Atwood Oceanics (IL/A): Improved relative valuation moves ATW among favorite small caps - Goldman Sachs - November 29, 2005
We are lowering our 2005 EPS estimate for Atwood Oceanics to $1.48 from $1.64 per recent guidance on reduced December qtr revenue for the semisubmersible drilling rig "Seahawk," but raising our 2006-07 estimates to $5.69/$9.20 from $5.26/$8.85 based on higher rig rates. Relative valuation has improved of late, w/ ATW -7% vs peers over the last month and the stock is now at discounts of 13%/20% on 06/07 EV/EBITDA vs. a 9% discount historically. Although ATW has 90% of 2006 rig days already booked, coverage drops to 60% in 2007, leaving ample opportunity for additional upward estimate revisions/ catalysts. Our IL/A rating and $94 fair value (8.5x 2006E EBITDA = +33% upside potential) remain unchanged, but ATW has moved back among our favorite small cap oil service ideas.
ATW's relative valuation has improved of late. ATW currently trades at 6.5x 2006E and 4.5x 2007E EBITDA, discounts of 13% and 20%, respectively, to its offshore driller peer group. While we believe some discount to the group is appropriate given ATW's small size/limited float, we think the current magnitude is unjustified given its smaller historical discount and the fact that 70% of ATW's revenues are from deepwater, where E&P economics remain superior. During the 1995-1998 and 1999-2001 upcycles, ATW traded at an average discount of 9% to the peer group on EV/EBITDA. On EV/DACF, ATW trades at a 14% discount to the peer group on both 2006 and 2007. We are keeping our fair value unchanged at $94, suggesting +33% upside, while reducing our fair value multiple slightly to 8.5x from 9x based on our cyclical view that multiples and ROCE are inversely related. Our current estimates suggest ROCE of 20% in 2006 and 27% in 2007.
Key drivers of estimate revision.
For 2005, we reduced our EPS to $1.48 from $1.64 due to project delays resulting in decreased revenue on the semisubmersible Seahawk.
For 2006, we raised our EPS to $5.30 from $5.26 driven primarily by increased dayrate assumptions on the submersible Richmond ($64k vs. $48k prior).
For 2007, we raised our EPS to $9.20 from $8.85 based on higher dayrate assumptions for the Richmond ($85k vs $55k prior) and Southern Cross ($200k vs. $144k prior).
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. |
