October 14, 2014 Oil Services, Equipment & Drilling James West +1 212 653-9047, [email protected]Samantha Hoh +1 212 653-9017, [email protected]Alex Nuta +1 212 653-9044, [email protected]Cameron Schnier +1 212 653-9041, [email protected]Initiating Coverage: Near-Term Industry Growth Increasingly Shifting West! Our Positive View Is Contrarian To Prevailing Market Sentiment Initiating Coverage with a Positive View. As a result of revised GDP forecasts and lackluster economic data, geopolitical tensions, dollar strength, commodity price weakness and investor re-allocations to other parts of the economy, the group has significantly underperformed the broader market since peaking in June with the OSX falling 25% compared to a modest 4% slide for the S&P 500. Investors have fled from the group and ISI’s proprietary survey of long only institutional investors suggests a 900 basis point drop in sector allocation from August to September. We suspect the October results will reveal a further decline. We believe the group is clearly under-owned, out-of-favor, and poised to outperform. We are launching coverage of the Oil Service, Equipment and Drilling group with a positive view and initiating coverage of 59 stocks. Oil to Recover. Over the next several months we expect geopolitical tensions that are threatening world GDP (ie Russia/Ukraine) will slowly ease, the U.S. dollar’s rapid ascent will slow and perhaps stabilize, oil demand should rebound as winter sets in, and as a result global oil prices will recover some of their recent losses. OPEC may also cut production at the cartel’s November meeting if a consensus can be reached. E&P Spending to Continue Rising. Despite a choppy third quarter reporting season and reduced expectations for the fourth quarter, global E&P spending is continuing on its upward trajectory which in 2015 and 2016 will be led by North America, most parts of Latin America, the majority of the Middle East, Sub-Saharan Africa and many countries in Southeast Asia. Successful resolutions to the conflict in Iraq and the stalemate in Ukraine would add further to E&P spending growth. We current forecast 2015 E&P spending growth of ~8-9% for North America and ~5% for International markets, with activity levels, especially abroad, outpacing E&P spending as oil companies benefit from substantially lower offshore rig costs. Contrary to the last few years we expect growth in the Western Hemisphere to outpace growth in the Eastern Hemisphere. Time to Step in. Given the recent significant weakness in the group we would use the pullback to add to or initiate positions in certain subsectors, specifically large cap diversifieds, North American-levered SMID caps, and offshore niche technology providers and support companies. We also believe some of the major capital equipment providers are good values. While the offshore drillers in general will likely chronically underperform the group over the next year with a few exceptions; we expect these stocks to rebound sharply off oversold conditions before broadly underperforming the group. Market “Indicators” Signaling a Bottom. Most of our “leading stock market indicators” before calling a bottom have hit recently including capitulation selling, portfolio strategist downgrades of Energy Street-wide, extremely negative and biased newsflow about oil, and oil price forecast revisions lower. The last, earnings revisions lower, have somewhat started but appear to be already reflected in the stocks. Our Top Picks are the large cap diversifieds including BHI, HAL, SLB, and WFT. In the SMID cap area we prefer production/completion service companies such as BAS, CFW.CN, CJES, SPN, and TCW.CN while for onshore drillers we recommend PTEN and HP. Offshore niche technology providers such as DRQ, FI, and OII are also attractive and in the offshore support are our favorites are HOS and BRS. In the offshore drilling group, which we remain cautious on, two solid dividend stories are appealing, ESV and NE, while PACD and ORIG deserve some valuation differentiation due to the high quality nature of their fleets. * See the last page of this report for an important disclosure regarding these stocks and this report.
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Transcript
October 14, 2014
Oil Services, Equipment & Drilling James West +1 212 653-9047, [email protected]
Initiating Coverage: Near-Term Industry Growth Increasingly Shifting West! Our Positive View Is Contrarian To Prevailing Market Sentiment
Initiating Coverage with a Positive View. As a result of revised GDP forecasts and lackluster economic data, geopolitical tensions, dollar strength, commodity price weakness and investor re-allocations to other parts of the economy, the group has significantly underperformed the broader market since peaking in June with the OSX falling 25% compared to a modest 4% slide for the S&P 500. Investors have fled from the group and ISI’s proprietary survey of long only institutional investors suggests a 900 basis point drop in sector allocation from August to September. We suspect the October results will reveal a further decline. We believe the group is clearly under-owned, out-of-favor, and poised to outperform. We are launching coverage of the Oil Service, Equipment and Drilling group with a positive view and initiating coverage of 59 stocks.
Oil to Recover. Over the next several months we expect geopolitical tensions that are threatening world GDP (ie Russia/Ukraine) will slowly ease, the U.S. dollar’s rapid ascent will slow and perhaps stabilize, oil demand should rebound as winter sets in, and as a result global oil prices will recover some of their recent losses. OPEC may also cut production at the cartel’s November meeting if a consensus can be reached.
E&P Spending to Continue Rising. Despite a choppy third quarter reporting season and reduced expectations for the fourth quarter, global E&P spending is continuing on its upward trajectory which in 2015 and 2016 will be led by North America, most parts of Latin America, the majority of the Middle East, Sub-Saharan Africa and many countries in Southeast Asia. Successful resolutions to the conflict in Iraq and the stalemate in Ukraine would add further to E&P spending growth. We current forecast 2015 E&P spending growth of ~8-9% for North America and ~5% for International markets, with activity levels, especially abroad, outpacing E&P spending as oil companies benefit from substantially lower offshore rig costs. Contrary to the last few years we expect growth in the Western Hemisphere to outpace growth in the Eastern Hemisphere.
Time to Step in. Given the recent significant weakness in the group we would use the pullback to add to or initiate positions in certain subsectors, specifically large cap diversifieds, North American-levered SMID caps, and offshore niche technology providers and support companies. We also believe some of the major capital equipment providers are good values. While the offshore drillers in general will likely chronically underperform the group over the next year with a few exceptions; we expect these stocks to rebound sharply off oversold conditions before broadly underperforming the group.
Market “Indicators” Signaling a Bottom. Most of our “leading stock market indicators” before calling a bottom have hit recently including capitulation selling, portfolio strategist downgrades of Energy Street-wide, extremely negative and biased newsflow about oil, and oil price forecast revisions lower. The last, earnings revisions lower, have somewhat started but appear to be already reflected in the stocks.
Our Top Picks are the large cap diversifieds including BHI, HAL, SLB, and WFT. In the SMID cap area we prefer production/completion service companies such as BAS, CFW.CN, CJES, SPN, and TCW.CN while for onshore drillers we recommend PTEN and HP. Offshore niche technology providers such as DRQ, FI, and OII are also attractive and in the offshore support are our favorites are HOS and BRS. In the offshore drilling group, which we remain cautious on, two solid dividend stories are appealing, ESV and NE, while PACD and ORIG deserve some valuation differentiation due to the high quality nature of their fleets.
* See the last page of this report for an important disclosure regarding these stocks and this report.
– North Atlantic Drilling (NADL) 231 – NOW Inc. (DNOW) 236 – Ocean Rig (ORIG) 241 – Oceaneering International (OII) 246 – Oil States International (OIS) 251 – Pacific Drilling (PACD) 256 – Paragon Offshore (PGN) 261 – Parker Drilling (PKD) 266 – Patterson-UTI Energy (PTEN) 271 – Precision Drilling (PD.CN) 276 – RPC Inc. 281 – Rowan Companies (RDC) 286 – Schlumberger (SLB) 291 – SEACOR Holdings (CKH) 296 – Seadrill Limited (SDRL) 302 – Seventy Seven Energy (SSE) 307 – Superior Energy Services (SPN) 312 – Tenaris (TS) 317 – TETRA Technologies (TTI) 322 – Thermon Group (THR) 327 – Tidewater (TDW) 332 – Transocean Inc. (RIG) 337 – Trican Well Services (TCW.CN) 342 – Vantage Drilling (VTG) 347 – Weatherford International (WFT) 352
Appendix 357
O
ctob
er 1
4, 2
014
4 Com
p Ta
ble:
ISI G
roup
’s G
loba
l Oil
Serv
ices
, Equ
ipm
ent &
Dril
ling
Cove
rage
Uni
vers
e
So
urce
: ISI
Ene
rgy
Rese
arch
, Blo
ombe
rg. N
ote:
Pric
ed a
s of 3
:25p
m o
n O
ctob
er 1
4, 2
014
Mk C
apEV
Div
Shar
eIS
ITa
rget
%Ti
cker
Com
pany
($B)
($B)
Yiel
dPr
ice
Ratin
gPr
ice
Upsid
e20
15E
Mul
tiple
2013
2014
E20
15E
2013
2014
E20
15E
2013
2014
E20
15E
2013
2014
E20
15E
Larg
e Ca
p Di
vers
ified
Serv
ices
BHI
Bake
r Hug
hes
$22.
8$2
6.4
1.3%
$52.
23Bu
y$9
582
%P/
E17
.3x
$2.6
2$4
.07
$5.5
1$3
,772
$4,8
22$5
,694
19.9
x12
.8x
9.5x
7.0x
5.5x
4.6x
HAL
Hal
libur
ton
42.1
47.5
1.2%
49.3
3Bu
y97
97%
P/E
18.2
x3.
153.
955.
316,
174
7,22
99,
127
15.7
x12
.5x
9.3x
7.7x
6.6x
5.2x
SLB
Schl
umbe
rger
115.
012
1.7
1.8%
88.3
5Bu
y12
946
%P/
E19
.8x
4.75
5.57
6.50
12,4
1213
,610
14,9
2118
.6x
15.9
x13
.6x
9.8x
8.9x
8.2x
WFT
Wea
ther
ford
Int'l
12.2
21.2
0.0%
15.7
9Bu
y29
84%
P/E
16.5
x0.
601.
121.
752,
688
3,08
63,
792
26.3
x14
.1x
9.0x
7.9x
6.9x
5.6x
Aver
age
1.1%
77%
20.1
x13
.8x
10.4
x8.
1x7.
0x5.
9xM
edia
n1.
3%83
%19
.3x
13.5
x9.
4x7.
8x6.
7x5.
4x
SMID
Cap
Div
ersif
ied
Serv
ices
SPN
Supe
rior E
nerg
y Se
rvic
es$3
.6$5
.11.
4%$2
3.43
Buy
$39
66%
P/E
14.9
x$1
.57
$1.8
9$2
.65
$1,1
13$1
,232
$1,4
3314
.9x
12.4
x8.
9x4.
6x4.
1x3.
6xTT
ITE
TRA
Tech
nolo
gies
0.7
1.1
0.0%
8.91
Buy
1346
%P/
E14
.0x
0.63
0.50
0.95
150
175
223
14.1
x17
.9x
9.4x
7.6x
6.5x
5.1x
Aver
age
0.7%
56%
14.5
x15
.2x
9.1x
6.1x
5.3x
4.3x
Med
ian
0.7%
56%
14.5
x15
.2x
9.1x
6.1x
5.3x
4.3x
Larg
e Ca
p Ca
pita
l Equ
ipm
ent
CAM
Cam
eron
Int'l
$11.
3$1
4.2
0.0%
$55.
55Bu
y$8
757
%P/
E16
.5x
$3.3
0$4
.20
$5.3
0$1
,443
$1,6
33$1
,911
16.8
x13
.2x
10.5
x9.
8x8.
7x7.
4xFT
IFM
C Te
chno
logi
es11
.512
.40.
0%48
.87
Buy
6737
%P/
E19
.0x
2.23
2.82
3.50
940
1,24
41,
506
21.9
x17
.3x
14.0
x13
.2x
10.0
x8.
3xN
OV
Nat
iona
l Oilw
ell V
arco
29.4
28.7
2.7%
68.0
8Bu
y95
40%
P/E
14.0
x5.
525.
956.
804,
143
4,59
85,
106
12.3
x11
.4x
10.0
x6.
9x6.
2x5.
6xTS
Tena
ris23
.326
.73.
1%39
.31
Hol
d41
4%P/
E14
.0x
1.31
2.76
2.90
2,78
82,
805
3,04
330
.0x
14.3
x13
.5x
9.6x
9.5x
8.8x
Aver
age
1.4%
35%
20.3
x14
.1x
12.0
x9.
9x8.
6x7.
5xM
edia
n1.
4%38
%19
.4x
13.7
x12
.0x
9.7x
9.1x
7.8x
SMID
Cap
Cap
ital E
quip
men
tDR
CDr
esse
r-Ra
nd G
roup
$6.2
$7.3
0.0%
$81.
14Se
ll$8
32%
EV/E
BITD
A13
.4x
$3.0
0$2
.57
$3.0
0$4
82$4
80$5
5427
.0x
31.6
x27
.0x
15.1
x15
.1x
13.1
xEX
HEx
terr
an H
oldi
ngs
2.4
4.4
1.7%
35.4
0Ho
ld40
12%
EV/E
BITD
A6.
0x1.
050.
781.
6060
065
074
233
.7x
45.6
x22
.2x
7.3x
6.7x
5.9x
FET
Foru
m E
nerg
y Te
chno
logi
es2.
22.
60.
0%23
.56
Buy
4070
%P/
E16
.5x
1.50
1.82
2.40
282
339
421
15.7
x13
.0x
9.8x
9.3x
7.7x
6.2x
GTL
SCh
art I
ndus
trie
s1.
31.
50.
0%43
.11
Buy
7267
%P/
E19
.0x
2.94
2.90
3.80
175
171
215
14.7
x14
.8x
11.3
x8.
3x8.
5x6.
8xO
ISO
il St
ates
Int'l
3.2
3.3
0.0%
58.1
5Bu
y71
22%
P/E
16.5
x5.
744.
174.
3182
252
146
410
.1x
13.9
x13
.5x
4.0x
6.3x
7.1x
THR
Ther
mon
Gro
up0.
70.
80.
0%22
.29
Buy
2512
%P/
E18
.2x
1.20
1.25
1.40
7675
8318
.6x
17.9
x15
.9x
10.0
x10
.1x
9.1x
Aver
age
0.3%
31%
20.0
x22
.8x
16.6
x9.
0x9.
1x8.
0xM
edia
n0.
0%17
%17
.1x
16.4
x14
.7x
8.8x
8.1x
6.9x
SMID
Cap
Nic
he Te
chno
logy
ASPN
Aspe
n Ae
roge
ls$0
.2$0
.20.
