Offshore Drillers: Raising estimates + fair values as day rates continue to surge - goldman Sachs - October 04, 2005
Two hurricanes later, US Gulf jackup supply has declined by 9+ rigs and should drop another 5+ as rigs leave for new foreign contracts. A 10% supply reduction in a mkt already at 99% effective utilization has key implications:
(1) we are less concerned about risk from incremental newbuild supply through 2006,
(2) US Gulf jackup day rates are likely to rise sharply again, +
(3) stronger US Gulf rates could drive another leg higher in foreign mkts.
Drillers w/ most jackup leverage are THE (+$0.37 EPS per $5,000 increase), ESV (+$0.14) and RDC (+$0.13-$0.17 pending damage). We are raising 2006-07 EPS for DO, ESV, GSF, RDC, THE, NE + RIG by +15%/+25% as a result. We will examine our PDE estimates upon release of pending fleet status. We maintain an Attractive coverage view.
US GULF JACKUP DAY RATES ARE POISED FOR ANOTHER LEG UP
We have raised our US Gulf jackup day rate assumptions for 2006 by an average of 17% (see Exhibit 2) following Rita, with the potential for additional upside. We believe that the US Gulf jackup market is in a near term supply crunch with no relief (i.e. economic elasticity) in sight. While the possibility of rigs migrating back to the Gulf in the future remains, it does not appear likely in the near term. Rig utilization is high globally, and, even if rigs were available in other markets, the heavy lift boat capacity needed for rig mobilizations is also tight. As a result, we see spot day rates for 300'C rigs going - almost overnight - from the $80k-$90k range to over $100k and 350' rigs moving from $100k-$115k to $115k-$130k. Low-end mat-supported jackups are moving into the mid-$70s from the upper $60s. We believe the risk to our new rate assumptions is to the upside.
HOW HIGH CAN US GULF JACKUP DAY RATES GO?
Despite the fact that day rates for most classes of Gulf jackups have doubled in the past year, operator demand is likely to remain inelastic. Exhibit 3 shows representative returns from a shallow water, US Gulf gas prospect at a range of gas prices and rig day rates. Bottom line - current commodity prices support attractive returns at day rates well beyond even our increased assumptions.
SHALLOW WATER IS STRONG... BUT DO NOT FORGET ABOUT THE DEEPWATER
We believe that concern over rig availability is an issue for deepwater operators as well. Recently, Anadarko announced two floater contracts for a combined term of 7 years to ensure rig availability for its deepwater strategy. We expect additional contract announcements near term that will be new high water marks for deepwater rigs and prompt upward revisions to consensus EPS for DO, RIG and other drillers with deepwater exposure. We believe spot rates for high spec, ultra deep rigs are in the upper $400k range.
SUMMARY OF CHANGES BY COMPANY
Diamond Offshore (OP/A) - US Gulf jackup leverage in deepwater clothing We recently raised our 2006/07 EPS to $5.00/$6.55 from $4.46/$5.73 based primarily on increased jackup day rate assumptions. DO currently trades at a discount to the peer group vs. a premium historically. We believe DO shares should trade at a modest premium - the average premium in 2005 YTD has been approximately 4% - given (1) our view that deepwater cash flows deserve a higher multiple due to the stronger growth picture for deepwater and reduced newbuild risk and (2) DO is the fourth most leveraged driller to rising US Gulf jackup day rates. We also increased our fair value to $84 (10x 2006E EBITDA) from $77, suggesting 38% upside.
Ensco International (IL/A) - Increasing estimates and fair value on strong jackup day rates We are raising 2006/07 estimates for Ensco to $3.96/$5.00 from $3.40/$4.25 based on rising jackup day rate assumptions. We are also raising fair value to $58 (8.5x 2006E EBITDA) from $51, suggesting +24% upside.
