DLJ Weekly Update & more on DO and FLC
SURVEYING THE PROSPECTS 04/19/99
Stocks Rally On Oil Price Gains; Lowering Ratings On CAM, DO, DRQ and ESV
Oilfield service stocks had another strong rally last week, primarily on Friday, rising 10% versus a 2% decline in the market and most stocks hit new highs for the year. The primary driven was oil prices, which closed above $17/bbl for the first time since 2/2/98. Natural gas prices also strengthened modestly. The US rig count looks like it is bottoming, while the Canadian rig count will continue to decline seasonally for a few more weeks. We expect the North American rig count to start turning up in May. Q1 earnings reports started last week - disappointing but immaterial. With the likelihood of a strong spending follow-through growing, we are raising our target multiples and prices for the group. However, we are lowering ratings on 4 stocks that are well ahead of fundamentals - CAM, DO, DRQ and ESV, from Buy To Market Performance. Favorite Stocks: BHI and HAL among the large caps, MDR and WFT among the mid caps and FLC, GW and NBR amongst the drillers.
DIAMOND OFFSHORE (DO: $32.1875 ) 04/19/99
Q1 earnings slightly below estimates-Lowering Ests- Lowering Rating
Earnings Per Share Old New P/E Ratios
(FY:Dec.) 2000E $1.65 $1.25 25.8
1999E 1.53 1.25 25.8
1998A 2.66 12.1
Rating: MARKET PERF. Change: Down From Buy 12-Mo. Target: $32
DO yesterday reported Q1 earnings of $0.37 versus $0.58 in Q4 1998, $0.02 below our $0.39 estimate and $0.01 below the street''s $0.38 estimate. EBITDA of $111.3 million was below our $113.5 million estimate due to lower revenues. DO will materially benefit from a gulf recovery as most of the company''s exposure is to North American drilling activity. However, the next several quarters will be difficult ones for DO, as semis roll to lower rates and jackups remain idle causing earnings to materialize later in the cycle than those companies more leveraged to shallow water. We are lowering our 1999 estimates from $1.54 to $1.25 and our 2000 estimates from $1.65 to $1.25. While we are raising our target multiple to10x, in line with the group, our estimate revision brings our target price down to $32, causing us to lower our opinion from Buy to Market Perform.
R&B FALCON (FLC: $9.375 )#+ 04/19/99
FLC Completes $300 MM Convert Offering; Lowering Ests But Reiterate Top Pick Rating As The Best Leveraged Offshore Driller
Earnings Per Share Old New P/E Ratios
(FY:Dec.) 2000E $0.55 $0.38 24.7
1999E (0.06) (0.18) -52.1
1998A 1.10 8.5
Rating: TOP PICK Change: None 12-Mo. Target: $16
FLC completed another financing on Friday, a $300 million preferred. This preferred has a very creative structure, which results in much lower costs to the company than a traditional preferred or straight equity. With this financing, FLC has raised $1.3 billion in the last 1 month and effectively answered any lingering liquidity concerns that investors may have had. We believe that FLC is the most compelling buy among the offshore drillers. We are lowering our estimates from a loss of $0.06 to a loss of $0.18 for 1999 and $0.55 to $0.38 for 2000, to account for the impact of the preferred offering. We continue to rate FLC Top Pick and are conservatively maintaining our target multiple at 9.5 times EBITDA, a significant discount to other offshore drillers. Our target price remains $16.
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