0%$9
.45
Buy
$17
80%
EV/E
BITD
A50
.0x
n/a
-$0.
63-$
0.15
n/a
-$8
$7n/
a-1
4.9x
-63.
2xn/
a-1
9.5x
23.8
xCL
BCo
re L
abor
ator
ies
5.9
6.3
1.3%
133.
41Bu
y15
113
%P/
E21
.5x
5.25
5.92
7.03
360
381
441
25.4
x22
.5x
19.0
x17
.4x
16.4
x14
.2x
CRR
Carb
o Ce
ram
ics
1.2
1.1
2.6%
50.0
0Ho
ld62
24%
P/E
16.5
x3.
673.
233.
7516
815
817
713
.6x
15.5
x13
.3x
6.6x
7.0x
6.3x
DRQ
Dril-
Qui
p3.
22.
80.
0%79
.53
Buy
126
58%
P/E
19.8
x4.
165.
056.
1025
230
136
219
.1x
15.8
x13
.0x
11.3
x9.
5x7.
9xFI
Fran
k's
Int'l
2.5
2.3
3.7%
16.2
9Bu
y26
60%
P/E
19.8
x1.
691.
141.
3043
643
348
19.
6x14
.3x
12.6
x5.
3x5.
3x4.
8xO
IIO
cean
eerin
g In
t'l6.
46.
41.
8%59
.46
Buy
9356
%P/
E19
.8x
3.42
3.99
4.70
745
860
1,00
717
.4x
14.9
x12
.7x
8.6x
7.4x
6.4x
Aver
age
1.6%
49%
17.0
x11
.3x
1.2x
9.8x
4.4x
10.6
xM
edia
n1.
5%57
%17
.4x
15.2
x12
.9x
8.6x
7.2x
7.1x
Prod
uctio
n an
d Co
mpl
etio
n Se
rvic
esBA
SBa
sic
Ener
gy S
ervi
ces
$0.5
$1.3
0.0%
$12.
07Bu
y$2
510
7%EV
/EBI
TDA
4.5x
-$0.
71$0
.58
$1.4
7$2
29$3
22$4
05-1
7.0x
20.9
x8.
2x5.
7x4.
1x3.
2xCF
W.C
N1
Calfr
ac W
ell S
ervi
ces
1.3
1.9
3.7%
13.3
5Bu
y22
65%
EV/E
BITD
A6.
9x0.
300.
791.
7018
929
939
844
.5x
16.9
x7.
9x10
.2x
6.4x
4.8x
CJES
2C&
J Ene
rgy
Serv
ices
2.4
5.8
0.0%
19.2
8Bu
y34
76%
EV/E
BITD
A6.
9x1.
221.
161.
3019
322
585
115
.8x
16.6
x14
.8x
30.2
x26
.0x
6.9x
KEG
Key
Ener
gy S
ervi
ces
0.6
1.3
0.0%
3.76
Buy
5.0
33%
EV/E
BITD
A5.
1x-0
.10
-0.3
80.
1227
016
529
7-3
7.6x
-9.8
x31
.0x
4.7x
7.7x
4.3x
RES
RPC,
Inc.
3.3
3.4
2.8%
15.1
0Bu
y23
52%
EV/E
BITD
A6.
0x0.
801.
151.
7050
463
484
018
.9x
13.1
x8.
9x6.
8x5.
4x4.
1xSS
ESe
vent
y Se
ven
Ener
gy0.
72.
30.
0%15
.19
Buy
2671
%EV
/EBI
TDA
5.0x
n/a
0.46
2.00
390
445
432
n/a
33.1
x7.
6x5.
9x5.
2x5.
3xTC
W.C
N1
Tric
an W
ell S
ervi
ce1.
62.
22.
9%10
.50
Buy
1652
%EV
/EBI
TDA
6.9x
-0.2
7-0
.03
0.95
195
229
443
-38.
9x-3
43.8
x11
.1x
11.2
x9.
6x4.
9xAv
erag
e1.
3%65
%-2
.4x
-36.
1x12
.8x
10.7
x9.
2x4.
8xM
edia
n0.
0%65
%-0
.6x
16.6
x8.
9x6.
8x6.
4x4.
8x
Pric
e Ta
rget
EPS
EBIT
DA ($
MM
)Pr
ice
to Ea
rnin
gsEV
/EBI
TDA
O
ctob
er 1
4, 2
014
5 Com
p Ta
ble:
ISI G
roup
’s G
loba
l Oil
Serv
ices
, Equ
ipm
ent &
Dril
ling
Cove
rage
Uni
vers
e (c
ontin
ued)
So
urce
: ISI
Ene
rgy
Rese
arch
, Blo
ombe
rg. N
ote:
Pric
ed a
s of 3
:25p
m o
n O
ctob
er 1
4, 2
014
Mk C
apEV
Div
Shar
eIS
ITa
rget
%Ti
cker
Com
pany
($B)
($B)
Yiel
dPr
ice
Ratin
gPr
ice
Upsid
e20
15E
Mul
tiple
2013
2014
E20
15E
2013
2014
E20
15E
2013
2014
E20
15E
2013
2014
E20
15E
Oilfi
eld
Dist
ribut
ors
DNO
WN
OW
Inc.
$2.9
$2.7
0.0%
$27.
32Ho
ld$2
96%
P/E
16.5
xn/
a$1
.35
$1.7
6$2
39$2
46$3
20n/
a20
.3x
15.5
x11
.3x
11.0
x8.
4xM
RCM
RC G
loba
l2.
03.
40.
0%19
.92
Buy
2946
%P/
E16
.5x
1.57
2.06
2.20
402
415
449
12.7
x9.
7x9.
0x8.
4x8.
1x7.
5xAv
erag
e0.
0%26
%12
.7x
15.0
x12
.3x
9.8x
9.6x
8.0x
Med
ian
0.0%
26%
12.7
x15
.0x
12.3
x9.
8x9.
6x8.
0x
Onsh
ore
Drill
ers
ESI.C
N1
Ensi
gn E
nerg
y Se
rvic
es$2
.1$2
.73.
5%$1
3.43
Hold
$17
27%
EV/E
BITD
A5.
1x$0
.84
$0.9
9$1
.15
$501
$540
$618
16.0
x13
.6x
11.7
x5.
3x4.
9x4.
3xH
PH
elm
eric
h &
Pay
ne8.
48.
13.
5%77
.86
Buy
114
46%
EV/E
BITD
A6.
3x5.
746.
527.
751,
394
1,63
21,
897
13.6
x11
.9x
10.0
x5.
8x5.
0x4.
3xIC
DIn
depe
nden
ce C
ontr
act D
rillin
g0.
20.
30.
0%7.
93Bu
y18
127%
EV/E
BITD
A7.
8xn/
a-0
.03
0.35
514
37n/
a-2
60.7
x22
.4x
46.2
x18
.1x
6.9x
NBR
Nab
ors
Indu
strie
s5.
08.
51.
4%16
.68
Buy
2974
%EV
/EBI
TDA
6.0x
1.02
1.21
2.00
1,59
01,
805
1,77
516
.4x
13.8
x8.
3x5.
3x4.
7x4.
8xPD
.CN
1Pr
ecis
ion
Drill
ing
2.8
3.9
2.5%
9.50
Buy
1444
%EV
/EBI
TDA
5.4x
0.66
0.84
1.20
624
816
957
14.4
x11
.3x
7.9x
6.3x
4.8x
4.1x
PKD
Park
er D
rillin
g0.
51.
00.
0%3.
89Bu
y8.
010
6%EV
/EBI
TDA
4.2x
0.18
0.44
0.74
250
279
355
21.6
x8.
9x5.
3x4.
0x3.
6x2.
8xPT
ENPa
tter
son-
UTI
Ene
rgy
3.2
3.7
1.9%
21.5
4Bu
y43
100%
EV/E
BITD
A5.
4x1.
431.
582.
7086
398
91,
258
15.1
x13
.6x
8.0x
4.3x
3.8x
3.0x
Aver
age
1.8%
75%
16.2
x-2
6.8x
10.5
x11
.0x
6.4x
4.3x
Med
ian
1.9%
74%
15.5
x11
.9x
8.3x
5.3x
4.8x
4.3x
Offsh
ore
Drill
ers
ATW
Atw
ood
Oce
anic
s$2
.5$3
.82.
6%$3
8.14
Buy
$48
26%
EV/E
BITD
A6.
0x$5
.32
$4.7
2$6
.95
$541
$541
$740
7.2x
8.1x
5.5x
7.0x
7.0x
5.1x
DO
Diam
ond
Offs
hore
5.2
6.3
9.3%
37.6
2Se
ll32
-15%
EV/E
BITD
A4.
8x4.
242.
953.
451,
207
1,03
21,
230
8.9x
12.8
x10
.9x
5.3x
6.1x
5.2x
ESV
Ensc
o PL
C8.
813
.38.
0%37
.40
Buy
4520
%EV
/EBI
TDA
6.6x
6.09
6.14
5.50
2,39
52,
380
2,27
46.
1x6.
1x6.
8x5.
6x5.
6x5.
9xHE
ROHe
rcul
es O
ffsho
re0.
21.
30.
0%1.
49Se
ll2.
034
%EV
/EBI
TDA
3.6x
0.27
0.01
0.20
295
262
357
5.5x
279.
0x7.
3x4.
3x4.
8x3.
5xN
ADL
Nor
th A
tlant
ic D
rillin
g1.
44.
116
.7%
5.77
Sell
5.8
1%EV
/EBI
TDA
7.2x
1.04
1.14
1.00
549
619
671
5.6x
5.1x
5.8x
7.5x
6.7x
6.2x
NE
Nob
le C
orp.
4.8
11.4
8.1%
18.4
5Bu
y25
36%
EV/E
BITD
A7.
2x2.
952.
762.
401,
964
1,94
21,
723
6.3x
6.7x
7.7x
5.8x
5.9x
6.6x
ORI
GO
cean
Rig
1.6
5.5
6.1%
12.4
7Bu
y34
173%
EV/E
BITD
A7.
2x0.
952.
033.
2652
590
51,
175
13.2
x6.
2x3.
8x10
.5x
6.1x
4.7x
PACD
Paci
fic D
rillin
g1.
54.
10.
0%7.
02Bu
y12
71%
EV/E
BITD
A7.
2x0.
350.
811.
1035
854
071
620
.2x
8.6x
6.4x
11.5
x7.
6x5.
7xPG
NPa
rago
n O
ffsho
re0.
52.
79.
1%5.
49Bu
y10
82%
EV/E
BITD
A3.
6xn/
a2.
401.
55n/
a38
070
5n/
a2.
3x3.
5xn/
a7.
1x3.
8xRD
CRo
wan
Dril
ling
2.7
4.3
1.9%
21.6
0Bu
y41
90%
EV/E
BITD
A6.
0x1.
952.
083.
9059
969
61,
104
11.1
x10
.4x
5.5x
7.1x
6.1x
3.9x
RIG
Tran
soce
an10
.518
.810
.4%
28.7
3Se
ll27
-6%
EV/E
BITD
A6.
0x4.
114.
593.
003,
483
3,54
82,
991
7.0x
6.3x
9.6x
5.4x
5.3x
6.3x
SDRL
Sead
rill
11.3
23.0
17.5
%22
.90
Buy
4075
%Di
v Yi
eld
10%
3.55
3.30
3.30
2,76
32,
531
2,80
36.
5x6.
9x6.
9x8.
3x9.
1x8.
2xVT
GVa
ntag
e Dr
illin
g0.
33.
00.
0%0.
94Ho
ld1.
06%
EV/E
BITD
A6.
6x0.
050.
160.
2035
742
644
618
.8x
6.0x
4.8x
8.5x
7.1x
6.8x
Aver
age
6.9%
46%
9.7x
28.0
x6.
5x7.
2x6.
5x5.
5xM
edia
n8.
0%34
%7.
1x6.
7x6.
4x7.
1x6.
1x5.
7x
Offsh
ore
Tran
spor
tatio
nBR
SBr
isto
w H
elic
opte
rs$2
.4$3
.21.
9%$6
5.95
Buy
$80
21%
EV/E
BITD
A7.
2x$4
.45
$5.1
4$5
.52
$314
$371
$398
14.8
x12
.8x
12.0
x10
.1x
8.6x
8.0x
CKH
SEAC
OR
Hold
ings
1.5
2.0
0.0%
76.4
5Ho
ld85
11%
BV1.
25x
1.39
3.34
4.45
200
268
336
55.0
x22
.9x
17.2
x10
.1x
7.5x
6.0x
ERA
Era
Gro
up0.
40.
70.
0%20
.80
Sell
19-9
%EV
/EBI
TDA
6.6x
0.77
1.19
1.36
8199
108
27.0
x17
.5x
15.3
x8.
6x6.
9x6.
4xGL
FGu
lfmar
k O
ffsho
re0.
81.
33.
6%28
.03
Buy
3525
%EV
/EBI
TDA
6.0x
2.54
3.30
4.24
161
199
242
11.0
x8.
5x6.
6x7.
9x6.
4x5.
3xH
ELI
CHC
Hel
icop
ter
0.4
1.8
0.0%
5.16
Buy
5.8
12%
EV/E
BITD
A5.
1x-3
.00
-1.3
2-0
.65
201
244
340
n/a
-3.9
x-8
.0x
8.8x
7.3x
5.2x
HOS
Horn
beck
Offs
hore
0.9
1.7
0.0%
25.2
5Bu
y50
98%
EV/E
BITD
A6.
3x2.
172.
724.
2526
931
042
011
.6x
9.3x
5.9x
6.4x
5.6x
4.1x
TDW
Tide
wat
er1.
83.
32.
7%36
.53
Hold
371%
EV/E
BITD
A6.
0x3.
563.
894.
8034
644
954
810
.3x
9.4x
7.6x
9.5x
7.3x
6.0x
Aver
age
1.2%
23%
21.6
x10
.9x
8.1x
8.8x
7.1x
5.8x
Med
ian
0.0%
12%
13.2
x9.
4x7.
6x8.
8x7.
3x6.
0x
Seism
icIO
ION
Geo
phys
ical
$0.4
$0.4
0.0%
$2.4
4H
old
$2.7
11%
SOTP
4.8x
-$0.
