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Gold/Mining/Energy : Big Dog's Boom Boom Room

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From: Q8	2/16/2007 9:18:58 AM
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From GS this morning Sell off overdone, but patience is necessary; Still Buy February 16, 2007 What's changed We have lowered our 12-month price target by $5 to $82 (12.5X 2007 EV/DACF), which implies 26% upside. We have lowered our 2007/2008 EPS forecast by $0.32/$0.28 to $4.74/$5.64. Implications We maintain our Buy rating for Baker Hughes shares and we would not be selling the stock at current levels. Having said that, we do recognize that patience is needed as the stock could be in the penalty box in the near term. We estimate that about $0.05 of the $0.08 EPS miss can be explained by cost items that should not reoccur in 1Q2007. To be clear, the fact that part of the cost increase may be somewhat non-recurring does not make the performance less frustrating. However, while the 4Q2006 is certainly a negative, we still believe that the 9.4% share price decline on Thursday was an overreaction. Valuation Baker Hughes’ discount to Schlumberger increased even after lowering our estimates by 6% for 2007. Schlumberger is now trading at an EV-DACF/P-E of 12.8X/17.3X, which implies a premium of 29%/26% relative to Baker Hughes’ 10.0X/13.7X versus the historic average premium of around 12%-14%. Key risks Key risks to our thesis include: (1) a US/global recession could result in weaker commodity prices and further E&P capex cuts; and (2) weakness in natural gas prices could lead to further E&P capex cuts in North America. Impact on related securities Baker Hughes’ cost disappointment seems to be company-specific and partly non-recurring in nature. We do not think there is a significant read across for other companies in the group.

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