To mph and thread ** re: MDCO**
mph, I should have followed that good advice
much of the time <g>.
The following from Smartmoney . . .
June 3, 1998
STOCK UPDATE
CAN MARINE DRILLING
RECOVER?
WE'VE TAKEN a lot
of flack for
recommending
Marine Drilling
(MDCO). The oil
driller was part of
our "10 Stocks
Under $25"
portfolio this May
and since we
selected it, the
stock is down
nearly 20%.
Unless you've been
in seclusion, you're
well aware of the
fact that falling oil
prices have caused oil drilling stocks to plummet. Even
merger speculation -- three major oil services mergers were
announced since February -- provided only temporary
reprieves from the bloodshed. Overall, drillers have been
dogs. And Marine's stock has taken a bigger hit than most of
its competitors.'
The truth is, things could get worse before they get better.
But they will get better. And that's why Marine is really
compelling -- it's a classic Investing 101 opportunity to buy
low and sell higher.
Marine's stock has fallen a little bit more than others' in its
group for a reason. The prolonged weakness in oil prices
finally had an impact on the daily rental rates for some
shallow water rigs in the Gulf of Mexico. Analysts estimate
that in the last two weeks, rates have fallen from the low
$60,000 range to about $48,000.
This weakness will probably make it necessary for analysts
to lower earnings estimates for 1998 for all the shallow
water drillers with exposure to the Gulf of Mexico, including
Marine. But Robert Trace, an analyst with Southcoast
Capital, says the decline in day rates is a temporary
phenomenon and that rates have bottomed out.
Now let's fast forward a year. Problems in the shallow water
segment won't be as big of a concern for Marine because
the company has been taking steps to diversify. In that
sense, the company is like Pride International (PDE),
another SmartMoney pick we've recently written about in
our story, "Plenty to Take Pride In."
As with Pride, investors are failing to notice the benefits of
Marine Drilling's diversification strategy while they focus on
oil prices. "What people don't realize is the big increase in
earnings Marine will get with their deep-water rigs," says
Lewis Kreps, an analyst with Dain Rauscher Wessels.
Deep-water drillers generally have long-term contracts with
oil companies so they are less vulnerable to intermittent
swings in crude prices. And the day rates for deep-water
drilling are much higher than for shallow-water drilling. In
January, Marine signed a three-year drilling contract with
Exxon (XON) to start deep-water drilling in the Gulf of
Mexico in the first quarter of 1999. The day rate is about
$190,000 making the whole contract worth about $207
million.
Trace estimates that Marine's revenue from deep-water
drilling will increase from 15% of 1998's overall total to
nearly 35% in 1999. And deep-water drilling could add $1
to its 1999 earnings per share, representing nearly 40% of
the consensus earnings estimate of $2.62.
This exposure to deep-water drilling will insulate Marine in
case the shallow day rate picture doesn't improve. Trace did
an analysis of three offshore drillers -- Marine, Rowan
Companies (RDC) and Ensco International (ESV) -- to
determine how earnings would be affected if day rates
stayed as they are now for the remainder of 1998 and 1999.
Even in this bearish scenario, Marine's earnings would
increase 65% from 1998 to 1999. Rowan's earnings would
only increase 8% and Ensco's would decrease slightly.
Despite this, Marine trades at only a slight premium to
Rowan and Ensco. Marine has a multiple of 11 times 1998
earnings while Rowan and Ensco are trading at 10 times
forward earnings.
What's more, Marine's long-term growth rate of 30.5% is
higher than 12 of 14 other oil drillers. Only UTI Energy
(UTI), a land driller, and deep-water driller Transocean
Offshore (RIG) are growing faster. UTI is trading at 14
times 1998 earnings and Transocean has a forward multiple
of 17. Other deep-water drillers such as Noble Drilling
(NE) and Diamond Offshore (DO) are trading at about 16
times earnings.
While Kreps thinks that the pure-play deep-water drillers
deserve to trade at a premium to Marine, these drillers also
trade at discounts to their growth rates of 25% and higher.
As a result, he doesn't think it's far-fetched for Marine trade
at a multiple closer to 15 times forward earnings. He has a
target price of 41, based on his 1999 earnings estimate of
$2.82.
So before we get more angry email, keep in mind that this
group is not for risk-averse investors. Volatility is the name
of the game when looking at this sector. There's no
guarantee that OPEC will agree to scale back production at
its meeting later this month, even though the prevailing notion
is that they will.
But as Marine increases its deep-water presence, its biggest
concern would be a dramatic falloff in global demand for
petroleum, not the price of crude. Remember that Marine's
earnings are still expected to increase at more than 30% for
the next three to five years and analysts say only a
worldwide collapse in demand for oil could change this.
So, in a market where Internet companies without earnings
are afforded stratospheric multiples, it seems foolish for a
legitimate growth company to be trading at just 11 times
forward earnings. Sooner or later, investors will have to
notice how cheap Marine and the rest of the sector is.
-- By Paul R. La Monica
smartmoney.com |