09$0
.03
$0.2
1$7
4$9
7$9
9-2
7.1x
70.0
x11
.7x
5.9x
4.5x
4.4x
Pric
e Ta
rget
EPS
EBIT
DA ($
MM
)Pr
ice
to Ea
rnin
gsEV
/EBI
TDA
6
Our Key Calls in this Report
We are launching coverage of the Oil Service, Equipment and Drilling industry with a positive view and initiating coverage on 59 companies. We believe the recent sharp sell-off in the group has created significant buying opportunities in certain subsectors and stocks. Our favorite sub-sectors are large cap diversifieds, SMID cap North American-leveraged companies, and offshore niche technology providers and support companies. We also believe the major capital equipment providers are good values.
We remain cautious on the offshore drillers as a group although some valuation differentiation should begin to emerge creating pair trading opportunities. We do expect the offshore drilling group to rebound sharply off recently oversold conditions before ultimately underperforming the broader group over the next several quarters.
Our Top Picks are the large cap diversifieds including Baker Hughes, Halliburton, Schlumberger, and Weatherford. In the SMID cap area we prefer production and completion service companies such as Basic Energy Services, Calfrac Well Services, C&J Energy Services, Superior Energy Services, and Trican Well Services while for onshore drillers we recommend Patterson-UTI Energy and Helmerich & Payne. Offshore niche technology providers such as Dril-Quip, Frank’s International, and Oceaneering International are also attractive and in the offshore support are our favorites are Hornbeck and Bristrow. In the offshore drilling group, which we remain cautious on, two solid dividend stories are appealing, Ensco plc and Noble, while Pacific Drilling and Ocean Rig deserve some valuation differentiation due to the high quality nature of their fleet.
Most of our “leading stock market indicators” before calling a bottom have been hit recently including capitulation selling, portfolio strategist downgrades of Energy, extremely negative and biased newsflow about oil, and oil price forecast revisions lower. The last, earnings revisions lower, have somewhat started but appear to be already reflected in the stocks.
Near-term upside catalysts include the 3Q earnings season, especially for SMID cap North American-leveraged companies. We also believe 3Q earnings will reset expectations for 4Q for the large cap diversifieds, helping these stocks to bottom and potentially rally following the revisions. For the group and Energy as a whole, the November 27th OPEC meeting could lead to a significant rally if the cartel moves forward with production cuts.
Concerns about OPEC infighting and discord appear meaningful. While a production response may prove elusive in November, stronger demand and slower growth in supply sow the seeds for recovery in 2015.
The major themes that we believe are driving growth for the industry currently are: the revolutionary change in drilling in North America, continuing growth in the international markets (especially Latam, Saudi in 2015), increasing deepwater drilling (at a moderate pace) and subsea production growth, the expansion of the installed base for capital equipment providers (the aftermarket potential), the emergence of North America as a global LNG force, the exploration/exploitation of the arctic, energy infrastructure and the “gasification” of the world, and the rise of mature field investments.
7
The Group is Oversold; Buying Opportunity
October 14, 2014
8
We Believe the Stocks are Bottoming
In our 15 years following the industry we’ve witness a multitude of corrections in the oil service group along with several industry downturns. We do not believe we are entering a downturn. Rather the softness in the stocks is a normal correction in the context of a long-term upcycle, primarily driven by macro concerns that appear to us to be overblown. During corrective periods we tend to look for several market signals to call a bottom in the group.
Most of our “stock market leading indicators” before calling a bottom have hit recently including capitulation selling, portfolio strategist downgrades, negative and biased newsflow, and oil price forecast revisions lower. The last, earnings revisions lower, are starting but also appear to be already reflected in the stocks.
Concerns that infighting at OPEC have risen in recent weeks, highlighted by Saudi Arabia and Kuwait's decision to lower prices to Asian buyers in October. Many market observers have suggested that OPEC is the most fractured than any time in its history since the cartel's founding in 1960. We do not agree. The 1980's market share battles were much more fierce and driven by massive amounts of spare capacity. Spare capacity today is minimal at best.
Sell-Off has Created Opportunities in Select Stocks
Since late June the Oil Service Index has dramatically underperformed the broader market, falling 25% since peaking on June 30 compared to a 4% slide for the S&P 500 over the same time-period. The combination of revised GDP forecasts, lackluster economic data, geopolitical tensions, falling oil prices, and investor re-allocations to other parts of the economy (i.e. Technology) has left the Energy sector and especially the Oil Service, Equipment and Drilling Group severely out-of-favor. We believe the sell-off has created significant opportunities. Since the recent June peak for the OSX, the index has dropped 25% while Brent has fallen 21% and WTI has corrected by 19%. The U.S. dollar, over the same time period has rallied 7%, adding pressure to commodities. The dollar has risen for three months straight and now sits at a 2-year high versus the Euro and a six-year high versus the Yen.
We believe the group is clearly under-owned, out-of-favor, and poised to outperform. We are launching coverage of the Oil Service, Equipment and Drilling industry with a positive view and initiating coverage of 59 stocks. Our Top Picks are the large cap diversifieds including BHI, HAL, SLB, and WFT. In the SMID cap area we prefer production/completion service companies such as BAS, CFW.CN, CJES, SPN, and TCW.CN while for onshore drillers we recommend PTEN and HP. Offshore niche technology providers such as DRQ, FI, and OII are also attractive and in the offshore support are our favorites are HOS and BRS. In the offshore drilling group, which we remain cautious on, two solid dividend stories are appealing, ESV and NE, while PACD and ORIG deserve some valuation differentiation due to the high quality nature of their fleets.
Commodity Prices have been Under Pressure, Pushing the OSX Lower Concerns over oil supplies, economic discontinuity, and geopolitics have driven down global and domestic oil prices and the oilfield service group.
Source: ISI Energy Research, Bloomberg
With the decline in cyclical sectors, the S&P 500 has been sliced by 4% since the June OSX peak. The OSX has fallen by 25%, led by Nabors’ 40% decline. We believe dollar weakness has played a significant role by pushing commodities down, and the U.S. dollar has rallied 7% since the OSX peak and is up three months in a row.
OSX has taken a Beating Despite S&P Strength as Dollar has Rallied While cyclical sectors and in particular energy have been under pressure the S&P 500 has continued higher.
Source: ISI Energy Research, Bloomberg
$80
$85
$90
$95
$100
$105
$110
$115
$240
$250
$260
$270
$280
$290
$300
$310
Jun-14 Jul-14 Aug-14 Sep-14 Oct-14
OSX (L)
Brent (R)
WTI (R)
$1,850
$1,875
$1,900
$1,925
$1,950
$1,975
$2,000
$2,025
S&P 500 (Far L)
$79
$80
$81
$82
$83
$84
$85
$86
$87
$240
$250
$260
$270
$280
$290
$300
$310
$320
Jun-14 Jul-14 Aug-14 Sep-14 Oct-14
OSX (L)
U.S. Dollar (R)
October 14, 2014
10
Along with the sharp decline in oil prices investors have quickly moved out of energy stocks and into other parts of economy, most notably Technology. ISI’s Head of Company Surveys Oscar Sloterbeck’s Institutional Equity Sector Allocation Survey demonstrates that investors have fled from the group with the survey posting a 900 basis point drop in allocation from August to September. We suspect the October results will reveal a further decline. In addition, hedge funds have cut net exposure very sharply in the last few weeks which is typically a negative market signal.
Investor Allocations To Energy Have Recently Diminished ISI’s Head of Company Surveys Oscar Sloterbeck’s Institutional Equity Sector Allocation Survey showed a 900 basis point drop in allocations towards Energy from August to September.
Source: ISI Research
Given the pullback in the shares, valuation have improved and are particularly compelling for the large cap diversifieds, which on average are trading at ~3x multiple turns below their historical average and 3x multiple turns below the S&P 500 compared to their historical premiums to the broader market of 11%.
Forward P/E’s for the “Big Four” are Attractive The “Big Four,” including Baker Hughes, Halliburton, Schlumberger and Weatherford are the best positioned stocks for the cycle as we see it unfolding over the next several years and valuation for this group remains attractive.
Institutional equity sector allocation towards equity dropped 900bp from
August to September and remains well below 2012 weightings
5x
8x
11x
14x
17x
20x
23x
26x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
The "big four" diversified services are trading at almost a 26% discount to their 2004-2013 average of 16.7x
October 14, 2014
11
The small and mid-cap North American-leveraged stocks and the land drillers have also experienced a sharp pull-back in valuations despite the superior outlook for growth in their main market of North America. We also believe valuations are misleading as the market traditionally underestimates the operating leverage and earnings power for this group during upturns. Our channel checks in recent weeks have suggested business conditions remain extremely robust.
SMID Cap NAM-Levered and Land Drillers have Pulled Back Sharply The North American-leveraged small and mid-cap stocks are also reasonably valued, especially given our view that consensus estimates dramatically underestimate the operational leverage and earnings power of this group.
Source: ISI Energy Research, Bloomberg
While the capital equipment stocks are not too far below their historical multiple ranges, the valuations have slipped which has created some value opportunities. We think the market has already discounted the slowdown in offshore rig orders for NOV and CAM but investors may be missing the enormous aftermarket opportunity that record backlogs and thus a huge expansion in the installed base of equipment present.
Capital Equipment Multiples Exhibit some Value Capital equipment multiples have contracted as the market anticipates lower order rates going forward; however, the market may be not be appropriately valuing the cash harvest that is underway and the aftermarket potential from the huge buildout of the installed equipment base. Source: ISI Energy Research, Bloomberg
2x
3x
4x
5x
6x
7x
8x
9x
10x
11x
'06 '07 '08 '09 '10 '11 '12 '13 '14
Production & Completion ServicesOnshore Drillers
Onshore Drillers historically trades at a 15% discount to SMID Cap NAM services, averaging 5.0x and 5.9x
respectively from 2004-2013
5x
9x
13x
17x
21x
25x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
The "big three" capital equipment providers averaged 16.6x from 2004-2013, in line with the "big four" diversified services, and are trading at a 24% discount currently
October 14, 2014
12
From only looking at share price performance year-to-date one might believe that the offshore drillers are inexpensive; however, we do not believe that to be the case. The group is facing heavy supply challenges and dayrates are dropping quickly and eroding earnings power. The companies are basically racing to the bottom in the floater market in order to protect utilization and in the jackup market the rate declines have only just begun. Despite this phenomenon, we do believe there is some value in a few names and we also think the market will start to differentiate between high and low quality fleets yielding pair trading opportunities. As a group, however, we expect the offshore drillers to underperform the rest of the industry until the dayrate cycle nears a bottom.
Despite Substantial Underperformance Offshore Drillers are Not Cheap While the offshore drilling group appears inexpensive on forward EV/EBITDA, the collapse in dayrates due to oversupply is likely still early in the process and significant earnings revisions lower are likely.
Source: ISI Energy Research, Bloomberg
Despite the dayrate trends in the offshore drilling space, offshore drilling activity remains robust and we believe the offshore, and especially the deepwater rig count will continue to grow. The dayrate issue is due to oversupply, rather than a growing rig count. As a result of continued growth the niche technology providers to the offshore markets will experience solid growth over the next decade as new wells are drilling, subsea systems are installed, and well interventions occur. Given that this group has sold off with the offshore drillers has created an opportunity.
Niche Offshore Technology Providers are Attractive Given our view that the offshore rig count will continue to climb, albeit at a modest pace, we believe the offshore technology providers should trade at higher multiples and have sold off due to the issues in the offshore rig market.
Source: ISI Energy Research, Bloomberg
Similar to offshore niche technology providers, the support companies that provide vessels and helicopters to the industry are experiencing solid demand and robust
3x
4x
5x
6x
7x
8x
9x
10x
'06 '07 '08 '09 '10 '11 '12 '13 '14
Offshore drillers are trading at 5.8x, only a 13% discount to their 6.7x average from 2006-2013
8x
11x
14x
17x
20x
23x
26x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Capital Technology / Equipment Providers are trading at an attractive 21% discount to their
2004-2013 average of 19.5x
October 14, 2014
13
offshore activity. Given the push into deeper waters the demand is growing more rapidly than the rig count as larger and more sophisticated equipment is required to make the longer trips from shore base to offshore rig or offshore platform.
Offshore Support Outlook Remains Healthy & Multiples could Improve Similar to our view on the offshore technology providers, in a rising rig count environment the offshore support companies will also experience rising demand for services, with a multiplier effect in place due to the continue push into deeper waters with greater distances between rigs, platforms and shore bases.
Source: ISI Energy Research, Bloomberg
4x
5x
6x
7x
8x
9x
'06 '07 '08 '09 '10 '11 '12 '13 '14
Offshore Support companies are generally trading in line with their historical average multiple of 6.6x
14
The State of the Oil Service Industry
October 14, 2014
15
The State of the Industry and the Outlook for E&P Spending
Global E&P spending trends remain relatively strong and we forecast record expenditures this year and for the next several years in most major markets around the world, especially in North America, most parts of Latin America, the majority of the Middle East, Sub-Saharan Africa, and many countries in Southeast Asia. Successful resolutions to the conflict in Iraq and the stalemate in Ukraine (which would end the sanctions on Russia) would add further to E&P spending growth.
We currently forecast 2015 E&P spending growth of ~8-9% for North America and ~5% for International markets, with activity levels, especially abroad, outpacing E&P spending as oil companies benefit from substantially lower offshore rig costs.
Large cap diversified oil service companies have record visibility, are generating record revenue, and are chasing the largest number of contracts in their history. The capital equipment providers are sitting on record backlogs and have dramatically increased the installed base of equipment in recent years with further additions to come which will drive huge growth in aftermarket sales, while offshore technology providers and support companies are experiencing impressive demand growth reflecting the continued increase in the rig count. The one area of weakness is offshore dayrates; a trend that we expect to continue through 2015.
After fairly low levels of E&P spending in the 1980s and 1990s spare oil productive capacity shrunk significantly and when in the early 2000s China’s expansion became more rapid, oil prices, and E&P spending began to surge and the world entered a new paradigm. From 1985 to 2005 E&P spending rose 5% annually while from 2005 to 2013 E&P spending growth accelerated to 12% per year.
Global E&P Spending Levels have Entered a New Paradigm Following anemic spending throughout the 1980’s and 1990s, the 2000s experienced a surge in spending.
