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

To: majaman1978 who wrote (88338)	3/4/2001 1:23:11 PM
From: Big Dog	Read Replies (1) \| Respond to of 95453

From SSB on HOFF, 2/27: In just three years, Horizon has grown from a two vessel pipelay company to the Gulf of Mexico’s second-largest construction contractor. With its entire fleet located in the domestic market, Horizon has the highest operating leverage to natural gas-related production activity in our marine construction coverage universe. Horizon has built a significant market presence. Through a savvy acquisition strategy, Horizon has rapidly become the second largest Gulf of Mexico construction contractor, a pure play on the red-hot domestic natural gas drilling market. During 2000, Horizon laid 30% of all Gulf of Mexico pipelines (37% in its “home turf,” water depths below 1,000’), and performed 30% of all derrick lifts. Gulf of Mexico construction activity appears poised to explode. Two years of feverish drilling activity (the jackup fleet has been fully utilized for more than a year), coupled with record-high gas prices, should quickly drive Gulf of Mexico barge utilization and pricing toward 1997-98’s peak levels, in our opinion. Since 1993, the domestic barge fleet, industry-wide, has contracted by 35%, while offshore discoveries have reached record levels. Management has proven its ability to execute. In aggressively expanding its fleet, Horizon has maintained a conservative balance sheet while, based on operating margins, outperforming its Gulf of Mexico peers. In four years, Horizon has lost money on less than 2% of all projects undertaken. Horizon has the highest operating leverage in our offshore construction universe. With 70% more capacity than in 1998, and its entire fleet located in the Gulf of Mexico, Horizon has significant leverage to domestic natural gas production. We estimate Horizon’s operating leverage to be two to four times that of its competitors, yielding ultimate earnings power of $3.00 per share. The valuation is compelling. At just 18.9x forecast 2001 EPS and 6.3x estimated earnings power, HOFF trades at discounts of 31% and 36%, respectively, to its marine construction peer group, and 22% and 42% to the entire Salomon Smith Barney small/mid-cap oil service coverage group, despite the fact that its earnings are poised to accelerate more rapidly. In fact, we recently shifted our oilfield service investment stance, from a stock picking perspective, toward later cycle plays such as marine construction (see our February 14 report, “Shifting our Focus to Late Cycle Plays”). We maintain our Buy (1H) investment rating and 12-18 month price target of $30 per share (representing 56% upside potential), which could, in our opinion, prove extremely conservative.