HAL (IL/A): Raising estimates + fair value to $72
Goldman Sachs July 25, 2005
We are raising our 2005-07 EPS estimates for HAL to $3.16/ $3.80/ $4.25 from $2.55/ $2.75/ $3.04 due to: (1) stronger 2Q05 EPS of $0.76 vs our $0.59 estimate, (2) 2005 E&P spend estimate of +20% vs +15% previously, (3) non-N.Am oilfield pricing has inflected and incremental margins are expected +40-45% vs +35-40% previously, (4) higher E&C margins on Gov't Svs award fee realizations and confidence that mgt has reduced risk by avoiding fixed contracts, and (4) significantly lower tax rate. We are also raising our fair value estimate to $72 from $58 (19x 2006 PE) despite lowering our fair value multiple by 10% given sharply higher ROCE, which we see as inversely correlated to multiples in a cyclical group like OFS. We rate HAL shares IL/A, but valuation upside is likely more attractive than OSX average pending a full view of 2Q2005 EPS performance across the sector.
HAL INCREMENTAL MARGINS OF +40% WERE COMPARABLE TO SLB
HAL (ESG) 2Q05 seq/y-y incrementals of 44.6%/41.5% were fairly comparable to SLB (ex seismic) incrementals of 43.1%/42.3%. HAL 2Q05 oilfield revenue rose 13.1% sequentially and 29.8% y-y and was 6% above our estimate. In contrast, SLB revenue rose 9.8% sequentially and 20.1% y-y and was also 6% above our estimate. HAL oilfield profit was +29.5% sequentially and +94.1% y-y with margins +267bps sequentially and +700 bps y-y. In contrast, SLB operating income rose 20.6% sequentially and 48.5% y-y with margins +198 bps sequentially and +422 bps y-y. HAL oilfield margin was 231 bps above our estimate while SLB was +176bps.
Exhibit 1: TRENDS IN 2Q2005 OILFIELD REVENUE/EBIT- HAL VS SLB
seq chg y-y chg chg vs GS est
Quarterly Revenue
SLB (EX GECO) 9.8% 20.1% 6.1%
HAL (ESG) 13.1% 29.8% 6.4%
Quarterly EBIT
SLB (EX GECO) 20.6% 48.5% 15.3%
HAL (ESG) 29.5% 94.1% 19.5%
EBIT margins (bps)
SLB (EX GECO) 198 422 176
HAL (ESG) 267 700 231
Revenue/rig
SLB (EX GECO) 18.0% 6.0% 6.6%
HAL (ESG) 21.6% 14.6% 8.2%
Source: Company reports and Goldman Sachs Research estimates
WHILE NAM STRENGTH WAS EXPECTED, NON-NAM MARKETS WERE SURPRISINGLY STRONG
HAL Europe/Africa revenue was very strong +25.3% vs. our estimate with Middle East/Asia (+6.2%), LAM(+5.7%) and NAM essentially in line. LAM results were disappointing relative to SLB and partially reflected charges associated with projects in Mexico. However, the company had a stellar quarter in Europe/Africa. North Sea was strong and HAL benefited from incremental projects in Africa. The outlook for Middle East (Saudi Arabia, Oman) remains particularly promising.
Exhibit 2: REGIONAL REVENUE TRENDS - SLB VS HAL
seq chg y-y chg chg vs GS est
NAM Revenue
SLB (EX GECO) 5.6% 19.9% 1.4%
HAL (ESG) 7.4% 34.4% -0.7%
Europe/Africa Revenue
SLB (EX GECO) 9.9% 17.2% 5.6%
HAL (ESG) 37.8% 42.3% 25.3%
Latin America Revenue
SLB (EX GECO) 18.1% 33.2% 15.8%
HAL (ESG) 6.1% 29.6% 5.7%
Middle East/Asia Revenue
SLB (EX GECO) 9.4% 14.9% 6.2%
HAL (ESG) 8.7% 7.9% 6.2%
Source: Company reports and Goldman Sachs Research estimates
HAL operating income was also impressive in Middle East/Asia (+58.2%) and Europe/Africa (+37.6%) vs. our estimate with NAM (+15.7%) and Latin America (-28.4%).
Exhibit 2: REGIONAL OP INCOME TRENDS - SLB VS HAL
seq chg y-y chg chg vs GS est
NAM Op Income
SLB (EX GECO) 16.8% 103.5% 13.4%
HAL (ESG) 17.5% 90.1% 15.7%
Europe/Africa Op Income
SLB (EX GECO) 24.2% 31.6% 15.8%
HAL (ESG) 64.1% 303.8% 37.6%
Latin America Op Income
SLB (EX GECO) 31.3% 33.3% 22.1%
HAL (ESG) -27.8% 8.3% -28.4%
Middle East/Asia Op Income
SLB (EX GECO) 18.4% 28.0% 14.4%
HAL (ESG) 89.4% 56.1% 58.2%
Source: Company reports and Goldman Sachs Research estimates
KBR RESULTS STRONG WITH 2H05 MARGINS PROJECTED IN THE 2-4% RANGE
KBR had a clean quarter with respectable margin of 4.5% or +160bps ahead of our expectations. While the outlook for the Govt and Infrastructure unit has improved with more contracts, the Energy and Chemical business outlook is very promising given backlog + anticipated LNG projects. An eventual spinoff of KBR could take place as early as 1H05, although mgt has indicated that the goal is to maximize shareholder value.
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. |
