Pride Int'l (IL/A): Another solid quarter, valuation nearly back in line with peers Goldman Sachs May 01, 2005
PDE continues to build credibility + delivered a solid 1Q2005 performance with recurring 1Q05 EPS of $0.10 in-line with our estimate + above consensus of $0.08, with EBITDA also in-line. With debt reduction via asset sales, improved mgt execution and a solid earnings outlook, PDE has largely closed the valuation discount vs. its peers, now trading at just a 4% discount on 2006 EV/ EBITDA vs. a historical average of a 23% discount. We are lowering our 2005E EPS to $0.70 from $0.76 based on higher tax rate assumptions. Our 2006E EPS estimate is unchanged at $1.35 + we are introducing a 2007E estimate of $1.84. We maintain our IL/A rating and fair value of $30 = 32% upside potential.
VALUATION: $30 fair value suggests 32% upside potential PDE shares have outperformed modestly in 2005 (+9% YTD vs. +7% for the peer group) + now trades at 7.5x 2006E EV/EBITDA, a 4% discount to the peer group average of 7.8x, versus its historical average of a 23% discount. The stock is also at a 5% discount to PDE's historical average EV/ EBITDA multiple of 7.9x. On EV/Replacement Value, PDE is trading at 63% using historical steel prices versus a prior peak of 83%. Using current steel prices, the stock is closer to 50%.
INTRODUCING NEW 2007 EPS ESTIMATE.
We are introducing a 2007 EPS estimate of $1.84. Based on Goldman Sachs commodity price forecast of $50/$55 per barrel, oil industry reinvestment rate existing 2006 would approximate 51% - which is at the low end of the historical range. Under this scenario, we believe, it is likely that E&P spending would continue rising through 2007 by at least 5-10%.
IMPLICATIONS FOR THE INDUSTRY.
(1) Mgmt believes that Petrobras will renew deepwater rigs at day rates that are more competitive with the global averages to stem the flow of equipment from the region.
(2) Latin America land rig demand continues strong and day rates are improving.
WHAT TO WATCH FOR.
(1) Share count increase due to call of $300mm convertible notes.
(2) 5 yr contract announcements on newbuilds Pride Portland and Pride Rio with Petrobras in the coming month.
(3) Management gave 2Q2005 EPS guidance of $0.12-$0.15 and CY2005E EPS of mid/high $0.60 range.
(4) Management gave EBITDA guidance of mid/highs $120mm range in 2Q05 and mid-$500mm range for CY2005.
(5) Potential for PDE to purchase the 70% of the Rio and Portland that it does not currently own.
(6) Closing of tender rig sale and potential divestiture of idle land rigs for proceeds of $20mm-$30mm.
(7) PDE expects to announce a number of 2 yr contracts with Pemex at rates competitive with US Gulf jackup rates.
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. |
