RBC Capital on GSF
Conference call review
Investment Opinion
As expected, tone of call was positive as the outlook for offshore drilling trends remains favorable through 2005 and into 2006.
After dropping 2.7% early in the day, shares rebounded and closed up 0.6% as the overhang surrounding the 4Q EPS miss was alleviated by the bullish offshore outlook.
Key Data Points
Offshore improvement seen across all regions, highlighted by the potential of certain regions being short rigs this year (e.g. West Africa, North Sea).
Tight capacity translating into additional price momentum.
Visibility into 2006 already pretty strong as (i) GSF has 20% of available rigs days booked in 2006 (66% in 2005) and (ii) customers are currently bidding projects that have a late 2006 start.
GSF continues to focus on cost containment evident by the company reducing drilling operating expenses by $50mn in 2004.
Shortfall at ADTI highlights lumpiness of business but does not detract from our expectations that margins will track in the 6%-range.
Stock Opinion
We are raising our 12-month price target to $41, from $36, to account for the roll-out of our 2006 EPS estimate.
Target is based on a P/E multiple of 21x our 2006.
2005 estimate of $1.40 remains unchanged.
GSF is rated Sector Perform with Average Risk.
Market Trends
North Sea
GSF expects higher utilization and pricing for standard jackups in 2005 with demand for HDHE rigs remaining strong.
Demand in both the U.K. and Norwegian sectors of the region could provide for the semi market to be rig short by this spring.
The company continues to study the possibility of unstacking its semi, the Artic II. Given the strength of the mid-depth market, we believe the rig will makes its way back to the market, though timing is uncertain as GSF waits for the right opportunity. On its call, the company did not change its previously estimated cost of $15-20mn of bringing the rig back to work.
West Africa
Current fleet of 19 jackups, industry-wide, expected to remain employed through 2005 with the potential for a rig shortage by mid-year.
Specifically, on its call, GSF stated that if 2/3 of potential tenders are awarded in Nigeria, the market could be short 4-6 jackups. It should be noted that the timing of projects in Nigeria is always difficult to determine given the propensity of delays.
Regarding pricing, current dayrates for 300' jackups are in the mid-$60,000/day range with expectations of moving "significantly" higher than $70,000/day.
In the semi market, GSF expects its two rigs (Aleutian Key and Rig 135) that roll-off contract in the near-term to achieve dayrates north of $100,000/day, which would bring them in-line with similar rigs in other regions. Currently, the two rigs are operating at rates in the low $50's and the mid $70's.
Gulf of Mexico Jackups
Pricing continues to push higher with leading-edge rates for 250-300' jackups at $50,000+/day versus ~$45,000/day three months ago.
Similarly, leading-edge rates for 350' jackups are $65,000+/day versus $50,000+ three months ago.
Other Markets
Trinidad - GSF has two rigs currently operating, the Monitor and the Adriatic VII. The Monitor is expected to remain in the region with the Adriatic VII being marketed outside of Trinidad for work once its contract expires in late February.
Eastern Canada - GSF expects both of its units to remain in the region through 2005 (Galaxy II jackup and the Grand Banks semi).
Middle East/Asia Pacific - Constructive outlook remains unchanged.
Drilling Management
Lackluster 4Q results were driven primarily by three "problem" wells which cost the company approximately $6mn.
Heading into the quarter, the company expected margins to fall within its 6-8% target range though these wells brought margins to 1.1%.
On its call, GSF stated confidence that the segment would be able to return to 6-8% margins.
The company also noted that bid activity remains strong and expects the typical trend through 2005, i.e. stronger activity in 2H05 versus 1H05.
4Q Synopsis
This morning, GSF reported 4Q operating EPS of $0.15 versus our estimate and consensus of $0.19.
Reported EPS of a loss of $0.03 related to a realignment of the company's subsidiary structure.
Downside to our EPS estimate driven by:
Slightly lower offshore utilization (91% versus our 93% estimate) and lower offshore drilling margins (37% versus 3 9% estimate)
Higher than expected tax rate (we estimate cost the quarter two cents)
Lower than expected results at drilling management segment
These differentials were unable to offset higher than expected results at the company's oil & gas operations (added two cents relative to our estimate).
Valuation
We are raising our 12-month price target to $41, from $36, to account for the roll-out of our 2006 EPS estimate.
Target is based on a P/E multiple of 21x our 2006, in-line with historical multiples. We reduced our target P/E multiple from 26x as we expect multiples to contract as the cycle unfolds.
2005 estimate of $1.40 remains unchanged.
GSF is rated Sector Perform with Average Risk.
Price Target Impediment
The major risks to our price target include lower commodity prices, reduced drilling activity, and global oil/natural gas supply/demand imbalances.
Company Description
GlobalSantaFe Corp. is a hybrid offshore/land driller, with a fleet of 58 offshore drilling rigs including 44 jackups, 9 semisubmersibles, 4 drillships, and 31 land rigs. The company has two rigs currently under construction and two more on order. In addition, the company provides drilling management services through its Applied Drilling Technology, Inc. (ADTI) subsidiary and screens oil and gas prospects through its Challenger Minerals, Inc. subsidiary. |
