Dain Rauscher on GLM. Good industry info included.
GLM:B-Avg;GLOBAL MARINE REPORTS GOOD 4Q00; WE BELIEVE THE BEST IS YET TO COME
Gulf Of Mexico Drilling Market Continues To Be Strong: Global Marine's Gulf of Mexico (GOM) jackup fleet continues to enjoy very strong utilization. The entire region is seeing marketed utilization of premium jackups at 100%, and new fixtures for 300-foot-plus 116C class ILC's are around the $60,000 mark-–in line with our forecast. New fixtures for the 250-foot ILC's are around the upper $46,000-48,000 range, which is also consistent with our forecast. Our analysis of the international market shows that West Africa, Mexico, and other regions could be undersupplied later this year, drawing premium rigs out of the GOM and pushing dayrates toward replacement levels.
Turnkey Results Kept Quarter From Being Even Better: Global Marine drilled 47 turnkey wells and performed 6 turnkey completions during 4Q00. Despite posting a record $154 million in revenues at ADTI (Global Marine's turnkey operations) in the fourth quarter, profits were only 1.4%, significantly less than the 7%-10% or higher historical range. Global Marine's largest competitor in the GOM became more aggressive on turnkey bidding at the same time subcontracting costs were increasing, creating much of the margin squeeze. Global Marine also experienced several execution problems. Management expects for ADTI to run at approximately $100 million per quarter in 2001 and has taken a stance towards defending profits, not market share, going forward. Since much of the backlog at ADTI is short term and its major competitor is involved in a large corporate transaction, Global Marine should get through this lower margin period by the end of the first quarter.
Select International Jackup Markets Are Also Strengthening: Our analysis of the international jackup market shows that marketed premium jackup utilization is running at 96%. Global Marine is seeing strong tendering activity in West Africa as NNPC continues to increase its budget. The company is reactivating the 250-foot ILC High Island III, a unit that had been stacked since September, 1998, although the company is wisely not actively marketing the unit until backlogs develop on its other jackups in the region. New fixtures are approaching that of the GOM, with recent signings in the $57,000-$60,000 range depending on the length of the term. Global Marine has received several proposals for work extending out several years. It appears that the work being planned in the region is greater than the jackup supply, which we always view as a good trend. The North Sea, Global Marine's other main jackup market, is likely to see rates firm substantially by summer as the market appears short a rig or so at that point. However, winter rates have not been as strong due to gaps in some of the work programs. While rates should exceed $70,000 for a standard North Sea jackup later this year, latest fixtures are stepping from about $39,000 currently to around $55,000 by the end of the option periods.
Global Marine's Big Floaters Have Good Outlooks: While marketed utilization for floaters worldwide is currently 88%, it is 98% for rigs rated to more than 3,000 feet vs. 80% for rigs rated to less than 3,000 feet. We believe the deepwater-rated rigs will show the greatest improvements this year. Worldwide, only 7 of the 50 units rated to deeper than 5,000 feet are rolling over in the next six months, down from 10 last summer. Tenders are coming out for additional equipment in West Africa and Brazil and moving the GOM into a development-driven market would appear highly probable in 2001. It is important to note that the move from a largely exploratory market in the GOM deepwater to-date toward a development-driven market would create a major shortage of equipment, as rigs would be on multi-well and potentially multi- year programs. Global Marine's Glomar Celtic Sea (5,740 feet) is up for a new commitment in the first quarter and we believe it can maintain a short-term rate of more than $100,000, particularly if it wins work in West Africa. The company appears to be firming the outlook for most of its other units, with the rigs in Eastern Canada (Grand Banks) and Norway (Jutlander) seeing the most attractive rates.
Stock Opinion
We believe most segments of the world's offshore drilling markets will face a capacity shortage during 2001-2002, driving dayrates to replacement levels. We believe the market will begin to discount that trend in the shallow-water market this year. Our analysis of trading multiples in previous up-cycles shows that offshore drillers peak at approximately 7.5x replacement cycle EBITDA. Using that valuation on our estimated $1 billion replacement cycle EBITDA on Global Marine implies a stock price potential of approximately $40, roughly equal to 11x peak EPS. We are raising our price target to $40 from $36 on GLM shares to reflect this analysis and maintaining our Buy-Average Risk rating. |
