliers gives customers in this market a great deal of bargaining power over offshore drillers. For these reasons, we give this force a rating of high. Threat of New Entrants: Low The offshore drilling industry is one that is very difficult to move in to. The drilling rigs require millions of dollars of capital to acquire and maintain, and the expertise that is required to operate and be successful in the industry is in very short demand. Given the pedigree of large players in the market, it would also be very difficult to establish a clientele for a small, developing company in an already populated industry. For these reasons, we give this force a rating of low. Threat of Substitute Products: Low Alternative fuel sources are the way of the future, but are any of them viable options right now? Our research shows that alternative fuel sources are not a legitimate threat to the oil industry at this point because each source has its own drawbacks. However, the rising price of oil does create an opportunity for substitute goods in the future. While alternative fuel sources will eventually cut into the production of offshore drilling companies, we do not see this as a threat in our 3-5 year investment horizon, and therefore give this force a rating of low.

10 Competitive Rivalry: High Ensco operates in an industry that is not involved in differentiated products, and therefore has a much more daunting task when competing with other companies. Ensco is just one of many companies that a customer could choose to do business with, and price is the main determinant of which companies are contracted for jobs. Because of these factors, we give this force a rating of high. Porter s Five Forces Summary After evaluating the offshore drilling industry, we can conclude that offshore drilling is a very alluring industry. For well established companies like Ensco, the high barriers to entry and current lack of viable substitutes make the industry attractive. High barriers to entry and a lack of substitutes allow companies like Ensco to focus more on increasing operating efficiency and developing a sustainable competitive advantage for the long term, rather than focusing on new competitors or rapid changes in the market. Comparative Analysis A comparative analysis between Ensco and Transocean (the world s largest offshore driller) shows that the two companies are on much different paths heading into the future, and Ensco looks to have a much brighter future than its main competitor. Fleet Size and Makeup Ensco Transocean 74 Total (+7 under construction) 79 total (+7 under construction) 46 jackups (+3 under 11 jackups construction) 19 UDW (+3 under construction) 27 UDW (+7 under construction) While Ensco and Transocean both compete in the same industry, it is easy to see where the companies differ. Ensco has continued to expand its fleet of jackups that are used for more shallow water drilling, and has the largest jackup fleet in the world. As for Transocean, the bulk of their fleet is concentrated on ultra deepwater drilling rigs that can drill at depths of more than 7,500 feet below sea level. Not only can these rigs drill deeper, they also bring in a much more lucrative dayrate than jackups. During 2013, the average dayrate for jackup rigs was $106,000, while the average dayrate for UDW rigs was a staggering $465,000. With UDW drilling becoming a more popular option in recent years, Ensco was late to position itself in the UDW market and allowed Transocean and other competitors to dominate the market for UDW drilling. Ensco has since been working to strengthen its UDW fleet, and has also focused on modernizing its other fleet segments. These strategic moves should allow the company to gain

11 market share in the developing UDW market, while maintaining its advantage in shallow drilling markets with its modernized jackup segment. Market share Ensco had been working to gain market share from Transocean with little success until In 2010, Transocean saw significant losses in both profits and worldwide popularity when its Deepwater Horizon exploded in the Gulf of Mexico and caused the largest oil spill in U.S. history. The company s reputation was forever tarnished, and the escalation of Ensco as a market leader was exacerbated by its competitor s faux pas. Ensco gained an 8% market share increase on Transocean the following year, and has been gaining ground at a rapid rate ever since. This upward trend for Ensco can be explained by their four consecutive years receiving awards for being #1 in Total Satisfaction among offshore drillers by EnergyPoint Research from years During that time span, Transocean ranked near the bottom in each year after winning the award in each year from Income Statement Forecast The valuation of ESV was performed using modeling assumptions that were conservative, yet realistic. The overall intrinsic value of the offshore drilling company is estimated using a variety of approaches. A discounted free cash flow model based on a 5-year forecast generated a current intrinsic value of $67.56, which indicates ESV is currently under-valued by 30%. The company was also valued using a more conservative dividend discount model, which valued the company based only on its expected future dividend payments. The modeling assumptions and intrinsic value estimates are further explained below.

