From SSB:
Based on a comprehensive study of 1995-2001 oilfield service stock performance, we recently published a report titled “Shifting our Focus to Later Cycle Plays.” Among the highest ranked subsectors, in terms of stock appreciation potential, were marine construction and seismic contracting.
During the past month, a step change has occurred in the demand for both of these subsectors, as oil and gas companies, particularly the Majors, have come rapidly out of the 2001 starting gate. We believe this surge results from several quarters of pent-up demand, as numerous projects, both large and small, were delayed or deferred during 2000.
In the marine construction sector, premium vessel pricing has doubled during the past six weeks, in some cases to levels 30% above the 1997-98 peak. In fact, Gulf of Mexico deepwater bidding, an area that has been nearly dead for two years, has also risen, yielding significantly improved confidence in our 2002 earnings outlook. These trends were best demonstrated by the more than $1 billion of contracts awarded last week for BP’s deepwater Gulf of Mexico development program, encompassing the Crazy Horse, Atlantis, Mad Dog, and Holstein fields. Consequently, we believe a rush to secure “field development capacity” could drive further price acceleration. Finally, shallow water bidding activity for Gulf of Mexico derrick and pipelay projects has also surged since January (with several contractors entertaining bids for long-term contracts, a rarity in that business), following an increase in permitting activity to levels last seen in 1997. Even selected international markets, such as West Africa and Southeast Asia, have seen increased bidding for shallow water projects.
Regarding seismic, the long-awaited return of marine contract demand appears to have arrived, as industry-wide fleet capacity has in recent weeks been rapidly booked. According to one contractor, pricing for selected surveys jumped more than 40% last month, with its fleet utilization expected to be essentially full through at least September. Moreover, December was perhaps the best industry-wide month for multi-client sales since late 1998, signifying, in our opinion, an inevitable focus shift toward new exploration (see our December 2000 report, “The E&P Spending Survey”).
In the marine construction segment, we continue to recommend Buy-rated stocks Coflexip Stena Offshore (CXIPY-$74.88, 1M), Global Industries (GLBL-$14.69, 1H), and Horizon Offshore# (HOFF-$23.06, 1H), as well as Outperform-rated Cal Dive International# (CDIS-$29.50, 2H) and Oceaneering International (OII-$21.75, 2M). Moreover, due to its key role in offshore field development, we maintain our Buy rating on subsea equipment manufacturer Cooper Cameron (CAM-$63.09, 1M). Regarding seismic, we believe Buy-rated Compagnie Generale de Geophysique# (GGY-$12.86, 1M), at a 32% discount to our small/mid cap service group based on price/full recovery EPS, is among the cheapest stocks in our coverage universe. |
