Remains focused on growing deepwater exposure - Goldman Sachs - August 03, 2007
What's changed
We are revising our 2007/2008/2009 EPS estimates to $3.00/$4.32/$5.27 from $2.95/$4.42/$5.47, primarily due to lower operating margins from Latin America and E&P services, offset by nonoperating items. Our 12-month price target is unchanged at $40 (6.75X 2008 EV/DACF). Pride also issued 3Q2007 guidance of $0.80-$0.83 (our estimate is $0.81).
Implications
(1) Pride is more constructive than some peers toward consolidation and expects to play an active role going forward, particularly on the deepwater side. Management believes scale is necessary to compete.
(2) Status of Latin American divesture: On its conference call yesterday, management indicated it is in advanced stages of a private process and appears to be ready to come to the market with a public alternative, including an IPO or spin-off, if necessary. While an S1 was initially expected to be filed in June, then July, we believe management was hoping to complete the private sale. We believe the delay is partly related to recent volatility in the credit markets. We have consistently suggested that a private sale is most preferred by management due to the strategic goal of growing the deepwater fleet. According to management, a private sale can be completed in tax-efficient manners as long as the proceeds are invested outside of the US—or in other words, in a newbuild floater.
Valuation
On 2007E/2008E EV/DACF, Pride is trading at a 7%/7% discount relative to peers. Pro forma for a separation, Pride will look very similar to GlobalSantaFe and Noble, to which it trades at a 0%/4% discount currently on 2007E/2008E EV/DACF.
Key risks
Risks to our thesis and price target include
(1) capacity additions could result in a flattening or depression of dayrates and
(2) a severe correction in commodity prices could result in decreased drilling demand. |