12 Revenue Growth Revenue Growth Avg. 2014E 2015E 2016E 2017E 2018E -15.8% -11.4% 67.1% 53.7% 14.4% 17.0% 5.0% 10.0% 5.0% 5.0% 2.5% ESV has experienced volatile revenue growth in recent years, but is expected to return to normal levels of revenue growth in the coming years. The entire market struggled in 2009 & 2010 when the U.S. economy was recovering from recession, but Ensco seems to have pulled out of its tailspin. The company saw unprecedented revenue growth in years 2011 & 2012, but we do not foresee this as being a normal occurrence for the company in the future. We have forecasted revenue growth well below the company s 5-year average of 17.0%, and see these projections as being both conservative and realistic. The 10.0% revenue growth projected for year 2015 is based on the completion of Ensco s new rigs that will become available in early This mirrors the drastic revenue increase that the company last saw a substantial increase in its fleet size, (2011) although we do not expect revenue growth in 2015 to rival that of The 2.5% perpetual growth gives the company a conservative, but attainable bump for free cash flow valuation. Gross Margin Gross Margin Avg. 2014E 2015E 2016E 2017E 2018E 62.5% 55.7% 48.2% 52.8% 51.2% 54.1% 51.0% 51.0% 51.0% 51.0% 51.0% Ensco s 2009 & 2010 gross margins are unstable and unrealistic to use in our conservative forecast, but ESV s gross margin has remained stable around a 3-year average of 51.0%. Operating Margin Ensco s ability to achieve and maintain an operating margin above 35% for four of the past five years proves that the company has the ability to maintain a steady operating margin over time. In order to be conservative, an operating margin of 35% is used in all forecasted years. Net Margin Ensco s ability to achieve and maintain a net margin above 27% for four of the past five years proves that the company has the ability to maintain a steady net margin over time. In order to be conservative, a net margin of 27% is used in all forecasted years.

13 Common Shares Growth C.S. Growth Avg. 2014E 2015E 2016E 2017E 2018E -0.8% 0.4% 36.3% 19.4% 0.7% 10.3% 1.0% 1.0% 1.0% 1.0% 1.0% ESV has actively used equity in order to raise capital in the past, but its use of equity has been sporadic. The large increases in 2011 & 2012 were used to fund the acquisition of Pride International. Because the company does not seem to follow a specified trend or stay within a stable range of common shares growth, we have projected a 1.0% increase in common shares for all forecasted years. This increase will somewhat dilute our intrinsic value calculation and create a larger margin of safety in our valuation. Dividend Growth Dividend Growth Avg. 2014E 2015E 2016E 2017E 2018E 0.0% 975.0% 30.2% 7.1% 50.0% 86.4% 12.0% 10.0% 10.0% 5.0% 3.5% Ensco is obviously committed to paying and growing its dividend moving into the future. While the company has grown its dividend in large increments in the past four years, we have implemented much more realistic and conservative growth rates in our forecasts. Our forecasted dividend growth culminates in a 3.5% perpetual growth rate.

14 Balance Sheet Forecast The balance sheet forecast for Ensco was rather interesting to piece together due to the acquisition of Pride International happening in 2011, which is right in the middle of the previous years we had to use to model our future expectations of the company. Due to this, we used a large number of two and three year averages and worked from there for our predictions. For cash and equivalents a three year average of 10% was used. The first two years of our data (2009 and 2010) had much higher percentages, and we felt it would throw off the results in our forecast if they were included. Total receivables has been in a decline over the past three years so we bumped down the results a bit from the five year average of 19.3% to 17% to reflect this decline. For inventory we went stuck with the five year average. The previous two years reflect the five year average closely, and we wanted to be conservative in our metrics. As a result, we simply stuck with the five year average for this metric instead of using a two or three year average that would have bumped the percentage up slightly.

