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Gold/Mining/Energy : ENERGY EXPLORATION & PRODUCTION

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From: Dennis Roth	8/3/2007 8:41:01 AM
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HOS - Valuation is still unattractive - Goldman Sachs - August 03, 2007 What's changed Hornbeck's recurring 2Q2007 EPS of $0.80 exceeded consensus and our estimate at $0.64. Key drivers of variance relative to our estimates included higher OSV operating income driven by higher dayrates and utilization (+$0.15 EPS variance). On July 24, the company announced the signing of a definitive asset purchase agreement with Nabors Industries to acquire 20 offshore supply vessels for $186 million and to purchase one 285-foot DP-2 newbuild currently under construction. We are raising our 2007/08/09E EPS to $3.09/$3.72/$4.14 from $2.62/$3.11/$3.34 to account for the Sea Mar acquisition, as well as higher OSV dayrate/utilization guidance and lower cost assumptions. As a result of higher estimates, we are also raising our 12-month price target to $37 from $34 (6.5X 2007 EV/DACF), implying 16% potential downside. Implications Management continues to rebuild credibility with investors following 4Q2006 disappointments. However, we maintain our Sell rating for the stock because we see more attractive valuation in other names, such as the offshore drillers. While market conditionals appear to be strong, we see potential for softening in 4Q2007/1Q2008 as rig departures increase and OSV newbuild deliveries pick up. We see potential for 7 floaters and 4-5 jackups to leave the US Gulf of Mexico in 2H2007. This could put pressure on OSV utilization and rates which would likely limit positive operating momentum - key driver of stock performance, in our view. Valuation Hornbeck is trading at a 2007/2008E EV/DACF of 8.5X/7.8X, versus 8.1X/7.3X for Tidewater and 9.4X/6.6X for the Offshore Driller average. Key risks Downside risks include weakness in commodity prices and a weak global economy. Upside risks include better utilization and dayrates.

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