CooperCameron (IL/A): Turning the corner?
Goldman Sachs May 30, 2005
CAM + NOV are our two favorite In-Line rated oil service stocks (Attractive coverage view) behind OP/A rated BHI, SII, SLB, RIG + DO. We are raising our above consensus 2006-2007 EPS ests for CAM to $3.60/$4.15 from $3.40/$4.00 for the recent Akpo subsea award + NuFlo acquisition. CAM under- performed the OSX by ~15% in 03 + 04 and is +3% YTD despite above consensus 1Q2005 EPS + upward EPS revisions. Falling steel prices would likely help margins for CAM more than its peers, potential for strong subsea growth into 2007 should be visible by year-end via add'l large W. Africa awards + CAM is proto-typically a mid to later cycle stock. Emerging rig newbuilding is positive for CAM's drilling systems, compression has been restructured + orders rose smartly in 1Q in surface equipment (CAM's highest margin unit). We are raising our fair value to $78 (21.5x 2006 PE), or ~31% upside.
VALUATION UPDATE: 5% DISCOUNT ON 2006 P/E AND 2% ON EV/EBITDA
CAM is trading at 22x/16.5x our 2005/2006 EPS estimates versus an average multiple of 24x over the last three upcycles. Relative to its peer group (BHI, BJS, SII, SLB, and WFT), CAM is at a premium of 5% on 2005 P-E and a 5% discount on 2006, which is about in line with its historical average. On EV/EBITDA, CAM is trading at 11.4x/ 9x our 2005/ 2006 EBITDA estimates of $303 mln/ $385 mln versus an average of 11.4x over the last two upcycles. This is a premium of 6%/a discount of 2% relative to the peer group on our 2005/ 2006 estimates vs. a historical average premium of 2%.
RECENT AKPO SUBSEA AWARD SUGGESTS 2006 CONSENSUS EPS TOO LOW
CAM was recently awarded a $415 million contract to provide subsea systems for the initial phase of Total's Akpo deepwater development project in West Africa, with about $200 mln revenue expected to be booked 2Q-4Q2006. Our previous estimates assumed 2006 CAM subsea revenue of $483 mln vs $400 mln in 2005 and $450 mln in 2004 - i.e. very close to the baseline subsea market run-rate in the current cyclical environment. Our new estimates now assume revenue for CAM's subsea division of $620-630 mln, which could still prove conservative assuming there is no slippage in the Akpo delivery schedule. Mgt indicates expectations for healthy margins on the project (which we translate at mid-10% EBITDA), with revenue of $9.4 mln per tree above recent levels for similar projects in the area of late. However, it appears there may be a higher local content requirement on the project, which may account for some of the variance.
KIZOMBA C AWARD WOULD PROVIDE VISIBILITY ON SUBSEA GROWTH INTO 2007
Despite recent reports that XOM is looking to open the bidding for subsea production systems on its Kizomba C project in West Africa (CAM won Kiz A + B), we continue to anticipate this project will be awarded to CAM later this year. Assuming "baseline" subsea revenue of $400-450 mln per year + the second $200 mln of Akpo in 2007 + Kizomba C at $100-200 mln, 2007 is stacking up to be an even better year than 2006 for CAM's subsea business, which remains the "hot button" for the stock. We believe a broader investor appreciation for this dynamic as 2005 progresses is an inevitable positive to emerge.
NUFLO ACQUISITION ACCRETIVE + REINFORCES STRONG TRACK RECORD
CAM also recently acquired NuFlo Technologies - a metering and flow measurement equipment company - for $120 million and a reasonable 6.7x 2005 EBITDA with the transaction immediately accretive to earnings. We have left NuFlo accretion (potentially $0.05) as upside to our 2005 estimate, which nonetheless remains above consensus, but incorporated $0.08 of accretion in our new 2006 estimate. Although CAM has had its share of operating difficulties in the past, we believe the company has one of the best acquisition track records in the oil service industry. NuFlo is a small acquisition - and potential for consolidation in subsea systems remains more intriguing - but one that makes financial sense and opens doors for additional opportunities.
I, Terry Darling, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. |
