108 The Business of Value InvestingTable 6.4 Ensco Free Cash Flow ($ millions )
Year CFFO Cap Ex Free Cash Flow
2004 $ 256 $ 304 – $ 48
2005 $ 358 $ 477 – $ 119
2006 $ 948 $ 528 $ 420
2007 $ 1242 $ 520 $ 722expenditures. Table 6.4 shows the four - year period, 2004 to 2007,
free cash fl ow.
A couple of observations should grab your attention. First, Ensco
is becoming more and more profi table. Cash fl ow from operations
has grown at a phenomenal rate, not surprising for a smaller player
in the oil services industry. Second, although capital expenditures
are increasing as the company grows and expands its fl eet, they are
more than offset by cash generated from operations leading to grow-
ing levels of free cash fl ow. Finally, the free cash fl ow growth rate of
nearly 70 percent in 2007 is not at all indicative of future cash fl ow
growth rates. The rate of growth will surely be much less.
As you might imagine, the demand for Ensco ’ s services is very
much affected by the price of oil. The year 2007 was a great one
for oil prices, but as we saw in 2008, the economy spiraled into a
nasty recession and the price of oil fell over 50 percent. However,
because many major oil companies plan their drilling projects
based on multiyear horizons, drilling demand won ’ t completely
die. Further, oil rigs typically are leased out on multiyear contracts,
which provide some stability during weaker environments. These
are some of the things that you should be aware of when forecast-
ing future cash fl ows.
At the end of 2008, Ensco ’ s CFFO was $ 1.2 billion and capi-
tal expenditures were $ 772 million, or free cash fl ow of $ 428 mil-
lion. Ensco is currently in the middle of expansion plan as it seeks
to acquire ultra - deepwater drilling rigs over the next few years.CH006.indd 108CH006.indd 108 9/2/09 6:58:09 PM9/2/09 6:58:09 PM