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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (177954)	4/18/2013 7:12:08 AM
From: Dennis Roth	2 Recommendations Read Replies (2) \| Respond to of 206176

Oil Services & Equipment 1Q13 EPS Preview (Citi) 16 April 2013 ¦ 46 pages ir.citi.com Expect Offshore Drilling Strength, Manufacturing Upside Macro Call for 1Q13: Outlook Is Bullish; Sector Selection Is Key — We are bullish on the long-term outlook of oil service stocks while mindful of near-term risks in certain sectors. Offshore drilling is best positioned despite what has been a choppy backdrop over the last few years; we expect ultra-deepwater demand to grow and day rates to hold firm at $600K+. The top-line growth story is intact for the equipment manufacturers, and margin expansion is imminent, in our view. North America onshore oilfield services has been challenged over the last several years although FTS International’s comments last week suggest that pressure pumping markets may have stabilized and that demand is recovering. Land drilling appears to be bottoming, and natural gas is a potential catalyst for an accelerated recovery. The stocks we believe are most likely to beat 1Q13 consensus estimates are ESV, HP, and RIG whereas those with the greatest EPS risks are CJES, EDG, and NE. Conclusion #1: Offshore Drilling Remains Our Top Sector — We consider the offshore drillers the best positioned companies given their limited stock price appreciation despite a robust fundamental demand backdrop. Although leading- edge rate gains have slowed, ultra-deepwater rigs are still securing contracts at profitable rates in the high-$500Ks for five-year terms and low-$600Ks for three- year terms. The offshore drillers faced headwinds in 2010 and 2011 due to a slow Gulf of Mexico market recovery, speculative new rig orders, and regulatory uncertainty. However, market conditions have improved substantially since that time although the stocks have yet to fully recover to fair value, in our opinion. Conclusion #2: Manufacturing Margins Should Begin to Expand — In spite of robust market conditions that are reflected in bookings, backlog, and top line growth, the profit margins of the oilfield equipment companies have not returned to the levels of 2007-08. In the absence of margin expansion, the performance of the leading oilfield equipment stocks such as NOV, CAM, FTI, and DRC has been inconsistent and generally disappointing. We believe that a new phase of top-line growth in 2013 and 2014 will be accompanied by meaningful margin expansion. We expect the oilfield equipment manufacturers to signal that better margins are in sight when they discuss 1Q13 earnings in the coming weeks. Conclusion #3: U.S. Pressure Pumping Prices May Have Stabilized — We were encouraged by 1Q13 comments from FTS International indicating that pricing held relatively firm in 1Q13 vs. 4Q12 and that costs per stage were below plan. From FTS International’s perspective, prices per stage have been flat, and the stage count has rebounded after a weak 4Q12. Earnings are also expected to benefit from lower guar costs relative to last year. These data points could bode well for diversified domestic fracturing services providers such as HAL, SLB, and BHI. Conclusion #4: Natural Gas Could Be a Catalyst for U.S. Drilling Recovery — We view as constructive that expected returns on land rigs are still strong enough to drive a limited number of orders. Still, we believe demand for another 250 to 300 rigs is required to balance the U.S. land rig market. We see a gradual upswing going forward and expect that a return of natural gas drilling activity could drive a more accelerated recovery by year-end 2013