From the Goldman Sachs energy conference.
Here's today's update:
"WE THINK EDGY ENERGY BULLS LOOKING FOR FRAYING AROUND THE EDGES CAME AWAY
EMPTY HANDED
We believe energy bears heard little on the second day of the GS energy
conference in the way of bottoms up, company-specific testimony that would
support the case that fundamental momentum is slowing in any meaningful
way. Not that this probably matters as the credible bear case at the turn
of the cycle almost always rests on the inevitable hard-to-predict
pull-back in commodity prices. It may just be that time of year, but it
seems to us that even the bulls (ourselves included) came into the
conference looking for a reason to become less positive - if only because
of very strong outperformance in 2004 and the "what goes up, must come
down" history of the industry. But we saw nothing but smiling faces and a
lot of back slapping as these same investors left the conference. The
sense that there is upside to consensus estimates became far more tangible
to investors, in our view. We may have slapped a few backs on the way out
the door ourselves.
OIL SERVICE OUTLOOK FOR NON-N. AMERICA MARKETS WAS BETTER THAN EXPECTED
BHI, WFT and NOI presented a very sanguine 2005 outlook for non-N. America
markets. We expected and heard very bullish commentary on the North Sea
and Middle East - WFT was most optimistic with a 30% growth expectation.
The surprising (in light of the Yukos meltdown) 10-15% growth outlook for
Russia noted by HAL and SII Tuesday was reinforced Wednesday by WFT, BHI
(who is more export sale-driven and even as recently as early December was
less optimistic) and NOI, who sees "mind-boggling" opportunities
intermediate term. NOI sees 30% growth in Russia in 2005. We expected a
flatish outlook for Asia-Pacific and +10-15% growth in West Africa and
that's exactly what we heard. We expected a flat outlook for Latin
America and heard a far more optimistic tone driven by optimism over
Brazil (PDE also indicated incremental deepwater demand we had not
expected), Argentina and (cautiously) Venezuela. WFT seemed most
optimistic about Latin America driven by heavy oil-related activity for
artificial lift demand.
JACKUP DRILLERS SEE A SOLD OUT MARKET BY 2H2005
Although consensus among rig contractors at the conference was that
deepwater continues to have better momentum/ upside than the jackup
market, ESV, RDC and PDE agreed that the global jackup market should be at
full utilization by mid-2005. One jackup market that appears to be moving
a bit faster than consensus already is the Gorilla-class segment in the US
Gulf. RDC indicated that Gorilla-class jackup leading-edge day rates are
now at $85,000, but that bidding is approaching $100,000 or better. Our
estimates assume closer to $80,000 for these rigs much of the year.
Investors are clearly interested in the jackup stocks because they lagged
in 2005, but broader upside to consensus day rate estimates still looks
like a 2H2005 event, in our view.
INTEREST IN THE LAGGARDS IS STRENGTHENING
Investor interest in two 2H2004 laggards - Smith Int'l (only 28% of the
sell-side has buy ratings vs closer to 50-60% for the peer group) and
Pride Int'l - seemed particularly strong. Other notable 2004 laggards
with a brightening outlook are CAM and RDC, in our view. For SII, price
increases are sticking, the pickup in deepwater activity should help
margin improvement, and a brighter outlook for Russia (which drove good
upside to 1H2004 EPS estimates) are catalysts. For PDE, substantial
underperformance in 2004, recent debt reduction, reduced concern about
offshore rigs being released in Mexico, and continued improvement in
deepwater rig spot day rates are the keys. Our estimates for WFT + HAL
remain above consensus and we came away believing our numbers could be too
low. HOS was our favorite small cap name going into the conference and
momentum may be stronger than our estimates assume.
VERITAS DGC INDICATES CONTINUED OPTIMISM ABOUT STRONG YR-END SEISMIC DATA
SALES
In contrast to a competitor's recent 4Q earnings pre-announcement driven
by disappointing data library sales - and commentary that this appeared to
be an industry-wide issue - VTS reiterated commentary from its early
December conference call that it was optimistic about year-end 2004
seismic data library sales. This may bode well for SLB and BHI, which
also have a significant presence in the data library business via their
70/30 joint venture, Western Geco." |