15 For current assets we used a three year average, similar to cash and equivalents, due to the much higher percentages in 2009 and 2010 and also as a way to be more conservative in our future estimates. For net PP&E and total assets we used a two year average. This is because the large jump in the percentage in 2011 from the acquisition of Pride International causes the average to be higher than it should be, and because the percent hanged around the same level in the years preceding and following For payables and accruals we simply toned down the percent from last year slightly. Not including 2011, the average has been right around 13% historically; and not the average presented or what you get from a two or three year average. Similarly for current liabilities, we simply toned down the number from last year. This was done in an attempt to be conservative in our forecasting and because the average in the other years was slightly above 20%. Finally, for total debt and total equity we used two year averages. The high fluctuation in the percentages over the years in these two metrics caused us to be more cautious and base our averages off a shorter period of time as opposed to a longer time period. In 2015 we gave Ensco a boost in net PP&E, total assets, payables and accruals, total current liabilities, total debt, and total equity. This is to reflect the seven new rigs that will become operational and start drilling in this year. We attempted to model the boost Ensco had in 2011 when acquiring Pride International, but we made the boost smaller since they aren t getting as many rigs in We thought about tapering the boost off over two years but decided not to since Ensco nearly returned to previous levels the year after acquiring Pride International, and the boost we gave them in 2015 wasn t nearly as large as the one they had in 2011.

16 WACC-ROIC Spread The weighted average cost of capital in our model is 8.415%. In comparison, the return on invested capital is 9.5%; which means that although it isn t a very large spread between the two, there still is a spread between the weighted average cost of capital and the return on invested capital. This means that Ensco makes.01 for every dollar invested in the company. Although this may seem like an insignificant amount of money, this is actually a very large sum when you look at how much money is invested into a company like Ensco. The amount made from the 1% spread between the weighted average cost of capital and the return on invested capital can be in the tens, or even hundreds of millions of dollars with the level of investments made into the company.

17 Intrinsic Value of FCFs Valuation Model Based on our forecasts for ESV s income statement, balance sheet, and WACC calculation we arrived at a 2014 per share intrinsic value of $ This value, when compared to the projected 2014 year-end stock price, has Ensco being $15.74 (30%) undervalued in This significant undervaluation allows the opportunity to purchase the shares before the value is recognized and corrected by the market in the future. Even with Ensco being stressed in our forecasts, our projections still have the stock increasing per share intrinsic value each year. These conservative forecasts project a future in which the intrinsic value of ESV will not significantly change, positively or negatively, in a short period of time. Due to the moderately bright future under stressed circumstances paired with a solid dividend stream, we conclude that Ensco has a great deal of upside risk in the future.

18 Dividend Discount Model For the dividend discount model we used our expected dividend growth rates along with our alternative beta of 1.20 that came from smoothing the two year beta of We smoothed the beta to 1.20 because of the steep decline seen between the five and two year beta, which leads us to believe the beta will continue to taper down towards the average beta level of The results of the dividend discount model show that the dividend alone has an intrinsic value of $44.73, which is over 70% of the current price of Ensco s stock. This is a good sign for Ensco because it means a lot of the current value for the stock comes from the dividend instead of having it come from economic value-added.

19 Conclusion After conducting our analysis of Ensco Plc. our research shows that the company has positioned itself to thrive in the offshore drilling market in the coming years. We recommend a buy of Ensco for the Student Investment Fund since it meets many of the criteria listed in the SIF s Policy Statement including: paying above average dividends, having a modest ROIC-WACC spread, and is currently trading at a price significantly below its intrinsic value based on conservative but realistic forecasts. We view this stock as a long-term (3-5 year) investment with dependable dividend payments and potential capital gains. This equity will help to overweight the SIF in the Energy sector (as we have optimism about the macroeconomic future), and will diversify us within the sector as well. For all of these reasons, we recommend a BUY for ESV.

