Mariner Energy Inc. (ME): Turning free cash flow into visible growth is key catalyst - Goldman Sachs - May 08, 2008
What's changed
Mariner reported 1Q2008 adjusted EPS of $0.82, above our estimate of $0.67 and consensus of $0.74. Operating cash flow was $240 million vs. our $220 million estimate. Production was 345 MMcfe/d, versus our 367 MMcfe/d. The company maintained 2008 production guidance of 355-383 MMcfe/d, despite current production of about 400 MMcfe/d. Management indicated it is prepared to spend $1 billion in capital in 2008 with additional drilling success. 2009E-2010E EPS are now $4.45, $3.96 (from $4.09, $2.97).
Implications
Mariner is uniquely levered to our bullish view on natural gas and crude oil, due to its short reserve life and 2008 production growth. As a result, we expect operating cash flow in 2008 and 2009 ($1.1 billion) to be 70% above 2007 levels. We expect management will use this cash flow both to bolster its onshore position, likely via acquisition, but more importantly to drill additional higher risk/higher potential deepwater exploration wells, especially in the subsalt. Success is needed to boost confidence in the visibility of growth after recent project startups, though we believe very little success is priced into the stock. Already our 2009 growth estimate is improving due to success at the Viosca Knoll 821 #1 well and the expected success at the Garden Banks 462 #1 well. Combined we believe these could add 35-40 MMcfe/d in net production in early 2009.
Valuation
Mariner (Neutral within our Attractive coverage view) trades at 3.0X 2009 EV/debt-adjusted cash flow, below other E&Ps, reflecting its short asset life and concerns over growth sustainability, in our view. We see 21% upside potential to our $38, 12-month discounted cash flow-based target price (up from $36 following exploration success) vs. 26% upside potential for E&Ps.
Key risks
Commodity price volatility, drilling results, cost pressures, government pronouncements. |
