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Gold/Mining/Energy : ENERGY EXPLORATION & PRODUCTION

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From: Dennis Roth	8/10/2007 1:39:27 PM
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Dresser-Rand Group Inc. (DRC) Energy - Goldman Sachs Note Stock rating: Sell - Coverage view: Attractive - Price: US$35.13 August 9, 2007 United States Dresser-Rand Group Inc. (DRC): Lowering 2007 estimates by $0.06 to account for labor strike What's changed We are lowering our 2007 EPS estimate for Dresser-Rand by $0.06 to $1.65 due to the labor strike of approximately 400 employees at its Painted Post facility, which was announced on Aug. 5. The negative effects of the strike will largely be two-fold: (1) an operating income impact of approximately $8-$12 million in 3Q2007 due to deferred production and (2) operating expenses of approximately $6 million for temporary workers filling in for employees on strike. We expect the bulk of the operating income impact to take place in 3Q2007, while in 4Q2007 any temporary workers expense will likely be offset by non-cash retiree medical expense curtailment gains. At this point in time, we are not assuming any financial impact in 2008. Implications As mentioned above, this strike has a negative impact on the operating results and will likely be an overhang on the stock over the short-term. It also creates a level of uncertainty as to when the production at the Painted Post facility (which makes reciprocating process compressors and government process compressors) will return tonormal, while taking some of management's focus away from growing the business. With that said, DRC appears to have a solid contingency plan in place and notes that none of its production has been lost, just deferred to later quarters. Valuation Our $34 (=11.5x 2008 EV/DACF) 12-month price target is unchanged. DRC is currently trading at 2008 EV-DACF/P-E of 11.5x/14.5x vs. the group at 10.9x/14.1x Key risks Key downside 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 N. America. Upside risks to our thesis includes better than expected growth and margins.

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