HAL (OP/A): First Take - Strong quarter; reiterate HAL as our top pick - Goldman Sachs - April 20, 2006
Recurring EPS of $0.90 was $0.03 above our estimate and consensus. ESG (Oilfield)results were very strong (EBIT 7% above our est) and support HAL as our Top Pick. The fact that KBR results came in lower than expected is disappointing, but we think it will be overshadowed by the strength in ESG for two key reasons: (1) KBR's weakness was largely due to 1x items; and (2) we think HAL stock should be less sensitive to KBR lumpiness than in the past since now there is a clear strategy to separate KBR from ESG. ESG results confirm our view that Oil Services fundamentals remained solid through the 1Q and the strength in NAM Pressure Pumping is a positive initial read across for BJS. In our view, continued solid ESG execution and the IPO of KBR should bridge the valuation gap between HAL and SLB/BHI. HAL is trading at an 07 EV/DACF of 13x and P/E of 15.9x vs SLB @ 14.9/20.5 and BHI @ 14.2/17.2.
QUARTERLY SUMMARY: STRENGTH IN ESG PARTLY OFFSET BY WEAKNESS IN KBR - HAL 1Q06 EPS of $0.90 was above our estimate and consensus of $0.87. Consolidated Operating Income was in line (with lower KBR offsetting higher ESG) and the difference between reported EPS and our estimate was mostly attributed to below the line items like interest income, foreign currency gains and other income. Key highlights: * ESG (Energy Services Group) results were very strong. Operating income was 6.7% above our estimates on strong incremental margins of 81% sequentially and 43% annually, while revenues were in line. Production Optimization and Fluid Systems were the key areas of strength. * KBR results were negatively impacted by 2 items: (1) $30 mn in charges (-$0.05) related to an equity method investment in an Australian railroad; and (2) $15 mn charge (-$0.02) on the Barracuda-Caratinga project. Adding back these charges, KBR's EBIT was only $4 million (~4%) lower than our estimate despite 20% lower than expected revenues since margins were better than expected for both G&I (Government and Infrastructure) and E&C (Energy and Construction). * G&I's revenues declined sharply this quarter primarily due to Iraq (down 19% sequentially). * E&C's backlog remained flat sequentially at $5.4 bn (adjusting for divestitures).
WHAT TO WATCH FOR ON THE CALL:
(1) Pressure pumping pricing and capacity increase outlook;
(2) further comments on KBR IPO;
(3) Additional color on individual geographic markets.
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: Daniel Henriques, CFA, and Daniel Boyd, CFA. |