Going forward we expect global E&P spending growth to slow modestly from the breakneck pace of the last four years as the Majors focus on returns, the NOCs push forward with major projects, the independents move fully into development phase in shale plays, and companies that drill offshore benefit from much lower offshore rig rates. Overall spending levels will also likely appear lower than actual drilling levels as the IOCs will be spending less on major LNG projects and more on drilling wells. We believe, however, that the risk to our estimates is to the upside as we expect higher oil prices and a resurgence in natural gas activity.
Global E&P Spending Heading Towards $1 Trillion/Yr by 2020 While we do expect E&P spending growth going forward to be more moderate, there is risk that our estimates prove too conservative.
While our outlook varies by region, we do anticipate most markets around the world will expand in 2015; however, the largest moves are likely to shift back to the Western Hemisphere where North and South America should experience above average growth as North American activity continues its strong upward momentum and Latin America rebounds from a lackluster 2014. We currently forecast E&P spending growth of ~5% internationally and 8-9% in North America in 2015. Spending will be once again led by the NOCs and Independents, while the IOCs continue to constrain capital investment. The NOCs and Independents represent roughly 78% of global E&P spending compared to the Majors which account for 22% of the market.
The NOC’s & Independent’s Dominate Global E&P Spending Despite popular perception in the equity markets the NOCs are the largest spenders of E&P dollars in the world at close to 40% compared to the Majors at only 22%.
Source: ISI Energy Research
North America has Momentum
Clearly the driving force in the Western Hemisphere at the moment is North America where rig counts in the U.S., and especially well counts have risen dramatically from their 2013 low and are set to continue upward momentum in 2015 and 2016. The U.S. market only five years ago was dominated by natural gas activity but currently ~85% of all rigs are targeting liquids. While the “great migration” to oil occurred primarily in 2011 and early 2012, the second half of 2012 and most of 2013 was spent delineating plays, securing geological knowledge and testing drilling and completion techniques. As we entered 2014 full scale development programs began to take hold and these are continuing to grow in scope and scale. The drive higher will incorporate not only more wells drilled, but continued increases in service intensity as more measurements, more fractures, and more proppants will be demanded to continue to optimize shale well productivity. While Canada has lagged the United States in shale exploitation the country is quickly playing catch up.
Independents39%
Majors22%
NOCs39%
October 14, 2014
19
North American Oil Production vs. Rest of the World Sharply rising North American oil production is barely offsetting stagnate production in the rest of the world.
7
Source: IEA, ISI Energy Research
Despite the recent pull-back in WTI, operators believe well economics remain healthy due to high initial flow rates and growing production levels will help drive higher cash flows (and thus higher CAPEX). We believe the E&P industry is sitting on the largest number of wells “to be drilled” in its history.
U.S. Well Count and Well to Rig Ratio
The U.S. well count increased to 9,566 during Q3:14, up 5% YoY and 1% sequentially.
Source: Baker Hughes, ISI Energy Research
After a difficult 2012 and 2013, pressure pumping fundamentals are rapidly improving with utilization 90% or higher in North America, a continued move towards greater service intensity, more horsepower required on location, and pricing inflecting higher. Average crew size have increased 20%-50% in certain regions.
Pressure Pumping Market Rebounding Solidly U.S. pressure pumping capacity increased 17% since early 2012 and PacWest forecasts another 2.4 MM HHP will be added to the system over the next several quarters, a 15% increase.
Source: PacWest Consulting, ISI Energy Research
Proppant usage per well continues to grow steadily with the average well now commanding 3.5 million pounds, up from 2 million pounds two years ago. According to Halliburton their typical job a year ago consumed roughly 4 million pounds which is the equivalent of 20 rail cars. Today, the company is working on jobs that consume 15 million pounds or the equivalent of 75 rail cars.
Proppant Demand Continues its Rapid Rise The industry fracs a steady 6,500-7,500 wells per quarter, but proppant usage has risen steadily from 2.0 MM lb per well two years ago to about 3.5 MM lb currently.
MM lbs / Well'000 Wells Wells Frac'ed Proppant per Well
About 6,500-7,500 wells are frac'ed per quarter ... ... but proppant usage per well
continues to rise
October 14, 2014
21
Following right along with the shale revolution is the growth in E&P spending in North America. We anticipate another healthy year of 8-9% growth in 2015.
North American E&P Spending (2004-2015E, $ in billions)
Source: ISI Energy Research
49 6592 99
12384 101
132 144 150 164
+8%
2530
36 32
38
25
38
4944 43
45
$0
$25
$50
$75
$100
$125
$150
$175
$200
$225
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14E '15E
October 14, 2014
22
A Rebound Coming for Latin America
While 2014 has been a lackluster year in Latin America, primarily due to Mexico and Brazil, trends for 2015 appear much stronger. Mexican energy reform passed, round zero is complete, round 0.5 is underway and round 1 is expected in 1Q. Last year we described the Mexican opportunity set as the next “El Dorado” for the oil service industry and we still expect this to be the case. The market is currently about $20 billion but we believe this could reach $80 by 2020 with about a 50/50 split between PEMEX and foreign investors. Several “mega-tenders” were awarded to oil service companies earlier this year and rigs are now being mobilized.
Mexico Round One Timeline Round One in Mexico will begin shortly with calls for the first round of bids due next month.
Source: Company Reports, ISI Energy Research
Separately, PEMEX has signed MOU’s and agreement with several Major and regional oil companies including Exxon, Petronas, and YPF, and we expect many others to be signed in the near term. In addition the Mexican government has set up four funds aimed at spreading the benefits of energy reform to the population including stabilizing and developing the economy.
Mexico Energy Reform Timeline We have been very impressed with the Mexican government’s quick move on Energy Reform, followed by very little slippage getting ready for foreign investment.
Source: Company Reports, ISI Energy Research
Further south, we have met with many senior executives of oil service and drilling companies in the last few weeks who recently visited with Petrobras in Brazil and almost all came away from their meetings feeling better about the Brazilian market next year. Several of the major contracts have been re-bid and awarded, Petrobas is currently expected to take 3-5 deepwater rigs from the market, and given the delivery timeline for several FPSOs the company needs to ramp up activity.
Acreage type
Open blocks & joint ventures
November 2014 January 2015 Shallow-water
December 2014 February 2015 Extra-heavy oil
January 2015 March 2015 Chicontepec/unconventionals
February 2015 April 2015 Onshore
March 2015 May 2015 Deep-water
Call for Bids Data room opening
"Round Zero"Pemex Proposals
Secondary Legislation
Government Response to Round Zero
Round One Tenders Activity Begins
March2014
April2014
September2014
1H2015
4Q2015
October 14, 2014
23
Brazil Oil & Gas Production Mexico Oil & Gas Production
Source: EIA, ISI Energy Research Source: EIA, ISI Energy Research
Both the Brazilian offshore rig count (down 44% from its 2011 peak) and the Mexican offshore and onshore (down 20% from the end of 2012) rig counts are poised to rebound.
Source: Baker Hughes, ISI Energy Research Source: Baker Hughes, ISI Energy Research
Petrobras & Pemex Budgets ($B)
Source: Company Reports, ISI Energy Research
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.0
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
'06 '07 '08 '09 '10 '11 '12 '13
OilNatural Gas
After a few disappointing years, Brazil's oil production growth is expected to accelerate this year
Oil MMBbl/d Gas Bcf/d
3.5
4.0
4.5
5.0
2.82.93.03.13.23.33.43.53.63.73.8
'06 '07 '08 '09 '10 '11 '12 '13
OilGas
Mexico's oil production is down sharply from 2006 levels, while gas production is relatively unchanged
Oil MMBbl/d Gas Bcf/d
0
10
20
30
40
50
60
70
80
90
'06 '07 '08 '09 '10 '11 '12 '13 '14
OnshoreOffshore
Brazil's offshore rig count is down 44%from its 2011 peak
The onshore rig count is down 60% since mid
2012
0
20
40
60
80
100
120
140
'06 '07 '08 '09 '10 '11 '12 '13 '14
OffshoreOnshore
Mexico's offshore rig count is near its historical highs, but the onshore count is down almost 50% from the end of 2012
$8
$13
$18
$23
$28
2006 2007 2008 2009 2010 2011 2012 2013 2014E
Petrobras PEMEX
October 14, 2014
24
Activity in Colombia is expected to continue to ramp up and permitting issues are easing, Argentina is strong and should remain so as shale activity grows further, and several major production management projects were recently awarded in Ecuador which will drive significant growth next year. Ecuador has awarded contracts to oil and oil service companies to operate 17 mature fields in Amazon territories. Both Halliburton and Schlumberger were awarded contracts. Schlumberger has already experienced huge success in Ecuador with its Shushufendi project and now Halliburton has agreed to long-term contracts (15 years plus a potential five-year extension) to provide field development and project management on nine mature fields and will invest $1 billion in the first five years.
E&P Spending by Select Latin American Companies ($ in billions) After a somewhat disappointing year in Latin America for the oil service industry, as Petrobras and PEMEX both slowed activity, 2015 should be a much better year for the industry.
Source: Company Reports, ISI Energy Research
* Our estimates include Petrobras, Pemex, PDVSA, Ecopetrol SA, OGX and others.
+5.5%
$0
$10
$20
$30
$40
$50
$60
$70
2006 2007 2008 2009 2010 2011 2012 2013 2014E
October 14, 2014
25
The Middle East to Drive Eastern Hemisphere Growth; but Iraq Could Remain Challenged
While proxy wars in Syria and Iraq are a concern, the rest of the Middle East is expanding rapidly, led by Saudi Arabia. Saudi Aramco is not only boosting spending in traditional fields, the company is also pushing into unconventionals including drilling shale gas wells in the North, tight gas wells in shallow water, and deepwater wells in the red sea.
Saudi Arabia Onshore & Offshore Rig Count The Kingdom of Saudi Arabia is likely to drive Middle Eastern growth in 2015 and beyond as Saudi Aramco pushes forward with ambitious drilling programs.
Source: Baker Hughes, ISI Energy Research
Middle Eastern operators are also increasingly making investments abroad, as evidenced by Kuwait Foreign Petroleum Exploration Company’s (the international investment arm of Kuwait Petroleum Company) recent agreement to acquire a 30% stake in Chevron’s interest in the Kaybob area of Canada’s Duvernay shale.
E&P Spending by Select Middle East Companies ($ in billions)
Source: Company Reports, ISI Energy Research
* Our estimates include Saudi Aramco, Kuwait Oil Company, Abu Dhabi National Oil Co. (ADNOC) and others.
0
20
40
60
80
100
'06 '07 '08 '09 '10 '11 '12 '13 '14
OffshoreOnshore
Saudi's onshore rig count has ramped up sharply since late 2013 and average up 23% year to date, outpacing offshore's 13% growth
+15.5%
$0
$10
$20
$30
$40
2007 2008 2009 2010 2011 2012 2013 2014E
October 14, 2014
26
Two Sides of Africa to Perform Well; North Africa likely to Remain in Flux
While North Africa remains slow with Libya essentially shut down and Egypt and Tunisia lackluster, the growth in Africa will emerge from sub-Saharan Africa on the West Coast and gas plays on the East Coast. We anticipate strong activity growth in Angola as a number of high profile pre-salt wells are to be drilled and also the surrounding countries. In Nigeria, activity may be slow until after the elections in February, 2015.
E&P Spending by Select African Companies ($ in billions)
Source: Company Reports, ISI Energy Research
* Our estimates include Sonangol, Nigerian National Petroleum Company (NNPC), Sonatrach and others.
+8.5%
$0
$5
$10
$15
$20
$25
2008 2009 2010 2011 2012 2013 2014E
October 14, 2014
27
North Sea should Continue at Elevated Levels
Activity and spending levels in the North Sea have flattened out in recent years, primarily due to Statoil re-assessing its capital program. BG is also working through a portfolio review. In the near term we expect these conditions to continue.
Some Modest Lowering of the Offshore Rig Count The offshore rig count in the North Sea has moderated somewhat although remains at healthy levels.
Source: Baker Hughes, ISI Energy Research
Despite a flattish spending outlook for 2015 the North Sea remains at historically high levels.
E&P Spending by Select European Companies ($ in billions)
Source: Company Reports, ISI Energy Research
* Our estimates include Eni, Statoil, BG Group and others.
0
10
20
30
40
50
60
'06 '07 '08 '09 '10 '11 '12 '13 '14
The North Sea's rig count is averaging down 12% Y-Y to date, despite another pickup in spending
-0.2%
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
2006 2007 2008 2009 2010 2011 2012 2013 2014E
October 14, 2014
28
India, Asia and Australia a Mixed Bag
India and certain parts of Southeast Asia are likely to be bright spots in 2015, although China may not be one of them. The corruption probes at CNPC have slowed spending by PetroChina, CNOOC and Sinopec and this overhang is likely to persist. However, over time, the country’s aggressive goal of producing 80 bcm of unconventional natural gas by 2020 (up from a minimal amount today) will eventually spur a spending surge.
In India ONGC is preparing to tender for up to five deepwater rigs to drill off its East Coast for three to five year terms, while activity levels in Australia are set to ramp up to fuel large LNG facilities.
E&P Spending by Select Indian, Asian & Australian Companies ($ in billions)
Source: Company Reports, ISI Energy Research
* Our estimates include PetroChina, Sinopec, CNOOC, Petronas, ONGC and others.
+8.0%
$0$10$20$30$40$50$60$70$80$90
$100$110
2006 2007 2008 2009 2010 2011 2012 2013 2014E
October 14, 2014
29
Russia: the Great Unknown
Russia is a market that holds great promise for the oil service industry given the emerging, technically challenging plays that are opening up including oil shale and the Arctic; however, these are the same plays that U.S. and EU sanctions are targeted at stopping technology transfer. Sanctions may also hinder Russian oil companies’ abilities to tap Western capital markets for financing.
E&P Spending by Select Russian Companies ($ in billions) The Russian market is a substantial opportunity for the oil service industry as mature fields are in decline and the next wave of drilling is planned to be in more technically challenging areas like shales and the Arctic; sanctions, however, have created uncertainty that at the current time is difficult to quantify. Source: Company Reports, ISI Energy Research
* Our estimates include Gazprom, Lukoil, Rosneft and others.
