Goldman Upgrades ENSCO To Buy, Sees 53% Upside

Goldman Sachs upgraded ENSCO PLC ESV to Buy from Neutral with an unchanged target price of $10.50, implying 53 percent total return.

The brokerage noted that ESV offers an option to investors to participate in upside from a potential "sharp" rebound in oil prices without taking too much downside risk.

"While ESV faces industry headwinds (as do other offshore drillers in our coverage), we believe ESV is relatively better positioned than peers, offering attractive stock upside due to its YTD underperformance (-55% vs. -33% for the peer group)," analysts including Waqar Syed wrote in a note.

Since Syed isn't expecting a "sharp recovery" offshore drilling's macro environment, ESV's balance sheet strength and available liquidity (>$2.5 billion through 2020) should protect it from downside risk and pave way for future stock performance.

In addition, ESV offers exposure to the jack-up market, on which the analyst has more positive near-term view than on the floater market.

"ESV's jack-ups offer exposure to Middle Eastern and South Asian markets, where we expect activity to recover first. Also, some of ESV's older jack-ups enjoy a technically competitive position in the Central North Sea," Syed noted.

The analyst also pointed out that ESV's lower profit concentration risk, as only 43 percent of its 2018 estimated gross profits are concentrated in the Top 3 rigs.

Meanwhile, Syed expects ESV to announce further cost cutting in October 2016 and sees a pick-up in jack-up demand, with announcements expected in fourth quarter for start-up in early 2017.

At time of writing, shares of Ensco rose 6.59 percent to $7.07.