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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: jim_p who wrote (61784)	3/8/2000 11:42:00 AM
From: Winkman777	Respond to of 95453

FLC initiated as buy (target = $70). streetadvisor.com Refiners and Drillers Set to Catch Fire Rick Olivere, CFA Mar 8 2000 Iran, Libya, and Algeria, which account for 5.5m barrels per day (b/d)--22 percent--of oil produced by the Organization of Petroleum Exporting Countries (OPEC), are expressing concerns about increasing production quotas at the upcoming vote on March 27. However, because of low gasoline inventories, many market observers and government agencies forecast gasoline prices may exceed $2.00 per gallon in the US this summer even if OPEC increases production by 1.5m b/d to 2.0 m b/d. In this environment, we are initiating coverage of energy companies Amerada Hess [AHC] and R&B Falcon [FLC] with buy recommendations on both. Crude oil prices are trading above $34, but sustained prices in the mid-$20s price range are becoming more visible to investors. This is an environment in which accelerated drilling plans are likely to generate greater-than-expected revenues and profits for oil producers, refiners, and drillers. Amerada Hess and R&B Falcon, energy companies with above-average operating and financial leverage, are projected to show dramatic earnings acceleration over the next several years. Amerada Hess operates a 400,000 b/d refinery in the Virgin Islands and produces oil and gas in the North Sea and West Africa. Management estimates that each $1 rise in crude oil increases per share net by $0.65, as compared with earnings of $0.58 and $1.45 for 3Q99 and 4Q99 respectively. Oil and gas production increased 23 percent year over year in 1999. The company has announced a $300m stock repurchase program. (See hess.com) We recommend purchase of Amerada with a price target of $80, or more than 45 percent higher than the current market price. Our target price is based on a multiple of 8x projected cash flow of $10 per share. (Readers may refer to our report on Occidental Petroleum [OXY] for valuation methodology.) R&B Falcon is the largest and most diversified offshore drilling company with a fleet of 141 drilling rigs, including 24 deep-water drilling and service units. During the recent drilling downturn, nine deep-water rigs under construction contributed to the rise in long-term debt to $2.9bn at year-end 1999 and the company?s vulnerability to construction cost overruns. Maximum cost overruns are now estimated at no more than $40m. With eight rigs delivered by the end of the first quarter and the last due by the end of the third quarter of this year, all nine deep-water units are working under long-term contracts. We recommend purchase of R&B Falcon with a price target of $70, or more than three times the current market price of $19. Our target price is based on a multiple of 10x projected peak cash flow per share. Projected earning power for the company is more than $5.00 per share, with cash flow per share exceeding $7.00 per share. Readers may refer to our report on Varco for more detail on deep-water drilling prospects. FWD this page to: