GlobalSantaFe (IL/A): Raising estimates + fair value to $56 Goldman Sachs August 04, 2005
We are raising our 05/06/07 ests to $1.67/$3.71/$4.90 from $1.57/$3.30/$4.00 based on continued strong dayrates in virtually all offshore markets. GSF fleet status released Wed contained several high water dayrates, highlighted by contracts on: 9,000' US Gulf drillship CR Luigs at $392k (vs. our $300k expectation), 7,800' drillship Explorer in Turkey at $365k (vs. $300k), 350'C Gulf jackup Adriatic III at $88k (vs. $76k) and 300' Gulf jackup Main Pass I at $75k (vs. $67k). The global jackup market is currently undersupplied, supporting our view that recent dayrate acceleration is sustainable. We believe that dayrates on premium US Gulf jackups need to move past $100k to prevent additional rigs from leaving the region, bullish for Gulf-centric jackup operators RDC and THE, as well as ESV, NE and GSF. We are raising our fair value to $56 (10x 2006E EBITDA) from $52. Maintain IL/A.
VALUATION.
GSF trades at 8.3x our new 2006 EBITDA estimate, a 3% premium to the peer group average of 8.1x and a 4% discount to closest peer NE. However, on EV/ DACF, GSF is trading at 9.5x vs the peer group average of 10.3x, a 7% discount. On EV/ replacement value, GSF is at 115% vs. a peer group average of 94%. Our new $56 fair value suggests 21% upside from current levels.
EQUITY OFFERING A POTENTIAL NEAR TERM OVERHANG.
We believe GSF's filing of a $1bn universal shelf registration statement may be an indication that Kuwait Petroleum Corporation ("KPC") is planning to sell down its remaining stake of 20mm GSF shares (current market value $950mm). The last KPC offering in April 05 was done off of a universal shelf.
WHERE ARE WE IN THE DEEPWATER NEWBUILDING CYCLE?
Excluding rig upgrades, there are currently 9 deepwater newbuilds planned with expectations of another 3-5 announcements in the near term through the exercise of options and other projects we believe to be in the planning process. As shown in Exhibit 2 the global order book represents approximately 7% of total global semi count vs. 10% of total global jackup count.
While spot market dayrates are sufficient to deliver cost of capital returns on floating rigs in almost all markets, we do believe that an onslaught of deepwater newbuilding is primarily a psychological risk at this point. First, rig operators are still in position to provide deepwater rig availability 2-3 years out, which is the earliest time that newbuild floaters would be available. Second, we still believe that there is still an ample supply of upgrade candidates in the global floater fleet, most notably Noble's two unfinished hulls.
STRONG 2Q 2005 RESULTS.
GSF 2Q05 EPS of $0.36 was ahead of our and consensus $0.28 driven by: (1) strong offshore drilling operating income driven by 6% higher than expected revenues, partially offset by 6% higher expenses (+$0.03 positive variance) (2) higher Oil & Gas revenues (+$0.03) and (3) lower tax rate (+$0.01). EBITDA was 11% ahead of our estimate.
WHAT TO WATCH FOR.
Mgt indicated that
(A) the next round of HDHE jackup contract fixtures in the N. Sea are expected at dayrates in the $200k range,
(B) spot rates for 250'C, 300'C and 350'C jackups in the US Gulf are seen at $75k, $85k and $100k, respectively,
(C) spot jackup rates in W. Africa are at the $120k level,
(D) spot jackup rates in SE Asia are seen at $100k,
(E) jackup demand exceeds supply in a number of markets, including N. Sea (6 rig deficit), W Africa (3), Mediterranean (1), Middle East (10), SE Asia (6) and US Gulf (4-5). Other potential catalysts include
(F) announcement with respect to Development Driller III newbuild, which we would expect under a term contract at dayrates of $400k-$450k and
(G) secondary share sale by KPC.
REVISIONS TO EPS.
Our change to 2005E EPS was driven by:
(1) higher than expected 2Q05 results (+$0.08 positive variance) and (2) increased other income (+0.02). Our change to 2006E EPS was primarily driven by: (1) increased international jackup dayrate assumptions, to $84k avg from $78 for >300' rigs (+$0.18 positive variance),
(2) increased domestic jackup dayrate assumptions to $74k avg from $66k for >300' rigs, (+$0.08),
(3) increased floater dayrate assumptions (+$0.11),
(4) increased Oil & Gas operating income (+$0.03)
(5) reduced tax rate to 17% from 18% (+$0.04) and partially offset by
(6) higher net interest expense (-$0.02 negative variance). Our change to 2007E EPS was primarily driven by higher offshore drilling dayrate assumptions across all rig types, particularly international jackups.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Jason Gilbert, Terry Darling. |
