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Gold/Mining/Energy : ENERGY EXPLORATION & PRODUCTION

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To: Dennis Roth who wrote (46)	2/22/2008 8:41:15 AM
From: Dennis Roth	Read Replies (1) of 111

Hornbeck Offshore Services (HOS): See better value in other names; maintain sell rating - Goldman Sachs - February 22, 2008 What's changed HOS reported 4Q2007 EPS of $0.97, above our estimate of $0.83 and consensus of $0.94. Higher than expected OSV rates were the primary reason for the better than expected results. HOS also issued 2008 EPS guidance of $3.68-$4.16 and EBITDA guidance of $220-$240 million. We maintained our 2008E EPS of $3.97 and lowered our 2009E EPS by 5% to $4.19. We also introduced our 2010E EPS of $4.67. Despite the decline in our 2009E EPS we increased our 2008/09E EBITDA by 9%/7%. As a result of higher EBITDA estimates, we also raised our 12-month price target to $41 from $38 (6.25X 2008 EV-DACF), implying 6% potential downside. Implications Management continues to build credibility and the OSV market appears to be holding up better than we had expected. However, we are still concerned with OSV capacity additions and see more upside in the Offshore Drillers. In our view, HOS’s valuation relative to the Offshore Drillers remains unattractive and we maintain our Sell rating. We are also concerned with HOS’s relatively high level of negative cash flow generation in 2008 and do not expect meaningful free cash flow until 2010. We view Pride (Conviction Buy) and Noble (Neutral) as better investment vehicles for investors looking for deepwater value. Pride and Noble are currently trading at discounts of 25% and 38%, respectively, relative to HOS on 2009E EV/DACF. Valuation With our revised estimates HOS is still trading at a premium to the Offshore Drillers on 2009 EV/DACF of 8.3X, versus 5.9X for Tidewater (TDW, Sell) and 6.9X for the Offshore Driller average. Key risks Downside risks include weakness in commodity prices and capacity additions. Upside risks include better utilization and dayrates.

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