First Take: Solid quarter across the board except for Tubulars May 02, 2007
Goldman Sachs
News
Reported EPS of $1.05 came in above our $0.98 and consensus of $0.99 and also above the guidance of $0.97 - $1.02. Variance to our estimate was driven by Accommodations (+$0.12), Rental Tools (+$0.02), Drilling Services (+$0.02), Offshore Products (+$0.01), and Tubulars (-$0.10). Management issued 2Q2007 normalized guidance of $0.81 - $0.86, in line with our estimate and consensus of $0.84.
Analysis
(1) Accommodations surprised with revenues in line with our estimate, but EBIT margins of 37.4% vs. our estimate of 27.5% due to a better mix towards oil sands where revenues increased 54% yoy and EBITDA increased 162% yoy. (2) Rental tools benefited from new equipment, improved pricing, and good activity level in the US, which were partially offset by weakness in Canada. (3) Drilling Services positively surprised due to higher than expected dayrates partially offset by lower than expected utilization. (4) Offshore products performed well due to connector products and rig equipment upgrades. (5) Tubulars disappointed shipping lower volumes (102.6K tons vs. our 124.2K) due to lower alloy demand/weaker pricing and reported EBIT margins of 4.2% versus our estimate of 6.9%.
Implications
We believe that Oil States’ underperformance since the beginning of the year and its discount to peers are, in part, results of its exposure to the deteriorating U.S. OCTG fundamentals, as shown by this quarter’s results. However, the fact that near term earnings momentum is limited by exposure to Canada, OCTG and land drilling is largely priced in. OIS trades at a significant discount to the group and also at a discount to our SOP valuation. And while the negatives seem overdiscounted, the company does not get enough recognition for its leading market position in its various end markets and diversification makes its earnings power more resilient than they get credit for. We also think that eventual strategic alternatives could unlock value. Price target and estimates under review. |
