Pride Int'l (IL/A): Raising fair value to $39 - Goldman Sachs - November 09, 2005
PDE shares are down 6% vs peers YTD on weaker EPS revisions + uncertainty over potential dilution from strategic divestitures. Mgt credibility is still on the mend w/ stronger than expected 3Q2005 EPS a clear positive, but diluted somewhat by lack of finality on EPS restatements + strategic divestitures as well as continuous uneven segment reporting and disclosure. Nonetheless, stronger than expected offshore drilling rig day rates lead us to raise our 2005-07 EPS estimates to $0.78/$2.14/$3.50 from $0.67/$1.68/$2.30 and our fair value estimate from $33 to $39, which implies 39% upside potential. Maintain IL/A rating.
VALUATION:
39% UPSIDE TO FAIR VALUE
After trading at a 20+% discount on EV/EBITDA to the peer group from 2001-2004, PDE's average discount in 2005 has narrowed to less than 15% following its exit from the construction business, improved balance sheet, management changes and solid quarterly earnings performance relative to expectations. Pride currently trades at 6.2x our estimated 2006E EV/EBITDA, a 12% discount to the peer group. On 2006 EV/DACF, Pride trades at 8.5x, a 5% discount to the peer group. We believe that PDE can earn its way to parity with the group over time.
In addition to delivering consistent quarterly results, we believe the following may support multiple expansion:
* Divestiture of non-offshore drilling businesses. If PDE (currently 49% shallow water, 27% deep water, 19% land, 4% San Antonio) divests its non-offshore businesses, it would look more like GSF (51% shallow, 44% deep, 4% other) and NE (55% shallow, 43% deep, 2% other). PDE currently trades at a 20% discount to NE and GSF on EV/EBITDA and a 5% discount on DACF.
* Expiration of long term drilling rig contracts. As a result of term contracts at below spot market rates, PDE's estimated EBITDA growth rate of 58% in 2006 is well below the peer group average of 124%. However, our EBITDA growth is expected at 35% in 2007, which is above the peer group average of 17%.
DIVESTITURES ARE LIKELY - SHORT-TERM EPS IMPACT LESS CLEAR
PDE has stated its strategic intention to become a pure offshore driller and that it is considering the divestiture of its L. America land drilling and services unit, and/ or, potentially its E. Hemisphere land assets and US Gulf jackup fleet. This could require some near-term earnings dilution.
WHAT ARE PDE'S LAND ASSETS WORTH?
We believe PDE has two packages of land assets under consideration for divestiture. The Latin America land business consists of 72 drilling and 137 workover rigs. We estimate the replacement cost for the Latin America land fleet at approximately $1bn (See Exhibit 3). However, most of PDE's rigs are older, mechanical rigs, as opposed to the newer AC variety. We believe a 30%-40% discount to replacement cost is appropriate, indicating a value of $600-$700mm. PDE's LA Land segment has approximately 60% market share in the region. Given that it has been generally known that PDE has been open to discussion regarding sale of these assets for some time, we believe a public market alternative may be the likely course. If PDE were able to sell the LA Land assets at $600-$700mm, the estimated EPS dilution in 2006 would be approximately 3%-5%. The second package of land assets is the 10 drilling and 3 workover rigs in the Eastern Hemisphere segment. We believe that these rigs are worth $175mm-$200mm based on a replacement value and multiple of EBITDA analysis. See Exhibit 2. Assuming PDE were able to sell these assets near our estimated values and reduce debt with proceeds, the impact would be 1% EPS dilution in 2006.
WHAT TO WATCH FOR:
(1) Mgt indicated a 12%-15% price increase across its Latin America businesses for 2006 was nearly finalized.
(2) PDE's Latin America pressure pumping business is operating near capacity and PDE is evaluating higher margin business opportunities in other parts of the world.
(3) Upcoming contract rollovers on the PDE South Seas semisubmersible (our day rate assumption is $170k) and the PDE Venezuela semisubmersible in Africa (GS day rate assumption = $170k).
(4) Potential restatement of historical financials due to accounting for swaps transactions, however, impact is expected to be minimal.
(5) Potential sale of LA Land, San Antonio and/or miscellaneous non-core assets to private buyers or in an IPO or spin-off.
IMPLICATIONS FOR THE INDUSTRY:
(1) Mgt reiterated industry expectations for meaningful insurance premia increases.
(2) Operators are increasingly concerned about deepwater rig availability in 2008/2009.
(3) PDE sees Pemex 6-8 jackups short in 2006/07 vs a deficit of 3 rigs indicated by a competitor on a recent conference call.
(4) PDE is considering a deepwater newbuild.
DRIVERS OF EPS REVISION:
Key drivers of changes to our 2006 estimates include:
(1) Increased E. Hemisphere dayrate and utilization assumptions (+$0.36 EPS impact);
(2) Increased US GOM segment rig count, dayrate and utilization assumptions (+$0.53 EPS impact), partially offset by
(3) reduced W. Hemisphere results, driven by movement of 2 rigs to US GOM segment (-$0.20) and
(4) reduced LA Land utilization and increased operating expense assumptions (-$0.08). Changes to 2007 EPS are driven primarily by increased offshore dayrate assumptions.
3Q05 RESULTS AHEAD OF EXPECTATIONS
Excluding impairment charges and gains on asset sales, PDE "clean" 3Q05 EPS of $0.28 was above our $0.20 estimate and consensus of $0.21, with offshore drilling operating income 13% ahead of expectations on strong Gulf of Mexico and Western Hemisphere results (+$0.05 EPS variance) and lower tax rate (+$0.08), offset by higher interest expense (-$0.02) and share count (-$0.02). LA Land and E&P Services results were in-line, with EBITDA 10% above expectations.
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. |