+7.9%
$0$5
$10$15$20$25$30$35$40$45$50$55
2006 2007 2008 2009 2010 2011 2012 2013 2014E
30
Oil Market Outlook
October 14, 2014
31
We Expect a Year-End Oil Price Rally; and Higher Prices in 2015
Despite the relentless downward momentum in oil prices in recent weeks, a higher price environment remains possible in 2015-2016. The marginal supply from U.S. oil shale is only economic over $85-$90/bbl in our view, and any sustained period of prices below those levels would likely induce a quick supply response. Most North American liquids basins experience first year decline rates in excess of 50% and roughly 80% of new wells that are drilled only serve to maintain production. This is clearly leading to rising price elasticity. In addition, OPEC may take action at its November meeting and the continued return of Libyan and Iraqi production is anything but certain.
Rising Price Elasticity of Global Oil Supply (MMBbl/d) Oil production from the Bakken, Eagle Ford, Permian, and Niobrara is highly sensitive to oil prices, as production from new wells are needed to offset high decline rates from existing wells.
Source: ISI Energy Research
ISI’s Integrated Oil Analyst Doug Terreson recently reduced ISI’s brent forecast for the fourth quarter to $95/bbl; however, he maintained his 2015 forecast of $110/bbl (although the bias at this point may be a downward revision given the recent unexpected supply surge in OPEC). Terreson believes that organic demand will recover, additions to China’s SPR will continue and that lower oil prices will elicit a production response from non-OPEC and OPEC. We also believe the supply situation is extremely fragile in Libya and Iraq, and despite recent upside surprises, production could just as quickly fall. Other markets such as Russia, Nigeria, and Venezuela are also a concern of ours.
Oil demand trends are currently better-than-expected in North America, although below expectations in most other markets around the world. Terreson estimates global oil demand growth of 1 million and 1.2 million bbls/day in 2014 and 2015, respectively. On the supply side oil production globally is in-line with expectations with North America topping forecasts and production in Latin America, Middle East and Asia disappointing.
4,7774,880
389286
4,000
4,200
4,400
4,600
4,800
5,000
5,200
Sep Production fromnew wells
Legacy productionchange
Oct
October 14, 2014
32
Since 2010 80% of oil supply growth has come from three countries – the United States, Canada and Saudi Arabia. This is despite oil prices averaging $105/bbl suggesting very little production growth elsewhere. We believe the growth in production from the United States is decelerating.
Oil Supply Growth During $105/Bbl Brent, 2009-2014 (MMBbl/d) Production growth from the U.S., Canada, and Saudi Arabia represented 80% of global oil supply growth since 2010.
Source: ISI Energy Research
Despite heavy investment spending growth by the oil industry since 1999 global oil production has barely risen. We calculate that global E&P spending rose by 4x since 1999 while global oil production only rose 20%. In recent years the vast majority of production growth was derived from North America while the rest of the world has been flattish.
Global E&P Spending vs. Global Oil Production Global E&P spending has grown 4x since 1999, while global oil production is up only 20%.
The Majors cutting back on upstream spending is also a concerning trend as similar periods of underinvestment have led to significant oil price spikes.
Major’s Upstream Spending vs. Brent Average Underinvestment in 2002 and 2003 may have contributed to 34% oil price spike in 2004 and 45% in 2005.
Source: ISI Energy Research
We believe oil production growth in North America is slowing, with growth of 8.3% forecast for 2015, 7.6% for 2016, and 4.3% for 2017. This compares to annual production growth of more than 10% from 2012 to 2014E.
ISI Energy Research forecast total NAM crude production to reach almost 15 MMBbl/d by 2017,
but U.S. production growth is decelerating from 2013 peaks, while Canada spikes in 2016 for oil sands
Source: ISI Energy Research Source: ISI Energy Research
4%
19%
1% 0%9% 8%
15%7%
15%
0%0%
16%11% 9%
3%
34%
45%
-40%
-20%
0%
20%
40%
60%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
E
Y-Y Chg Majors' Upstream SpendingBrent Average
34%%
45%
0.0
1.5
3.0
4.5
6.0
7.5
9.0
10.5
12.0
13.5
15.0
'10 '11 '12 '13 14E 15E 16E 17E
MMBbl/d
CanadaU.S.
0%
5%
10%
15%
20%
'10 '11 '12 '13 14E 15E 16E 17E
Y-Y Growth
CanadaU.S.
October 14, 2014
34
In addition the incremental barrel is becoming harder to find and more expensive as E&P companies are moving out of the “sweet” spots in the major plays and new wells are requiring more technology, more pressure pumping horsepower, and more proppants. Logistical issues such as rail and trucking bottlenecks are only serving to increase costs. Halliburton recently stated that new wells they are fracturing are consuming 15 million pounds of proppants (75 rail cars of sand) compared to four million pounds of sand (20 railcars of sand) a year ago. We understand that some operators are testing wells that will consume 30-50 million pounds of proppants.
Oil service capacity utilization has also moved higher with the increased activity levels over the last year and we understand that both land rig and pressure pumping prices are moving higher which will only increase well costs further.
Incremental barrel is getting harder and more expensive to find The incremental cost of NAM production slowed in recent years because of oil services over capacity, but this should reverse in the not too distant future.
Source: IEA, Rystad, ISI Energy Research
In addition to our views on shale economics and production growth, 3Q and 4Q will likely see global oil inventories decline.
Global Oil Inventory Build (MM Bbl/d) ISI forecast inventory declines over the next two quarters, followed by a modest build in 2015.
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 14E 15E
OPEC Production Change
36
North America Natural Gas Outlook
October 14, 2014
37
Steady Natural Gas Prices and Rising Domestic Demand
Unlike our view on the North American oil markets we believe the gas market is truly leading to a real “revolution.” As a result we believe natural gas related activity, and production, will rebound solidly. We view North American natural gas as a triple threat: it’s 1) abundant, 2) environmentally friendly, and has 3) geopolitical implications among many other positive attributes.
The revolution in North America natural gas production is likely to have at least three major implications: 1) it will make North America a true force in the global LNG market, 2) lower prices are leading to a significant industrial & chemical renaissance in the U.S., and 3) there could be major changes to the transportation sector.
In the LNG space the U.S. is taking a leadership role with some ~12 bcf/d of export capacity already approved and more approvals likely. We understand that allies of the United States have asked the State Department for more than 70 bcf/d of LNG. (Or more natural gas than the country currently consumes).
Approved & Pending U.S. LNG Export Terminals Four projects have received all necessary approvals to export natural gas to date, but only Cheniere’s Sabine Pass has started construction with the first train available in early 2016.
Canada is also likely to become a significant player in the LNG market due to its advantaged geographic position relative to the Asian markets and the loss of its major export partner, the United States.
Approved & Pending Western Canada LNG Export Terminals
Source: National Energy Board of Canada, Company Reports, ISI Energy Research
Canada is at the wrong end of the pipe and must, in our view, move forward with LNG exports to access Asian markets as its formerly key customer is sitting on a tremendous amount of reserves.
U.S. vs. Canada Gas Production As U.S. gas production has grown over the past eight years, Canada is losing its major export market.
Source: EIA, ISI Energy Research
Operator Project Location App Status Start Year
Capacity (bcf/d)
Capacity (mt/yr)
ExxonMobil WCC LNG Kitimat or Prince Rupert approved 2023 3.9 30.0Shell LNG Canada Kitimat approved 2020 3.2 24.0Nexen (CNOOC) Aurora LNG Prince Rupert approved 2021 3.2 24.0BG Group Prince Rupert LNG Prince Rupert approved 2022 2.8 21.6Petronas Pacific NorthWest LNG Lelu Island approved 2018 2.6 20.0Chevron Kitimat LNG Kitimat approved 2016 1.3 10.0AltaGas Ltd Triton LNG Kitimat or Prince Rupert approved 2017 2.3Woodfibre Natural Gas Woodfibre LNG Squamish approved 2017 0.27 2.1Douglas Channel EP BC LNG (Douglas Channel) Kitimat approved 2016 0.25 1.8Steelhead Steelhead LNG TBD, British Columbia pending TBD 3.9 30.0Orca Orca LNG Prince Rupert pending 2019 3.2 24.0Woodside Grassy Point LNG Prince Rupert pending 2021 2.6 20.0Kitsault Energy Kitsault Energy Project Kitsault pending 2018 2.6 20.0Quicksilver Discovery LNG Campbell River pending 2021 2.5 18.8Haisla Nation Cedar LNG Kitimat pending 2021 2.1 16.0WesPac Midstream WesPac Marine Terminal Delta pending 2017 0.4 3.0
13
14
15
16
17
18
19
50
52
54
56
58
60
62
64
66
68
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Canada Bcf/dU.S. Bcf/d
Canada's dry gas production fell 5% annually from 2007-2012 ... ... while U.S. production has
increased 4% annually since bottoming in 2005
October 14, 2014
39
Industrial, chemical, and transportation demand is increasing across the board in the United States. We estimate that the U.S. will need to produce over 90 bcf/day by 2020 due to the demand drivers mentioned above and the closing of coal-fired power generation. This compares to ~70 bcf/day of current production.
U.S. Natural Gas Industrial Demand is on the Rise (Bcf/d) Industrial demand for natural gas is expanding rapidly and new industrial plants continue to be built to take advantage of the abundant natural gas resources in the United States.
Source: EIA, ISI Energy Research
CNG and LNG fuel stations are beginning to meaningfully increase and we expect market penetration of ~5-8% by 2020, up from 1% today as adoption improves.
CNG & LNG fueling stations remain just 1% of traditional stations CNG and LNG fueling stations, while still minimal in terms of overall fueling stations, are starting to recover rapidly.
Source: Alternative Fuels Data Center, ISI Energy Research
The CNG & LNG fueling station count has changed in 15 years
October 14, 2014
40
The number of traditional gas stations in the United States continues to decline, although this is mostly a function of more high-volume stations replacing smaller, lower volume stations.
Traditional Gas Stations (‘000 stations) Traditional gas stations have been in decline as high-volume stations in optimized locations replace low-volume stations.
Source: Alternative Fuels Data Center, ISI Energy Research
Traditional gas stationscount has fallen 1% per year
since 1996
41
Subsector Outlooks
October 14, 2014
42
Large Cap Diversifieds Still In Pole Position; Choppy 2H14 Results Already Discounted
We continue to view the large cap diversified companies as the best positioned to benefit from the growth in most international markets, the changing dynamics driving growth in North America, the continued expansion in deepwater and subsea activity, and the increased technological requirements of the modern oilfield. These companies dominate most of the advanced segments of the industry, control enormous swaths of market share in the international arena, and are increasingly returning capital to shareholders. In addition, with revenue and earnings continuing to increase and CAPEX falling both in aggregate terms and as a percentage of revenue, returns on capital are increasing which should drive stock multiples higher.
Large Cap Diversifieds ROIC, 2012-2015E
Source: Company Reports, ISI Energy Research
Capital Equipment Companies Shifting To Cash Harvesting And Returns To Shareholders
With capital equipment backlogs at all-time highs and 50%+ higher than last cycle, and a slowdown in orders for new rig equipment and subsea trees moderating somewhat, the large capital equipment providers are in a cash harvesting mode and are increasingly returning this capital to shareholders through higher dividends and share buybacks. For example, NOV recently announced a $3 billion buyback authorization; the first buyback in the company’s history.
We also believe the market may be underestimating the huge aftermarket opportunity that is being created with the massive expansion of the installed base of equipment. National Oilwell Varco, for example, has set up a separate group to focus on five-year surveys for offshore rigs. Currently the company services 35-40 rigs/year and that should grow to 110-115 rigs/year by 2017. With respect to Cameron, the company’s drilling aftermarket business in 2014 will likely surpass $1 billion in revenue compared to ~$300 million in 2009.
SMID Cap North American-Leveraged Companies Back In Action
With the North American market, and especially the United States moving quickly into full scale liquid shale development mode the once over-supplied services market is becoming quickly undersupplied. Capacity utilization is filling quickly and backlogs for land rigs are lengthening. Unless WTI breaks significantly lower (which we do not anticipate), the North American market has several more years of an upcycle to go.
Order Books for Major Land Drillers
Source: Company Reports, ISI Energy Research
Note: As of 9/30, 9/2, 9/9 and 7/23for HP, PTEN, PD and NBR, respectively. NBR did not provide a number of rigs contracted, but did mention a revenue backlog of greater than $800MM for its rigs under contract in the lower-48 as of 9/02. PD rig count includes 3 to Middle East, 7 to Canada and 8 to US during 2014 with 16 announced deliveries in 2015 to undisclosed locations
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
'09 '10 '11 '12 '13 '114 '15E
FTI
CAM
NOV
0
10
20
30
40
50
60
80%
85%
90%
95%
100%
HP PTEN PD NBR
Planned Newbuild Deliveries (R) % of Newbuilds Contracted (L)
October 14, 2014
44
SMID Cap Production & Completion Services EBITDA Margins, 1Q13-4Q15E
Source: Company Reports, ISI Energy Research
Offshore Drilling Markets Remain Challenged; Although some Long-Term Values Emerging
As a CEO of a major offshore driller recently remarked to us “the market is terrible.” While the ultra-deep, deepwater, and mid-water rig markets have been under pressure for some time, the shallow water market is now also starting to correct. The reason is purely over-supply. Demand for offshore rigs continues to grow; however, supply of new assets is well in advance of the asset expansion.
A total of 43 newbuild floaters are available, including eight to be delivered over the next few months still without contracts.
Floater Newbuild Deliveries, 2010-2020E
Source: RigLogix, ISI Energy Research
The jackup market has even more availability in the near to medium term, with several units delivered in recent years that are ready stacked.
…But Offshore Niche Technologies and Logistics Remains Healthy
Despite the pricing and utilization pain which is intensifying for the offshore drillers, the rig count continues to grow which is a positive for those companies that service offshore rigs, especially the niche technology providers such as Dril-Quip, Franks International and Oceaneering International. This is also true for those companies that transport equipment and personnel to offshore rigs and offshore platforms such as Bristow Group, CHC Group, and ERA on the helicopter side and Hornbeck, GulfMark and Tidewater in the supply vessel space.
Large helicopter supply remains tight and production lines are sold out until 2016. Helicopter demand is expected to grow steadily at ~4% per year; while LACE rates have consistently outperformed offshore rig dayrates and are growing at 10% per year. Bristow believes there are 255 incremental aircraft opportunities in the next three years, compared to an order and options book for 80 aircraft.
