GlobalSantaFe (IL/A): Raising 2007 ests and fair value for the global dayrate leader - Goldman Sachs - February 24, 2006
We are raising our 2007 EPS estimate for GlobalSantaFe to $7.05 from $6.15 on higher jackup + mid-water floater dayrates. With its floater days nearly contracted through 2007 + balanced exposure to four key jackup markets (i.e., +$0.05 EPS leverage to +$5k change in US Gulf JU dayrates; +$0.04 N. Sea; +$0.06 W Africa; +$0.04 SE Asia), GSF has all-purpose exposure to global drilling rig markets. We continue to see solid upside in GSF, but prefer ESV (greater SE Asia and N Sea leverage) and NE (M East; N Sea) and DO (midwater). We are raising our GSF fair value to $70 (7x 2007E EBITDA, + 27% upside) from $61. We are also lowering our 2006E EPS to $4.14 from $4.16 on increased expense assumptions. Maintain IL/A.
Valuation.
On 2007E EV/EBITDA, GSF trades at 6.7x, a 10% premium to the peer group. However, on EV/DACF, which we believe is more appropriate given GSF's low effective tax rates, the company trades at a 2% discount. YTD, GSF is +15% vs. +6% for the peers.
4Q2005 core operations in line. Excluding one-time items (gain on sale and insurance proceeds), GlobalSantaFe's recurring 4Q05 EPS of $0.62 was above our estimate of $0.60 and consensus $0.56. The upside EPS surprise, however, was generated almost entirely by (1) lower S,G&A expense (+$0.01 positive variance) and (2) lower tax rate (+$0.01). Core contract drilling operating income was in line with our expectations. Non-core Turnkey operating income was 17% below our expectations on higher costs, offset by Oil & Gas op income 5% ahead on lower costs.
What to watch for.
(1) No material hurricane impact expected on 2006 earnings other than the potential for net gains on insurance settlements.
(2) Contract drilling expense for 2006 is expected to rise approx. 20% in 06 - $50mm of the increase is due to fleet changes, $30mm is on existing fleet maintenance, and $65mm is related to offshore labor costs.
(3) Capex expected to be at $325mm for 2006, $45mm of which is related to hurricane repairs.
(4) Strong free cash generation should allow for a potential dividend increase or share buyback program in the foreseeable future.
(5) GSF is in discussions with operators on potential floater newbuilds and mgmt expects to secure 1-2 newbuilds backed by term contracts in the current cycle.
Implications for the industry.
(1) As GSF clients are contracting jackups into 2008/9, mgmt expects demand for between 36 to as many as 52 additional jackups through 2007, exceeding the 31 new jackups scheduled for delivery during this period.
(2) For the West Africa market in particular, mgmt sees a shortage of 4-5 rigs in 2006/7 despite increased rig supply in the region.
(3) Shipyard capacity remains tight in mgmt's view and would be challenged to deliver more than 20 rigs a year.
(4) A new fixture of 145k on the High Island IX in West Africa is the highest rate ever seen for a 250' jackup; North Sea 300' jackup rates seen at $220k+; S.E. Asia's leading rates seen at $195k premium jackups.
We have lowered 2006E EPS to $4.14 from $4.16. Our revision to 2006 EPS was driven primarily by: (1) a 7% average dayrate increase offset by a 17% increase in drilling expense (-$0.01 EPS impact); (2) increased SG&A (-$0.01), depreciation (-$0.03) and interest expense (-$0.02); and offset by (3) decrease in tax rate assumption (+$0.04); and (4) a slightly higher contribution from the Oil and Gas segment (+$0.01). See Exhibit 1 for more detail.
We have raised 2007E EPS to $7.05 from $6.15. Our revision to 2007 EPS was driven primarily by: (1) a 13% average dayrate increase headlined by 23% avg dayrate increases for <3,000' floaters and >300' jackups and an 18% increase in <300' jackup dayrates (+$0.84 EPS impact); (2) a higher contribution from the ADTI segment (+$0.04); (3) a decrease in tax rate assumption (+$0.08); and partially offset by (4) increased depreciation expense (-$0.05) and a lower contribution from the Oil and Gas segment (-$0.02). See Exhibit 1 for more detail.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Jason Gilbert, Terry Darling. |
