GlobalSantaFe (IL/A): Raising estimates + fair value - Goldman Sachs - November 03, 2005
We are raising our 2005-07 EPS estimates to $1.61/$4.16/$6.15 from $1.57/$4.08/$5.55 following 3Q results and a bullish fleet status that indicates that offshore rig rates continue to surge globally. GSF now has 95% of 2006 + 75% of 2007 floater days under contract, which increases visibility, but reduces spot market upside. GSF still has substantial leverage in its jackup fleet, particularly in the US Gulf, SE Asia and Middle East. While we see solid upside of 34% to fair value, we continue to prefer DO (OP/A), RIG (OP/A) + RDC (IL/A). We have boosted our GSF fair value to $61 (10x 2006E EBITDA) from $58. We maintain our IL/A rating.
VALUATION.
GSF currently trades a 7.5x 2006 EBITDA, in-line with the peer group and at a 33% discount to the company's historical upcycle multiple. On EV/DACF, GSF trades at 8.5x, a 3% premium to the group. YTD GSF is +39% vs +58% for the peer group. On balance, we believe that GSF is fairly valued relative to the group.
3Q05 RESULTS IN-LINE WITH EXPECTATIONS.
Excluding one-time items (insurance and Oil & Gas gain), GSF recurring 3Q05 EPS of $0.46 was in-line with our estimate and below consensus of $0.48, though several estimates appear not to have included hurricane impact. Core Contract drilling revenue was 1% above our estimate and expenses were in-line. Non-core turnkey and Oil & Gas operating income was below expectations on lower revenue and higher costs (-$0.04 impact), partially offset by higher other income and lower tax rate (+$0.03). Total EBITDA was 3% below our estimate.
SUMMARY OF CHANGES TO EPS.
Our changes to 2006 EPS were driven primarily by decreased tax rate assumption (+$0.09 EPS impact). Our changes to 2007E EPS were driven primarily by increased offshore drilling dayrate assumptions (+$0.48 EPS impact), particularly in the US Gulf jackup market. See Exhibit 1 for details.
IMPLICATIONS FOR THE INDUSTRY.
(1) Announcement of 2 x 3-year deepwater rig contracts beginning in 2007 suggest operator appetite for long dated rig contracts continues to increase.
(2) Mgt sees 150 rig months of unsatisfied deepwater demand in the N Sea due to lack of rig availability and sees 2007 dayrates 30%-50% higher than 2006. Standard jackup dayrates seen at $150k with HDHE units above $200k.
(3) Spot jackup rates in W. Africa approaching $150k.
(4) SE Asia jackup dayrates moving through the $110k level.
(5) In the US Gulf, spot rates for 300' jackups are approximately $110k today and 350' rigs are $135k-$150k.
(6) Mgt sees labor cost inflation at 6%-9% next year and materials at 5%-6%.
(7) GSF sees Middle East 10+ jackups short in 2006.
WHAT TO WATCH FOR.
(1) Increase in insurance costs in 2006.
(2) ADTI operating margins seen at 6%-8% in 4Q.
(3) GSF has an option for a third Development Driller class semisubmersible rig and indicates potential to build one under an acceptable term contract.
TAKEAWAYS FROM GSF FLEET STATUS RELEASED WEDNESDAY.
(1) 300' W. Africa jackup Adriatic 6 received a 9 month contract at a dayrate of $145k vs. our expectations of $115k-$120k.
(2) A new contract on the 300' Main Pass 4 at $100k-$110k and verification of an industry-reported contract on the 300' High Island 4 near $120k provide further confirmation of the surge in US Gulf jackup dayrates.
(3) Two deepwater rigs are moving to Brazil in 2007 for 3 year contracts. The 3,400' Arctic 1, currently in the US Gulf, will be starting early 2007 at a dayrate of $270k-$290k vs. our model at $200k. The 1,800' Arctic 4, currently in the North Sea, will be starting late 2007 at a dayrate of $240k-$260k vs. our model at $200k. We do not believe either rig will be working for Petrobras.
(4) GSF Rig 135, a 2,400' floater in W. Africa, received a 2 year commitment near $325k/day vs. our model at $210k. This data point is also bullish for PDE, which has the 1,000' PDE South Seas in W. Africa rolling off contract in mid-2006.
(5) GSF High Island II will be idle for an estimated 2 quarters due to hurricane damage, with each quarter down impacting EPS by -$0.02 to -$0.03.
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. |
