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Gold/Mining/Energy : Big Dog's Boom Boom Room

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From: Dennis Roth	8/9/2007 8:49:38 PM
	of 206178

Americas: Energy: Oil Services: Time to pull the trigger: Upgrading coverage view to Attractive Goldman Sachs Note August 9, 2007 United States Time to pull the trigger, too much upside to wait We are upgrading our coverage view for the oil service/drillers to Attractive from Neutral. We believe we are in the early stages of a multi-year investment period and believe the recent correction provides an attractive entry point. We are bullish on the outlook for crude oil prices through 2008 and believe E&P spending growth estimates are conservative. We raised our worldwide 2007/2008 E&P spending growth forecast to 14%/16% from 10%/14%. We recognize that the shoulder months are approaching and a subsequent pullback in the 5-10% range is possible; however, the recent correction may have effectively pre-traded any seasonal pullback. Four key points that support our upgrade are: (1) E&P spending is trending above expectations; (2) 2Q2007 was better than expected; (3) Deepwater fundamentals remain strong and visible demand is likely to outstrip supply though at least 2009. We believe the offshore drillers will benefit from multiple expansion as backlogs increase and investors gain confidence in the longevity of the cycle. (4) Valuation is still attractive. Sector multiples are well below historic averages; this combined with operating momentum is one of the key reasons for our bullish view. DO remains favorite; upgrading PDE to Buy Diamond Offshore remains our Conviction Buy-rated top pick due to the combination of good earnings visibility, a clear strategy of returning cash the shareholders (expect >$5 dividend in 1Q08), leading position in the midwater market and attractive valuation. We also upgraded Pride to Buy from Neutral. We were previously waiting on further progress of the Latin America separation; however, we are more comfortable with the possible outcomes and believe that valuation is compelling enough to weather the uncertainty. Among the Oil Service stocks we continue to prefer National Oilwell Varco, Baker Hughes, and Weatherford all Buy-rated. Risk/reward favorable We now see 18% upside to target prices on average and 27% upside to potential "high-end" trading values versus only 15% downside risk to "low-end" values that we think will serve as a floor for valuations in the context of our bullish commodity outlook. Our target prices are based on 2008 EV/DACF and asset value, with the key risks being a sustained decline in commodity prices or the broader stock market indices.

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