GlobalSantaFe (IL/A) - Increased day rate assumptions more than offset earnings of damaged rigs GSF reported jackups Adriatic 7 (was working at a day rate in the low $80s) and High Island 3 ($70s) have incurred severe damage from recent hurricanes and we are assuming they are total losses. Even if GSF decides to repair these rigs, we believe they will not return to service for at least 1 year. GSF had insurance of $125mm for the two rigs, and will expense an insurance deductible of $10mm in 3Q. We are lowering 2005 EPS to $1.57 from $1.59 due to the impact of the hurricane. However, we are also raising our 06/07 EPS to $4.08/$5.55 from $3.79/$5.25 based on higher day rate assumptions that more than offset the lost earnings power of the two damaged jackups. We are raising our fair value to $61 (10x 2006E EBITDA) from $58, suggesting +35% upside. GSF shares have lagged recently, partially, in our view, due to expectations of a possible KPC secondary offering. We remind investors that GSF shares outperformed the peer group following the announcement of the KPC secondary completed in April of this year.
Noble Corporation (IL/A) - Impact of Hurricanes expected to be transient; raising 06/07 estimates We are lowering our 2005 EPS for NE to $2.31 from $2.39 based on insurance deductible payments related to Rita and Katrina as well as downtime on rigs damaged by the storms. Specifically, NE did not have loss of hire insurance on the semisubmersible Bouzigard or submersible Alford, which we assume will be off day rate for at least 45 days. We are raising our 2006/07 EPS estimates to $5.76/$7.90 from $5.35/$6.30 based on increased day rate assumptions. We are raising our fair value to $88 (10x 2006E EBITDA) from $82,suggesting +29% upside.
Pride International (IL/A) - No change to estimates, but see upward bias to consensus We are not adjusting EPS estimates for Pride at this time, pending release of PDE's monthly fleet status later this week. However, we believe consensus EPS has 10%+ upside based on rising jackup day rates in the US Gulf of Mexico.
Rowan Companies (IL/A) - Loss of 3 to 4 jackups from Rita reduces earnings power We are lowering our 2005 EPS for RDC to $1.50 from $1.59 following the presumed loss of 3-4 jackups due to Rita. However, we are raising our 07 EPS for RDC to $3.70 from $3.50, as we believe the increase in Gulf day rates will be sufficient to offset the earnings power of the lost rigs. Our estimates assume 3 rigs are complete losses and that 1 is repairable with 3 quarters of downtime. The company is still in the process of trying to locate the missing rigs, but history suggests that when a jackup rig is not on location following a storm, it has either sunk or had legs sheared from the platform. Our 2006E EPS remains unchanged at $3.17, with an implied fair value of $47 (8.5x 2006E EBITDA), suggesting +34% upside.
Todco (IL/A) - Raising 06/07 estimates on higher day rate assumptions and rig reactivations We are raising our 2006/07 EPS to $3.96/$4.80 from $5.34/$3.16 based on higher day rate assumptions and rig reactivations. We now believe that Todco will be in a position to reactivate most (or all) of its cold stacked jackups in 2006. Our new estimates assume that 6 of THE's stacked jackups, 1 submersible and 1 cold stacked barge return to work at varying points in 2006. We have raised our fair value to $56 (=7.0x 2006E EBITDA) from $41, suggesting +34% upside. We have increased our fair value multiple from 6.5x to 7.0x given our view that reduced Gulf jackup supply mitigates THE's risk from newbuilding.
Transocean (OP/A) - Minor EPS impact in 05 from storms, but raising 06/07 on higher day rates Transocean incurred damage to semisubmersibles Nautilus and Marianas, which broke free of moorings during the storm. While the extent of the damage to the rigs is still being determined, our estimates assume both rigs will be off day rate for all of 4Q05 (though RIG will likely receive "force majeure" payments in the quarter) and part of 1Q06. Due to increased rig downtime and insurance deductible payments, we are lowering our 2005 EPS estimate to $1.63 from $1.70. However, we are raising our 2006/07 EPS estimates to $4.87/$7.25 from $4.55/$6.15 based on increased day rates. We believe spot rates for high spec floaters are currently in the upper-$400k range and expect term contracts for high spec rigs to be announced near term. We are increasing our fair value to $79 (11.5x 2006E EBITDA) from $74, suggesting +29% upside.
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. |