20 ESV 2008 Total Revenue Gross Profit Operating Income Net Income Retained Earnings Total Common Shares Total Diluted Shares Earnings Per Share Dividends Per Share Sector Historical Income Statement Highlights ,243 1,506 1,280 1,151 4, $ Cash and Equivalents Total Receivables Inventory Total Current Assets Net PPE Total Assets Payables and Accruals Total Current Liabilities Total Debt Total Equity Ensco plc 1,889 1, , $ , , $4.11 $1.08 2,798 1, , $3.12 $1.40 4,301 2,273 1,565 1,170 6, $5.10 $1.50 Historical Balance Sheet Highlights ,401 3,871 5, ,684 1, ,653 4,477 6, ,507 1, ,437 5,050 7, , ,681 12,422 17, ,333 5,003 10, ,724 13,146 18, ,798 11,852 Total Revenue $2,000 $7,000 $6, E 4,920 2,517 1,759 1,418 7, $6.14 $ ,166 2,635 1,808 1,395 8, $5.98 $ E ,535 14,311 19, ,047 4,719 12, ,263 15,497 21, ,033 5,321 13,839 Report Date Forecasted Income Statement Highlights 2015E 2016E 2017E 5,682 2,898 1,989 1,534 9, $6.51 $2.77 5,966 3,043 2,088 1,611 9, $6.77 $3.05 $4, ,489 19,888 29,264 1,421 2,273 8,239 17, , ,613 17,899 24, ,193 6,145 15,984 $2,000 Total Current Assets Cash and Equivalents Total Assets $30,000 $2,000 $25,000 $1,500 $20,000 $1,000 $500 THE REAL FINAL EXCEL FOR ENSCO. Datasource: CapitalIQ Net PPE $35,000 $2, E 626 1, ,744 18,794 25, ,253 6,453 16, , ,813 19,264 26, ,284 6,614 17,203 Earnings Per Share E Dividends Per Share $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $ $500 $1,000 5/11/2014 6,421 3,275 2,248 1,734 11, $7.14 $3.31 Net Income $1,000 $3,000 6,265 3,195 2,193 1,691 10, $7.04 $3.20 Forecasted Balance Sheet Highlights 2015E 2016E 2017E $1,500 $5,000 $3, Energy 20,000 15,000 10,000 $15,000 $10,000 5,000 $5,000 0 Financial Analysis & Valuation, Page 1 of 5 Total Equity Total Debt 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Copyright Robert A. Weigand, Ph.D., 2013

21 Margins E 2015E 2016E 2017E 2018E Gross Profit Margin 67.2% 62.5% 55.7% 48.2% 52.8% 51.2% 51.0% 51.0% 51.0% 51.0% 51.0% Operating Profit Margin 57.1% 49.0% 38.0% 27.9% 36.4% 35.7% 35.0% 35.0% 35.0% 35.0% 35.0% Net Profit Margin 51.3% 41.3% 34.6% 21.5% 27.2% 28.8% 27.0% 27.0% 27.0% 27.0% 27.0% Free Cash Flow Margin 17.4% 0.0% 10.9% 0.0% 7.9% 11.7% 0.7% 0.0% 51.3% 15.1% 22.5% 80% 70% 60% 50% 40% 30% 20% 10% 0% Gross Profit Margin Operating Profit Margin 60% 50% 40% 30% 20% 10% 0% Net Profit Margin Free Cash Flow Margin Liquidity and Debt E 2015E 2016E 2017E 2018E Days Sales Outstanding Inventory Turnover Total Debt to Equity 5.9% 4.7% 4.0% 46.0% 40.5% 36.9% 38.4% 46.8% 38.4% 38.4% 38.4% Total Debt to Assets 4.7% 3.8% 3.4% 27.9% 25.8% 24.2% 24.9% 28.2% 24.9% 24.9% 24.9% 120 Days Sales Outstanding Inventory Turnover 60 50% Total Debt to Equity Total Debt to Assets % 30% 20% 10% 0 0 0% Profitability E 2015E 2016E 2017E 2018E Total Asset Turnover Equity Multiplier Return on Assets 19.7% 11.6% 8.2% 3.4% 6.3% 7.3% 6.5% 5.2% 6.5% 6.5% 6.5% Return on Equity 24.6% 14.2% 9.7% 5.5% 9.9% 11.1% 10.1% 8.7% 10.1% 10.1% 10.1% Return on Capital 21.4% 12.9% 8.8% 5.0% 9.3% 10.2% 9.5% 8.5% 9.5% 9.5% 9.5% Total Asset Turnover Equity Multiplier % 25% 20% 15% 10% 5% 0% Return on Equity Return on Assets 30% 25% 20% 15% 10% 5% 0% Return on Equity Return on Capital THE REAL FINAL EXCEL FOR ENSCO. Datasource: CapitalIQ Financial Analysis & Valuation, Page 2 of 5 Copyright Robert A. Weigand, Ph.D., 2013