In the offshore market the kilometers from shore base to offshore facility continue to increase, placing greater demand on equipment and driving the need for advanced, higher capacity assets. For example, transit times to wells in the deepwater Gulf of Mexico and Brazil by vessel can take six to 24 hours while in frontier areas the times are measured by days, not hours. With only ~455 OSVs under construction and ~700 (or 25% of the global fleet at 25-years or older), we believe the market for supply vessels will remain balanced and perhaps tighten further.
Exploration and Thus Seismic Activity Is Lackluster
Active tenders in the marine seismic market remain at very low levels and the trough in the seismic market, could, in our view, last through 2015. Exploration spending fell roughly 7% in 2014 and is likely to fall a 2-3% in 2015. At the same time streamer growth, while declining by 4% in 2014 is expected to grow 5% in 2015 and 4% in 2016.
Vessel owners are responding to the weak demand by stacking and in some cases scrapping vessels. Companies are also raising pre-funding requirements for multi-client work. Visibility remains limited as evidenced by Petroleum GeoServices which has 75% of its vessel time booked for 4Q but only 35% for 1Q15 and a mere 20% for 2Q15.
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2010 2011 2012 2013 2014E 2015E 2016E 2017E
Available
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October 14, 2014
46
M&A Activity Remains Brisk and is Likely to Continue
Merger and acquisition activity remains fairly healthy in the group with more deals likely in the coming quarters. The two most recent announcements were the pending purchase of Dresser-Rand by Siemens and C&J’s acquisition of Nabor’s production services business.
We believe at least five (and likely more) areas of M&A will be active over the next several years:
1. Industrial companies continuing to seek additional energy exposure.
2. More combinations of North American companies to take on the Big 4.
3. R&D-driven M&A by the largest companies to supplement their own internal
R&D efforts.
4. The reconsolidation of the offshore drilling space.
5. Rollups of emerging subsectors such as FPSOs, subsea, subsea services, fracking
technologies, and proppant companies.
47
The Major Themes
October 14, 2014
48
Several Major Themes Characterize This Cycle
While the oilfield services, equipment and drilling market combines multiple subsectors, varying outlooks and degrees of complexity, and a large number of public and private companies, we believe looking at the industry through what we view as the major themes is a way to tie it all together. Below are eight themes that we believe will define the next part of the cycle for the industry.
A Revolutionary Change In Drilling in North America
Continuing Growth In The International Markets
Increasing Deepwater Drilling and Subsea Production Growth
The Expansion Of The Installed Base For Capital Equipment Providers
North America To Emerge As A Global LNG Force
Exploration And Exploitation Of The Final Frontier (The Arctic)
Energy Infrastructure and the “Gasification” Of The World
The Rise Of Mature Field Investments
While we briefly define and highlight these major themes in the following pages, we plan to explore them more in depth in future research reports.
October 14, 2014
49
A Revolutionary Change in Drilling in North America
The shift to full-scale liquids shale development is a having a profound impact on global oil and refined products markets, and changing the way the service companies operate in North America.
The large-cap diversified oil service companies have successfully taken market share, about 1,000 basis points, as these companies have the scale, resources, and technology to support large-scale “manufacturing like” drilling programs. Our data suggests the Big 4 now have 25% of the North American market, up from 15% before the liquids shale revolution.
The Big Four are Taking Market Share… Big Four NAM revenues ($B) as % of total NAM upstream capex increased from 15% to 25% over the last decade.
Source: Company Reports, ISI Energy Research
In addition to a market share grab, the large caps are spending more on R&D to support and defend their position. While R&D spending is holding steady at ~2.5% of revenue the absolute dollar amounts continue to rise.
Partially Due to its Full Technology Suite Offering, Supported by Higher R&D Big Four spending ($MM) continues to rise, but has stabilized as a % of total global revenue.
Source: Company Reports, ISI Energy Research
This enhanced market share position has also led to higher capital expenditures to support the E&P spending growth and CAPEX for the Big 4 has risen by 14% annually since 2005.
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WFTBHIHALSLB
October 14, 2014
50
Big Four Capex ($B) Spend Has Grown by 14% CAGR Since 2005
We believe global decline rates are in the 7-8% range, forcing companies, especially large NOCs to increase investment by a similar amount each year or face declining production. This, coupled with increasing oil demand of 1-2% per annum should lead to ~10% annual growth in E&P spending and activity levels (in a stable oil service and drilling pricing environment). We do not forecast that level of growth in 2015 as companies such as the IOCs remain returns focused and constrain CAPEX and as oil companies benefit from much lower offshore rig rates.
International E&P spending trends remain relatively strong and we forecast record expenditures this year and for the next several years in most major markets around the world such as parts of Latin America, the majority of the Middle East, Sub-Saharan Africa, and many countries in Southeast Asia. Successful resolutions to the conflict in Iraq and the stalemate in Ukraine would add further to E&P spending growth.
We currently forecast 2015 E&P spending growth of ~5% for International markets, with activity levels, especially abroad, outpacing E&P spending. The growth in the International arena is part of a longer term theme that kicked in when spare capacity was fully absorbed, all prices respond to China’s awakening and the NOCs rose to the challenge. Only five times in the last 30 years has International E&Ps spending retreated.
International E&P Spending to Exceed $500 Billion/Yr in 2014
Source: ISI Energy Research
+5.3%
$200
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2006 2007 2008 2009 2010 2011 2012 2013 2014E
October 14, 2014
52
Increasing Deepwater Drilling and Subsea Production Growth
Deepwater and subsea remain the major macro themes of this cycle. Roughly 50% of conventional discoveries over the past four years have occurred in deepwater, 10% of global reserves are in deepwater, deepwater subsea production and SURF capex are expected to increase 115% over next five years, and the subsea industry is entering its strongest years for equipment installations in history.
While 2014 is a slow year for subsea tree orders, 2015 and 2016 should return to growth in orders.
Subsea Tree Awards Worldwide, 2001-2018E Subsea tree awards, after taking a dip in 2014 to an estimated 332 are expected to rebound to 465 in 2015 and 481 in 2016.
Source: Quest Offshore estimates, ISI Energy Research
Averaging Spending $MM per Subsea Well, 1996-2018E The average cost of a subsea well has increased by 11% annually since 1996.
Source: Quest Offshore estimates, ISI Energy Research
Startup Subsea Wells Onstream by Water Depth Subsea well startups are ramping significantly and will jump from 328 this year to 379 in 2015, 404 in 2016, 460 in 2017 and 542 in 2018.
ANSD
Source: Quest Offshore estimates, ISI Energy Research
Global Subsea CAPEX by Region Global subsea capex is ramping significantly and will double from 2014 t0 2018.
Source: Quest Offshore estimates, ISI Energy Research
Asia PacificAfrica/Med.North SeaS. AmericaN. America
October 14, 2014
54
The Expansion of the Installed Base for the Capital Equipment Providers
One of the most underappreciated and likely overlooked themes in the industry is the massive equipment buildout that is underway, especially in the offshore rig and subsea equipment markets, and what that buildout will ultimately mean for aftermarket earnings for the major capital equipment companies.
For example, Cameron’s Drilling aftermarket business has grown from ~$300 million in revenue in 2009 to what we expect to be over $1 billion in 2014.
Cameron International’s Backlog & Aftermarket ($B), 2003-2015E Cameron’s aftermarket business has doubled since 2009.
Source: Quest Offshore estimates, ISI Energy Research
In the case of National Oilwell Varco, the company’s non-capital goods business has surged from less than $2 billion in 2009 and 2010, to well over $3 billion in 2014. NOV performed five-year surveys on 35-40 offshore rigs in 2013 and will perform five-year surveys on 125-130 by 2017.
National Oilwell Varco’s Backlog & Non-Capital Goods Revenues ($B), 2003-2015E
NOV’s non-capital goods revenue could approach $4 billion in 2015.
Source: Quest Offshore estimates, ISI Energy Research
In the case of FMC Technologies, the subsea industry which FTI leads is moving into the heaviest installation period in its history. In the next five years over 2,100 subsea trees will be installed, compared to 1,543 in the prior five years.
Global Subsea Trees Onstream, 1996-2018E In the next five years over 2,100 subsea trees will be installed, compared to 1,543 in the prior five years.
Source: Quest Offshore estimates, ISI Energy Research
In both the U.S. and Canada proposed LNG export projects are proceeding at various speeds but in our view exports are definitely coming, and will alter the balance of power in the global LNG market. The U.S. is taking a leadership role with some ~12 bcf/d of export capacity already approved and more approvals likely. We understand that allies of the United States have asked the State Department for more than 70 bcf/d of LNG. (Or more natural gas than the country currently consumes).
There are currently close to 20 proposed projects for Canada’s west coast and over 30 proposals in the United States.
While in Canada, the best hopes for the country to increase natural gas sales is through exports to Asia, via LNG. In the U.S., the abundance of supply makes LNG exports a strong driver of growth and a way to influence global geopolitics.
Exploration and Exploitation of the Final Frontier (The Arctic)
There is clear interest by the Major oil companies and several of their NOC or quasi-NOC counterparts to explore and drill in the Arctic. These companies have been buying seismic in the Russian Arctic, the Norwegian Arctic and pursuing activity offshore Canada and the United States. While activity levels are small currently, they are growing and will be a part of most major oil companies’ portfolio’s in the coming years.
The Arctic is estimated to hold 25%-30% of the world’s undiscovered reserves, with 80% offshore.
Unfortunately, in the current geopolitical environment, the sanctions recently placed on Russia by the U.S. and the E.U. will likely slow exploration plans offshore Russia (Rosneft and Exxon recently announced a solid discovery). Russia is estimated to hold over half of the world’s Arctic hydrocarbons.
Estimated Arctic Reserves by Country/Region Russia Dominates Estimated Holdings of Arctic Hydrocarbons
Source: ISI Energy Research Source: USGS, ISI Energy Research
5%
11% 12%
52%
20%
Canada Greenland Norway Russia U.S.
October 14, 2014
57
Energy Infrastructure and the “Gasification” of the World
Similar to the proposed LNG exports from North America discussed earlier, on a global scale there is a huge demand for energy infrastructure to support not only the growth in oil consumption but also the general “gasification” of many countries and regions around the world, especially Latin America, the Middle East and Asia. Clearly this theme hasn’t gone unnoticed, as evidenced by the proposed acquisition of Dresser-Rand by Siemens and GE’s large push into the oil and gas business over the last decade.
Backlogs for Dresser and Chart Industries are turning up again, as the energy infrastructure buildout restarts.
Dresser Rand’s New Units Backlog ($MM), 2005-2015E
Source: Company Reports, ISI Energy Research
Chart Industries Backlog ($MM), 2005-2015E Chart Industries’ backlog consists of several large LNG liquefaction awards.
Source: Company Reports, ISI Energy Research
$688
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BioMedicalDistribution and StorageEnergy and Chemicals
October 14, 2014
58
The Rise of Mature Field Investments
Production from existing assets continues to decline globally and in order to stem these declines the industry needs to extract more from mature fields. While recovery rates for traditional oil reservoirs is about 35%, many of the large oil service companies are working on new techniques and technologies to improve ultimate recovery and in some cases by 20%. It is estimated that a 1% increase in the recovery rate of mature fields could add two years to global oil production.
With about 1.5 million producing wells in the world, and additions of ~100,000 new wells per year, mature fields already account for roughly 70% of global production. Many of these fields are already in secondary or tertiary phase of production and decline rates are roughly 8%.
Most wells go through four phases of recovery:
1. The Primary Phase. This is the initial production when hydrocarbons flow naturally due to pressure.
2. The Secondary Phase. This is when simple technologies such as water injection or the use of artificial lift occurs to create additional hydrocarbon recovery.
3. Improved Recovery Phase. After the “easy oil” has been produced this phase involves the drilling of infill wells, more sophisticated water floods, and facility upgrades.
4. Enhanced Recovery Phase. This final phase utilizes new techniques such as gas, steam or chemical injection.
Halliburton has been awarded close to $10 billion in mature field projects and is chasing another ~$20 billion of projects. The most recent award was for nine fields in Ecuador.
Investment Thesis Aspen Aerogel produce insulation materials used in the oil and gas industry, serving the refinery, petrochem, LNG, offshore, oil sands and power gen sectors. The company is levered to the $3bn global infrastructure market, supplying it with critical thermal performance insulation for both greenfield and brownfield applications. With demand picking up sharply in recent quarters, the company has been drawing down inventories to meet orders and is aggressively adding manufacturing capacity through an expansion of its existing plant and construction of a new international plant. We rate ASPN a Buy with a $14 share price, equivalent to a 50x EBITDA multiple on our 2015 estimate, as we see substantial growth opportunities as the company increase market share (just 3% currently), penetrates new markets, and collect follow-on work from its large installed base in more than 40 countries.
Company Strategy Aspen completed its IPO in June, raising $77mm net proceeds to repay its existing debt and line of credit. With a clean balance sheet, the company is growing capacity aggressively, expanding its East Providence, Rhode Island facility which is already running at full capacity, and building a second plant in either Europe or Asia. Management is currently viewing potential sites and expects to make a decision and announcement about the international location by the end of this year, with construction starting in 2015 and for the plant to be operational in 2017, adding 50% increase in total capacity.
Outlook for 2015 Expansion of the Rhode Island manufacturing facility is expected to be complete before year end, adding 25% capacity to the facility by 1H15. Management estimate the energy insulation market will grow by almost 5% annually through 2018, driven largely by Asia Pacific, and recently booked several large purchase order for Asia petrochem projects. While the company is also considering Europe for its international plant, we believe an Asia location is more likely, though will have to take into account local operating costs, proximity to raw materials, labor, logistics, IP protection, government grant, and other factors. Revenue growth is 2015 will also be driven by offshore projects in Latin America, which is expected to double in 2015, and U.S. maintenance activity. While pricing continues to improve modestly, up about 3-5% Y-Y, the net result is neutral as pricing varies by product and region. Rather, margins should improve in 2015 from higher absorption of fixed costs with the Rhode Island facility running with 25% greater capacity.
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Aspen Aerogels
Key Thoughts and Potential Catalysts Management guided for products gross margins to increase by several points in 2H14, and we’re modeling
margins to peak at almost 20% in 3Q14, falling again in 4Q for seasonality (holiday disruptions to shipments and deliveries). Last quarter’s margins were 100bp negatively impacted by GAAP revenue recognition delays, offset by inventory drawdowns as the company full filled orders by drawing down inventories by more than 50% over the past year.
