GlobalSantaFe (IL/A): 1Q2005 solid, raising estimates and fair value Goldman Sachs May 05, 2005
GSF 1Q2005 EPS of $0.21 was in-line with our/consensus ests of $0.20/$0.21. EBITDA was slightly lower (-3%) than our model due to higher opex, offset by lower tax rate and higher interest income. Although we have become increasingly concerned with jackup supply beyond 2006 as a result of newbuilding, we are raising our 2005-06E EPS estimates to $1.55/ $2.70 from $1.35/ $2.21, as it's clear that day rate increases are stronger than previously expected. We are also raising our fair value estimate to $47 from $44 (10.5x 2006E EV-EBITDA). Near term positives include further upside to estimates based on accelerating day rates in the West Africa jackup mkt (GSF has ~40% share) and the N Sea semi mkt (GSF has the third highest exposure behind RIG +DO). We maintain our IL/A rating.
VALUATION: $47 FAIR VALUE SUGGESTS 33% UPSIDE POTENTIAL
GSF shares have underperformed modestly in 2005 (+7% YTD vs. +9% for the peer group) + now trade at 8.0x 2006E EV/EBITDA, a 3% premium to the peer group average of 7.8x, versus an 8% historical average premium. The stock is also at a 25% discount to GSF's historical average EV/ EBITDA multiple of 10.6x. On EV/Replacement Value, GSF is trading at 88% using historical steel prices versus a prior peak of 132%. Using current steel prices, the stock is closer to 70%.
DRIVERS OF 2006 ESTIMATE REVISION
Our increase to 2006E EPS is driven by:
(1) Increased dayrate and utilization assumptions (+$0.62) and
(2) increased interest income (+$0.05), offset by
(3) increased tax rate assumption (-$0.10),
(4) increased S,G&A and depreciation (-$0.02) and
(5) higher share count (-$0.06). W. Africa jackup dayrates - where GSF has 9 rigs - have recently moved to the $90k/$100k range, versus GSF's current contracted average in the region of approximately $60k. Similarly, spot rates for 2nd/3rd gen semis in the N. Sea are in the $150k range, while GSF's 3 rigs (excluding the coldstacked Arctic II, which will return to service in August) are currently working at an average dayrate of $68k.
INTRODUCING NEW 2007 EPS ESTIMATE
We are introducing a 2007 EPS estimate of $3.50. Based on Goldman Sachs commodity price forecast of $50/$55 per barrel, oil industry reinvestment rate existing 2006 would approximate 51% - which is at the low end of the historical range. Under this scenario, we believe, it is likely that E&P spending would continue rising through 2007 by at least 5-10%. Our 2007 EPS estimate for GSF assumes revenue growth of 11%.
IMPLICATIONS FOR THE INDUSTRY
(1) Customers are inquiring for deepwater rig availability in 2007 and jackup rigs through mid-2006.
(2) Mgt continues to see a shortage of jackups in W. Africa, where dayrates continue to rise. The 300' jackup GSF Adriatic 6 recently receiving a contract at $105k, a new high water mark for the region.
(3) Mobilization costs have increased significantly due to lack of availability of heavy lift vessels and rising opportunity cost.
(4) Mgt sees incremental demand for 20+ jackups through the end of 2006 and does not believe jackup newbuilding will impact the market until 2007 at the earliest.
(5) Mgt estimates that Iran has requirements for 5+ jackups.
(6) Jackup contract term in the US Gulf is lengthening, with GSF seeing increased inquiries for 3-6 well and even longer jobs.
(7) Mgt sees increased demand for 15,000-20,000 ft. wells, but believes significant shallow water, ultradeep well activity is still a ways off.
WHAT TO WATCH FOR.
(1) Coldstacked N. Sea semi Arctic II will be reactivated for work beginning August 2005 at a cost of $14mm.
(2) Operating expense guided at $220mm in each 2Q and 3Q and $210 in 4Q. Our model assumes expense levels below guidance.
(3) Tax rate seen at 18% for the remainder of 2005.
(4) Mgt continues to evaluate uses for excess cash, including rig acquisitions (though opportunities are limited), share repurchase and dividends.
(5) ADTI should return to historical operating margins going forward.
I, Terry Darling, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. |