22 Capital, NOPAT & FCF E 2015E 2016E 2017E 2018E NOWC 1,073 1,311 1, ,115 1,171 1,200 Net Fixed Assets 3,871 4,477 5,050 12,422 13,146 14,311 15,497 19,888 17,899 18,794 19,264 Total Invested Capital 4,944 5,789 6,148 13,032 13,995 14,938 16,463 20,268 19,014 19,965 20,464 Effective Tax Rate 17.4% 19.2% 14.9% 16.0% 16.7% 13.6% (Tax rate from last historical year used in forecasts) NOPAT 1, ,304 1,519 1,562 1,718 1,804 1,894 1,942 Free Cash Flow N/A , ,087 3, ,443 NOPAT Per Share FCF/Share N/A Return on Capital 21.4% 12.9% 8.8% 5.0% 9.3% 10.2% 9.5% 8.5% 9.5% 9.5% 9.5% $25,000 $20,000 $15,000 $10,000 $5,000 Total Invested Capital Net Fixed Assets $4,000 $2,000 ($2,000) ($4,000) ($6,000) ($8,000) NOPAT Free Cash Flow $800 $600 $400 $200 -$200 -$400 -$600 Economic Value-Added Market Valued-Added $2,500 $2,000 $1,500 $1,000 $500 -$500 -$1,000 -$1,500 -$2,000 -$2,500 Intrinsic Value of FCFs Valuation Model Value Creation E 2015E 2016E 2017E 2018E Economic Value-Added Market Valued-Added ,562-1,866 1, , ,836 1,782 1,827 PV of Future FCFs 8,495 9,306 9,907 16,969 18,055 18,997 20,559 24,376 23,369 24,392 25,002 Value of Non-Oper. Assets 790 1,141 1, Total Intrinsic Firm Value 9,285 10,448 10,958 17,399 18,542 19,163 21,075 24,944 23,966 25,018 25,644 Intrinsic Value of Equity 9,011 10,191 10,718 12,397 13,744 14,444 15,755 16,705 17,820 18,566 19,030 Per Share Intrinsic Value $63.63 $72.58 $76.01 $64.50 $59.91 $62.56 $67.56 $70.92 $74.91 $77.27 $ Year-End Stock Price $28.39 $39.94 $53.38 $46.92 $59.28 $57.18 $50.43 Over (Under) Valuation/Sh ($35.24) ($32.64) ($22.63) ($17.58) (.63) ($5.38) % Over (Under) Valued % -81.7% -42.4% -37.5% -1.1% -9.4% Cost of Capital 2013 Weight % Cost Wgt Cost Equity Capitalization 13, % 9.9% 7.3% Total Debt 4, % 5.0% 1.1% Preferred Stock 0 0.0% 0.0% 0.0% Value of All Securities 17, % Effective Tax Rate 13.6% Long-Term Growth Rate: Risk-Free Rate 2.678% 2.5% 5-Yr Beta Alternative Beta: Market Risk Premium 6.0% 1.20 CAPM Cost of Equity 9.878% Weighted Average Cost of Capital: 8.415% $90 $80 $70 $60 $50 $40 $30 $20 $10 Year-End Stock Price Per Share Intrinsic Value ($5) ($10) ($15) ($20) ($25) ($30) ($35) ($40) Over (Under) Valuation/Sh % Over (Under) Valued 0% -20% -40% -60% -80% -100% -120% -140% THE REAL FINAL EXCEL FOR ENSCO. Datasource: CapitalIQ Financial Analysis & Valuation, Page 3 of 5 Copyright Robert A. Weigand, Ph.D., 2013