With a clean balance sheet, ASPN now has access to cheaper financing to fund its capacity addition, as well as potentially consolidate a highly fragmented industry.
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Aspen Aerogels
Annual Income Statement, 2009-2015E ($ in millions, except per share)
Investment Thesis Atwood is a SMID cap offshore contract driller with a diversified fleet of mostly highly spec assets operating globally. While the company was founded in 1968, more than half of its assets were built in the last five years, including two newbuild drillships delivered in the last 12 months. With a high-quality fleet, we believe the company is well positioned for a potential market recovery in 2016, though two newbuild drillships under construction for 2015 delivery remain uncontracted. The next newbuild Atwood Admiral is being marketed for a handful of programs, but will not be contracted to potential short term programs – a contrast to other contractors that prefer shorter term contracts for now to position the rig to be available when the market recovers. Despite ongoing newbuild capex commitments, we believe the company’s new dividend is safe as the company’s existing fleet is highly contracted over the next year. We rate Atwood a Buy with a $48 price target based on 6.0x our 2015E EBITDA.
Company Strategy Atwood has high graded its fleet in recently years, divesting older jackups and tender rigs while taking delivery of several new drillships and high spec jackups. The company has four active drillships, all built in the last four years, and five active jackups capable of working in 350 ft or deeper. With two drillships under construction scheduled for 2015 delivery, Atwood is about to wind down its $4.5bn newbuild commitment and recently initiated a quarterly cash dividend of $0.25. Management plans to grow the dividend by 10% per annum, which is achievable as it’s contracted after tax cashflow exceeds in near term capex needs. With a modern fleet, Atwood also targets 100% revenue efficiency; both the Atwood Condor and Osprey recently achieved 99% operating efficiency.
Outlook for 2015 Atwood’s fleet is 81% contracted in fiscal 2015, with the majority of its rigs contracted through early 2016 and beyond. The company does have two vessels rolling off contract next month, the 5k ft semisub Atwood Hunter and 400 ft Atwood Mako. Atwood recently reactivated the Atwood Hunter for its current program with CNOOC in Equatorial Guinea and sees additional work for the vessel in West Africa, however, we are conservatively modeling a three month gap between contracts for the rig to put it back to work in March at $325kpd, a 5% discount from its current rate. We’re modeling similar gap for the Atwood Mako, though the rig could stay busy with follow-on work in Southeast Asia and the rig’s current operator Salamander recently received regulatory approval for 18 of 20 exploratory drilling locations in the Greater Bualuang area off Thailand. Atwood has no other active units schedule to roll off contract until December 2015, but the company expects to take delivery of two newbuild drillships during the year, both of which are currently uncontracted. Scheduled to be delivered in March 2015, we’re modeling the Atwood Admiral to start work in 4Q15 at $500kpd, but don’t expect the Atwood Archer to contribute to 2015 results as this newbuild is not scheduled to be delivered until early 2015 and both units are likely to be delayed. Tendering activity for floaters has been slow, with the industry likely to see increased market weakness through 2015. Demand is expected to remain disappointing into 2016 but could be offset by older and less capable rigs being retired or stacked. Atwood is likely to divest the Southern Cross (originally built in 1976) but has only three semisubs built prior to 2010, two of which are contracted in Australia to about mid 2016.
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Atwood Oceanics
Key Thoughts and Potential Catalysts Atwood is poised to report sharply higher earnings this F4Q14, with a full quarter contribution from the
newbuild Atwood Advantage, mobe of newbuild Atwood Achiever, and the Atwood Eagle and Mako rolling onto higher dayrates. We expect an update on possible follow on work for the Hunter and Mako, both of which are scheduled to roll off contract in November, as well as its next available newbuild drillship Atwood Admiral.
While the market becomes increasingly concerned about a supply-driven weakness in the jackup market, Atwood is well protected as its active units are largely contracted to late 2015 and beyond. We believe the Atwood Mako is likely to be renewed by Salamander for its Greater Bualuang program, though conservatively model three months of contract gap when the unit rolls off its current $165kpd contract in November.
With a new $1.55bn revolver in place and just $1.05bn in newbuild commitments over the next two fiscal years, Atwood recently initiated a quarterly dividend of $0.25 per share, equivalent to a modest 3% yield. Atwood plans to growth the dividend by 10% per year, which we believe is feasible in the near term if the company can successfully contract the final two newbuild drillships but could be more difficult longer term as the dividend continues to grow.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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10x
'06 '07 '08 '09 '10 '11 '12 '13 '14
ATWOffshore Drillers
ATW current trades at 4.9x, a -14% discount to the group's
5.8x average but a -25% discount to its historical 6.6x.
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Atwood Oceanics
Annual Income Statement, 2011-2015E ($ in millions, except per share)
Investment Thesis Baker Hughes is one of our favorite large cap stocks as 1) we believe the convergence of North American margins with its peers could drive considerable earnings upside, 2) the company has recently taken share in several key international markets, 3) the company’s cash flow profile is improving, and 4) more share buybacks are likely on the way. The transformation of Baker Hughes has unfolded and a new company focused on innovation, integration and execution has emerged. We rates the shares a Buy with a $95 price target based on a 17.3x target multiple on our 2015E EPS.
Company Strategy Back in May Baker Hughes management team laid out a new strategy for the company which included 1) changing from a world class supplier to a world class partner, 2) the delivery of earnings through the three “I”s of technology innovation, integration, and creating interdependence, and 3) the development and implementation of a new innovation process. This process includes accelerating time to market for new technologies, creating the fabric of interdependence, adding discipline to commercialization, and measurement of innovation revenues. The company committed to $6+ in EPS in 2016, to set the pace for secondary recovery in unconventionals, continued leadership in deepwater , rapid growth in the company’s midstream business, revenue growth of 10% per year for Europe, Africa, Russia, Caspian, 15% CAGR revenue growth for the company in the Middle East, Latin American margins of 17% by 2016, North American margins in 4Q14 of 15% and a minimum of “upper teens” in 2016, and $1 billion in new product revenues in 2014 and 20% per year growth going forward.
Outlook for 2015 The outlook for Baker Hughes in 2015 is solid as the company’s continues to make strides in North America, delivers on share gains in Brazil, the North Sea and Africa, introduces new, potentially game-changing technologies, and drives innovation through a more focused and energized corporation.
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Baker Hughes
Key Thoughts and Potential Catalysts The achievement of Baker’s margin targets for NAM in 4Q14 would likely lead to earnings revisions higher.
The company’s cash flow profile continues to improve and more returns of capital to shareholders are likely.
Recent share gains in key international regions could drive outsized growth in 2015.
Recent alignments with CGGVeritas and Aker Solutions have put Baker into both the seismic and subsea arena.
A new CFO from outside the energy industry will be a set of fresh eyes on the new organization and could spur further transformation.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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BHIBig Four Average
BHI current trades at 10.8x, a -7% premium to the group's 11.7x
average but a -33% discount to its historical 16.2x.
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Baker Hughes
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Operating IncomeNorth America NA NA NA NA $1,284 $331 $1,175 $2,034 $1,301 $993 $1,536 $1,927Latin America NA NA NA NA 218 140 74 291 289 183 240 268Europe, Africa, CIS NA NA NA NA 735 522 263 460 604 576 690 840Middle East, APAC NA NA NA NA 444 274 179 368 323 481 681 835Industrial and Other NA NA NA NA NA NA 82 104 101 136 153 209Corporate (208) (215) (216) (241) (243) (284) (232) (272) (301) (268) (284) (280)Operating Income $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Affiliate Income $36 $100 $60 $1 $3 $0 $0 $0 $0 $0 $0 $0Net Interest Expense (77) (54) (1) (22) (62) (121) (141) (221) (210) (234) (234) (236)Pretax income $781 $1,285 $2,018 $2,257 $2,378 $861 $1,400 $2,764 $2,107 $1,867 $2,782 $3,563Taxes 253 407 631 743 725 264 499 919 675 626 966 1,158Minority interest NA NA NA NA NA NA (7) (4) (6) (7) (26) (4)Net income $529 $878 $1,387 $1,514 $1,652 $598 $894 $1,841 $1,426 $1,234 $1,790 $2,401
North America NA NA NA NA 25% 9% 17% 20% 12% 9% 13% 15%Latin America NA NA NA NA 19% 12% 5% 13% 12% 8% 11% 12%Europe, Africa, CIS NA NA NA NA 22% 18% 9% 14% 17% 15% 17% 18%Middle East, APAC NA NA NA NA 20% 14% 8% 13% 10% 12% 14% 16%Industrial and Other NA NA NA NA NA NA 10% 8% 10% 11% 11% 13%Companywide 13% 17% 22% 22% 21% 10% 11% 15% 11% 9% 12% 15%
Investment Thesis We view several factors as working in Basic’s favor. Firstly, we believe pressure pumping prices began to accelerate during Q3, more than offsetting costs, and leading to net pricing gains for the segment. Additionally, BAS has been able to maintain margins and grow market share in the ultra-competitive fluid services segment by building a strong salt water disposal well network and leveraging that network to maximize utilization of its transportation assets. And thirdly, we believe the bevy of newly drilled wells will soon undergo a well servicing cycle as operators try to revive production rates for those fast-declining assets leading to higher utilization and margins. We initiate with a Buy and a $25 PT.
Company Strategy Operating in scalable business where assets are mobile has allowed BAS to thrive in both downcycles (relative to peers) and upcycles. The company’s focus on utilization may sometime hurt margins but allows the company to increase market share and then benefit from basin wide price increases with already established customer relationship. During downcycles, BAS focuses on maximizing CF by decreasing capex, maximizing utilization to protect market share and decreasing its cost structure.
Outlook for 2015 Basic’s significant presence in the Permian (45% of revenues) has paid off as activity in the basin has outpaced all other areas. We expect strong activity in the basin, and other liquids rich basins, to continue through 2015 and predict an 8%-9% increase in NAM capex in those regions.
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Basic Energy Services
Key Thoughts and Potential Catalysts BAS has captured a large market share in the often overlooked yet very profitable vertical completion and
production services segment within the Permian Basin. The vertical market is high margin, high return market which encompasses more than half of the active and newly drilled wells drilled in the basin. We do not expect the permitting trend to slow in the near-term as it is much cheaper for operators to drill new vertical wells rather than horizontal wells as they explore risked acreage on the outer boundaries of the Permian and test new benches within the Wolfcamp, Spraberry and the Cline Shales. We expect strong performance from BAS in this segment for many years as the competitive environment is more favorable (less competitors and less capital equipment needed).
BAS continues to excel in the oilfield’s least prohibitive entry segment, fluid services. BAS’ integrated approach to fluid services where it pairs salt water disposal wells with trucking assets continues to pay dividends in the form of high utilization and improving margins while other public participants continually seek to exit the segment due to low barriers to entry and constant price cutting by smaller competitors.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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'06 '07 '08 '09 '10 '11 '12 '13 '14
BAS
Production & Completion Services
BAS current trades at 3.7x, a -20% discount to the group's 4.7x average but
a -28% discount to its historical 5.2x.
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Basic Energy Services
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Well Servicing 31% 38% 44% 40% 37% 24% 23% 31% 29% 27% 27% 30% Fluid Services 34% 38% 39% 37% 36% 26% 26% 36% 33% 30% 28% 29% Completions 40% 48% 51% 48% 46% 29% 40% 45% 39% 35% 38% 40% Contract Drilling NA NA NA NA NA NA NA NA NA NA NA 32%
Investment Thesis As the worldwide leader in the offshore helicopter service industry, we believe Bristow is well situated to grow its revenues, margins and fleet size on the back of increased offshore drilling and continued privatization of the search and rescue (SAR) services. Offshore transportation services are one of the main beneficiaries of offshore drilling projects moving into deeper and deeper waters further and further from onshore bases as large aircrafts become more vital and trips take longer. The continued privatization of SAR is an added bonus as that work carries higher margins. One of BRS’ main competitive advantages is its balance sheet which enables the company to finance fleet expansion much easier than its overly levered peers and in turn take additional market share. These factors combine to form what we believe is a clear earnings growth story. We also applaud management for their focus on cash flow performance and history of returning capital to shareholders via large share repurchases and increasing dividend. We initiate with a Buy rating and an $80 PT based on a 17.3x target multiple on our 2015E EPS.
Company Strategy BRS is the leading provider of logistics services to the offshore E&P industry and a top provider of privatized search and rescue services to both oil and gas clients as well as governments. BRS operates across the entire lifeline of offshore development from seismic to exploration, development, production and decommissioning. BRS’ fleet is about 1/3 of the approximately 1,700 helicopters that service the worldwide oil and gas industry. Though there have been delays in rig activations, BRS’ stock has held up well as its business is more closely correlated to the number of offshore production installations (8,000) than it is to the offshore rig count which may continue to experience short term choppiness.
Outlook for 2015 With production lines sold out until 2016 and helicopter supply tightening we expect rates to increase throughout most offshore oil and gas producing regions. We see further tightening in the market occurring during 2015 and 2016 as Petrobras issues tenders for 31 total aircraft (3-7 incremental aircrafts). Beyond helicopter services, the company is in discussions to offer SAR services for governments in Australia, Brazil, the Falklands, Libya, the Netherlands and Nigeria. BRS’ SAR fleet in the UK will increase by 18 large helicopters between September 2014 and December 2015. It’s helicopter services fleet will increase by 19.5 LACE (large aircraft equivalent) between September 2014 and December 2015 with eight going to Europe, four and a half going to north America, three going to West Africa, three going to Australia and one going to another region.
October 14, 2014
81
Bristow Helicopters
Key Thoughts and Potential Catalysts Bristow’s two-tiered contract structure includes both a fixed monthly standing charge to reserve helicopter
capacity and variable fees based on hours flown with fuel pass-through. As a result, 65% of oil and gas contracts earn revenue without flying and 85% of SAR contracts in the United Kingdom earn revenues without flying. This contract structure allows BRS to reduce its own costs and risk structure thus generating higher margins.
BRS offered FY2015 EPS guidance of $4.70-$5.20, implying 11% YoY EPS growth. BRS has also guided to an average LACE rate of $9.50-$10.5MM, implying 14% YoY growth at the midpoint, a LACE aircraft count of 161-167, up 2% YoY at the midpoint, and a continued dividend payout policy of 20%-30%.