23 Relative Valuation 2008 Stock Price/Intr. Value Price to Earnings Price to Free Cash Flow Price to Sales Price to Book Earnings Yield Dividend Yield Free Cash Flow Yield 2009 $ N/A % 0.4% N/A Price to Earnings $ N/A % 0.3% -1.7% 2010 $ % 2.0% 2.4% $ N/A % 3.0% -69.1% $ % 2.5% 2.5% Price to Free Cash Flow E $ % 3.9% 4.4% $ % 3.7% 0.2% Price to Sales E 2016E $ N/A % 3.9% -12.5% 2017E $ % 4.1% 17.2% Earnings Yield E Metric $ $22.15 $91.65 Estimated Target Prices vs. Current Price PV of Free Cash Flows Dividend Discount Model Price to Earnings Price to Free Cash Flow Price to Sales Price to Book Target Price $67.56 $67.56 $67.56 $ E $50.43 $67.56 $44.73 $67.56 $67.56 $67.56 $67.56 Dividend Yield 16% 14% 12% 10% 8% 6% 4% 2% 0% 4.0 Adjust Ratio $ % 4.2% 7.6% Price to Book 5.0 Relative Valuation Pricing Model 2014E Ratio Ratio Price to Earnings 11.3 Price to Free Cash Flow Price to Sales 3.0 Price to Book E $ % 4.1% 5.1% Dividend Discount Valuation Model ESV Ensco plc Annual Dividend $1.08 $ Yr Div Growth 3-Yr Div Growth 5-Yr Div Growth Risk-Free Rate 5-Yr Beta Market Premium Required Return Alternative Beta Estimated Target Prices vs. Current Price 50.0% 27.9% 86.4% 2.68% % 9.9% 1.20 May 11, $1.50 PV Dividends 1-4 PV Perpetual Div. Intrinsic Value Current Price 2013 $2.25 $9.08 $35.64 $44.73 $50.43 ($50.43) 12.0% 2014E $2.52 Expected Dividend Growth Rates 10.0% 10.0% 5.0% 2015E 2016E 2017E $2.77 $3.05 $ % 2018E $ % Dividend Yield If Purchased For: Expected Return = $2.52 $2.77 $ % $3.05 $ % $51.96 Analyst Notes: Based on a current dividend of $2.25, expected growth as shown above and an equity required return of 9.9%, ESV is worth $44.73 per share, vs. a current price of $ Compared With: Compared With: Transocean Ltd. S&P 500 Index Diamond Offshore Drilling, Inc. $80 $70 $60 $50 $40 $30 $20 $10 Current Price PV of Free Cash Flows Dividend Discount Model Price to Earnings THE REAL FINAL EXCEL FOR ENSCO. Datasource: CapitalIQ Price to Free Price to SalesPrice to Book Cash Flow 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% -40% ESV RIG Financial Analysis & Valuation, Page 4 of 5 NYSE:DO 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% ESV ^SPX Copyright Robert A. Weigand, Ph.D., 2013

24 Piotroski Financial Fitness Scorecard (10-point scale) E 2015E 2016E 2017E 2018E Positive Net Income Positive Free Cash Flow Growing ROA (% change NI > % change TA) Earnings Quality (Operating Income > Net Income) Total Assets Growing Faster Than Total Liabilities Increasing Liquidity (Current Ratio) % Change Shares Outstanding (Diluted) < +2.0% Expanding Gross Margin Asset Turnover (% change sales > % change assets) Total Liabilities to Operating Cash Flow (EBIT) < Piotroski Score Altman Probability of Bankruptcy Z-Score Weight E 2015E 2016E 2017E 2018E (Current Assets-Current Liabilities)/Total Assets Retained Earnings/Total Assets Earnings Before Interest & Tax/Total Assets Market Value Equity/Total Liabilities Sales/Total Assets Altman Score The interpretation for the Altman Score is: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < Piotroski Financial Fitness Scorecard (10-pt scale) Altman Probability of Bankruptcy Z-Score THE REAL FINAL EXCEL FOR ENSCO. Datasource: CapitalIQ Financial Analysis & Valuation, Page 5 of 5 Copyright Robert A. Weigand, Ph.D., 2013