Historical Multiples
Source: ISI Energy Research, Bloomberg
4x
5x
6x
7x
8x
9x
10x
'06 '07 '08 '09 '10 '11 '12 '13 '14
BRSOffshore Technology
BRS current trades at 8.1x, a 24% premium to the group's 6.5x average but
a 13% premium to its historical 7.1x.
October 14, 2014
82
Bristow Helicopters
Annual Income Statement, 2006-2015E ($ in millions, except per share)
North America NA NA NA NA $45 $194 $177 $225 $229 $244 $273 Europe 245 298 362 402 453 476 450 502 623 844 937 West Africa 107 131 171 192 219 226 246 282 315 352 385 Australia NA NA NA NA 131 159 148 159 149 204 229 Other 416 469 508 540 319 177 178 176 201 206 212Total revenues $769 $898 $1,040 $1,134 $1,168 $1,233 $1,199 $1,344 $1,516 $1,850 $2,036
EBITDARNorth America NA NA NA NA NA NA $31 $58 $74 $86 $99Europe NA NA NA NA NA NA 148 181 216 278 314West Africa NA NA NA NA NA NA 86 89 101 94 105Australia NA NA NA NA NA NA 36 43 29 48 55Other International NA NA NA NA NA NA 56 62 65 59 62Total Helicopter Services $0 $0 $0 $0 $0 $0 $357 $433 $485 $565 $635Corporate NA NA NA NA NA NA (7) (52) (51) (40) (40)Total EBITDAR NA NA NA NA NA NA $350 $381 $435 $525 $594Rent Expense NA NA NA NA NA NA (15) (15) (31) (150) (185)D&A (42) (43) (54) (66) (79) (85) (96) (74) (70) (101) (109)Other 0 0 0 0 0 0 (58) (68) (101) 0 0Total Operating Income $74 $115 $151 $144 $183 $193 $180 $225 $233 $273 $300Other Income 1 0 7 (9) (43) (45) (36) (43) (32) (34) (37)
Investment Thesis We think CJES offers one of the best ways to gain exposure to the recovery in U.S. land activity, with gaining momentum in C&J's own improving utilization and enhanced outlook for 2014. We continue to believe the acceleration of U.S. activity and the balancing of many product lines is being overlooked by investors and stocks levered to this theme represent some of the most compelling ideas in the group, especially CJES. We also believe C&J possesses several distinct advantages that set it apart from the multitude of companies currently competing in the U.S. shale plays, including: 1) a unique product mix that garners strong demand from the E&Ps; 2) a structural advantage to generate better returns on capital by leveraging its in-house manufacturing capability; 3) an attractive geographic footprint in the U.S., and 4) the successful integration and onboarding of the recently acquired NBR assets. CJES is also targeting fast-growing markets internationally which could help drive earnings expansion in excess of our estimates in the coming years. We rate the shares Buy with a $27 price target based on a 7.0x target multiple on our 2015E EBITDA.
Company Strategy CEO Josh Comstock founded C&J in 1997 to be the premier hydraulic fracturing company, emphasizing superior execution and efficiency for its fleets under long term take-or-pay contracts. Since the June 2011 IPO, the company has not only grown organically with incremental fleet additions, but has also expanded its service offerings and geographic footprint through acquisitions, most recently of a casedhole wireline company on the West Coast. C&J now offers a full suite of completions services, including coiled tubing and other complementary services. The planned merger with Nabor’s Completion & Production Services segment accelerates C&J’s long term growth strategy, more than doubling the company’s asset base of hydraulic horsepower, wireline trucks and coiled tubing units while also adding cementing services. The new Global Alliance Agreement provides additional opportunities to expand internationally by leveraging Nabor’s global footprint, while the Production segment provides a platform for C&J to grow its organically developed specialty chemicals business.
Outlook for 2015 With the Nabors merger expected to close by year end, C&J starts 2015 as the 5th largest completion & product services provider, edging out WFT’s 1.1MM HHP with nearly 1.2MM HHP of pressure pumping capacity across the U.S. We expect the company to restructure its financial reporting into three segments (Completion Services, Production Services, and Vertically Integrated & Other Services), making it difficult to isolate growth from recent capacity addition and utilization improvements. Nevertheless, revenues are expected to more than double to management’s guidance of $4.0-4.4bn while EBITDA margins recovering to the high teens from 14.4% last quarter. C&J plans to trim back growth capex in the near term, but further expansion through acquisitions appears likely as the company stresses financial flexibility of the combined company, with expansion into integrated downhole tools next.
October 14, 2014
86
C&J Energy Services
Key Thoughts and Potential Catalysts Service line diversification brings unknown risks, but the company is experiencing benefits from recent entry
into directional drilling (technology acquired in April 2013). We see potential upside for the expansion of recently acquired Tiger Cased Hole Services into Canada, as well as potential synergies from integration with CJES’s legacy Casedhole Solutions business.
The June 25th agreement to acquire Nabor’s C&P business remains subject to shareholders approval but is expected to close before year end. The transaction should be accretive and will generate >$100mm in annual synergies by 2017, likely not yet reflected in consensus estimates.
C&J added 60k HHP over the past two quarters and has another 40K contracted to start before year end. While customers are looking for incremental capacity, additional growth capital is unlikely as the company has further opportunity to drive improvements through utilization of existing equipment. This should free cash for debt reduction by 2H15.
While C&J has traditionally shunned bundling services, a potential shift in pricing strategy could be meaningful as the company transition into a more highly diversified service company. This could increase the company’s penetration with select customers, driving margins higher through operating leverage of fixed costs.
Historical Multiples
Source: ISI Energy Research, Bloomberg
2x
3x
4x
5x
6x
7x
8x
9x
10x
11x
'06 '07 '08 '09 '10 '11 '12 '13 '14
CJES
Production & Completion Services
CJES current trades at 4.9x, a 4% premium to the group's 4.7x average but
a 29% premium to its historical 3.8x.
October 14, 2014
87
C&J Energy Services
Annual Income Statement, 2006-2015E ($ in millions, except per share)
Investment Thesis Calfrac is a pure play production and completion services provider, operating primarily in North America but growing international. The company has 1.2 MM HHP of pressure pumping capacity, making it the 7th largest service provider in North America. Fracturing account for 92% of the company’s revenues, followed by coiled tubing and cementing at less than 5% each. With the majority of its U.S. pressure pumping assets in the Marcellus/Utica, followed by the Eagle Ford, the company should benefit from increasing activity in these key basins. Internationally the company is well positioned in Argentina, where it recently signed a multi-year contract with YPF, as well as Mexico and Russia. We rate the shares Buy with a 7.0x target multiple on our 2015E EBITDA.
Company Strategy Industry trend towards more stages per well and greater tonnage per stage should positive impact Calfrac’s fleet of pressure pumping equipment. Though a relatively small mix of its operations currently, management plan to grow the coiled tubing and cementing business meaningfully. However, pricing remains competitive, with a modest upward bias in select basins. Meanwhile, the company likely continues to make small bulk-on acquisitions similar to its 4Q13 purchase of Mission Well Services.
Outlook for 2015 The company has a very high percentage of its fleet on 24 hour operations, with 95% in the 15 U.S. fleet and 30% of the International fleet near full utilization. About 30% of the company’s Canada operations are on 24-hour ops, with the company targeting 50% by year end 2015. With supply chain and logistics an increasing headwind, the company is investing in network optimization, leveraging the supplier landscape to better manage frac sand inventories. Calfrac recent expanded its 2014 capital program to $360mm from $150mm, but anticipates $120mm will occur in 2015, as the company adds 155K HHP of incremental capacity. The company is adding two crews in the U.S., one in Canada and another in Argentina’s Vaca Muerta shale.
October 14, 2014
91
Calfrac Well Services
Key Thoughts and Potential Catalysts The YPF contract is based in U.S. dollar, which should protect the company against unfavorable
foreign currency translation effects.
Horizontal fracturing is becoming an increasingly larger mix of Calfrac’s Russia activity, expanding from 32% last year to 42% year to date and resulting in stronger margins. With the mix likely to grow as the region accelerates high grade its aging drilling fleet. While geopolitical issues had yet to impact activity, the company continues to monitory sanctions daily.
Historical Multiples
Source: ISI Energy Research, Bloomberg
2x
3x
4x
5x
6x
7x
8x
9x
10x
11x
'06 '07 '08 '09 '10 '11 '12 '13 '14
CFW
Production & Completion Services
CFW current trades at 4.8x, a 1% premium to the group's 4.7x average but
a -20% discount to its historical 6.1x.
October 14, 2014
92
Calfrac Well Services
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis The valuations for capital equipment names have slipped recently and we believe this has created some value opportunities for stocks like CAM. We think the market has already discounted the slowdown in offshore rig orders for the company but investors may be missing the enormous aftermarket opportunity that record backlogs and thus a huge expansion in the installed base of equipment present. A rebound in offshore development should drive new orders and tie-back work for Christmas Tree systems thus adding to the backlog and sales for CAM’s Drilling & Production Systems segment. We are also confident in continued buybacks, though at a slower pace than the past four quarters. We initiate with a Buy on the stock and an $87 PT.
Company Strategy CAM has recently slimmed down through the divestiture of non -core assets and efficiency improvements in its cost structures and manufacturing systems.
Outlook for 2015 We expect CAM to continue its stellar progress with its strategic initiatives leading to a further improvement in profitability through the remainder of the year and 2015. Internal cost control efforts are improving DPS margins while additional cash infusions from non-core business divestitures are funding the buyback program. We believe CAM’s improvement story is clear and we expect continued improvement, especially as the subsea outlook comes into focus.
October 14, 2014
96
Cameron Int’l
Key Thoughts and Potential Catalysts Recent awards to FTI and OneSubsea give us confidence in assumptions that Tree awards will rebound in
’15. Additionally, we view the fact that CAM’s award was for the first deepwater subsea field to be developed by Pemex in a very strong light given our feeling’s surrounding Mexico’s deepwater potential.
Sale of Centrifugal Compression division for after tax proceeds of $600MM will fund further stock buybacks.
Still in the early innings of cost control and manufacturing improvement initiatives which should help company wide margins, driven by the DPS segment.
The 2014 target exit rate for DPS margins has moved up nominally as the company gets more units out the door and expects margins to improve 100 bps each sequential quarter as volumes increase. CAM is targeting 18% margins for Q4 and expects to be north of 20% during 2016.
New safety and equipment requirements will drive additional opportunities in its drill equipment aftermarket segment, namely new BOP equipment, retrofit opportunities and the upgrades and inspection of BOPs and BOP control systems.
Historical Multiples
Source: ISI Energy Research, Bloomberg
5x
9x
13x
17x
21x
25x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
CAMCapital Equipment
CAM current trades at 15.5x, a -7% discount to the group's 12.6x average but a -30%
discount to its historical 17.0x.
October 14, 2014
97
Cameron Int’l
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis Carbo is repositioning itself as a production enhancement company, providing integrated solutions to optimize a well’s EURs. Noting that over 90% of shale reservoirs are left in the ground, the company aims to create more contact area and greater conductivity in the wellbore. While the company has traditionally been a proppant company, specializing in higher priced ceramics and resin-coated sand; however, recent trends towards Northern White sand has resulted in unfavorable mix for the company. New manufacturing capacity, an expanded distribution network, and launch of KRYPTOSPHERE could offset increased pricing competition and unfavorable mix over the next several quarters, but are still unlikely to impress compared to growing sales volumes by traditional frac sand suppliers. We rate CRR a Hold with a $62 price target based on a 16.5x target multiple on our 2015E EPS, seeing few catalysts in the near term.
Company Strategy As a production enhancement company, Carbo integrated several businesses around the goal of “Higher Production & EUR.” Engineers in StrataGen, FRACPRO design and monitor data to optimize a well, using proppants supplied by Carbo. Management believes that ceramics have the highest conductivity and EUR, while sand crushes into fine particles that result in loss of frac width, plugging flow channels, and loss in conductivity that lowers the EUR of a well over time. However, operators continue to experiment with lower priced sand, dramatically increasing volume per well. Meanwhile, competition from foreign ceramic manufacturers have lowered pricing for Carbo’s core product line, just as the company brings on new production capacity and investing in expanding its distribution network.
Outlook for 2015 Management recently lowered guidance for 3Q14, citing increased pricing competition in ceramics from both domestic and international manufacturers, as operators continue to experiment with the use of lower priced Northern While sand in their well completions. We expect an unfavorable mix to pressure the stock for the foreseeable future, as CRR’s average selling price trend lower from a higher mix of Northern White Sand priced at just $0.03 per lb vs. $0.33 per lb for ceramics last quarter. Despite recent penetration with new clients in several new oil and gas basins, we expect competition to remain fierce from traditional frac sand suppliers as they continue to add significant new capacity. Longer term the company’s new KRYPTOSPHERE targeting U.S. GOM Lower Tertiary completion activity could provide some upside to 2015 results, with management noting that it is likely to be expanded into the Miocene and internationally.
October 14, 2014
101
Carbo Ceramics
Key Thoughts and Potential Catalysts Management guided 3Q ceramics volume to be like 1Q14, with pricing lower for increased competition from
both domestic and international manufacturers, especially in the Bakken. While imports of Chinese ceramics tends to be volatile, Carbo tested Chinese ceramics to be of lower quality and lower conductivity than their CARBOECONOPROP low density ceramics, resulting in 20% lower production in the initial 30 days of the well and ultimately lower EUR of 120,000 Bbl of oil.
PacWest forecast ceramics demand to grow by just 2% annually in North America through 2016, well below the 24% growth in frac sand demand and 9% growth in resin-coated sand. Making up just 4% of the North America proppant market, ceramics is most popularly used in the Bakken with 8% market share of all horizontal wells in the basin. PacWest forecast ceramics pricing to grow by a modest 2% over the next several years, driven by logistic bottlenecks at the well pad due to a shortage of railcars and trucks.
Historical Multiples
Source: ISI Energy Research, Bloomberg
8x
12x
16x
20x
24x
28x
32x
36x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
CRRNiche Offshore Technology Providers
CRR current trades at 14.0x, a -8% discount to the group's 15.3x average but a -32% discount to its historical 20.7x.
October 14, 2014
102
Carbo Ceramics
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis Chart Industries report three operating segments (Energy & Chemical, Distribution & Storage, and BioMedical) as the company serves many sectors of the economy, but with Energy companies represent 53% of end-users, we especially like the company’s exposure to LNG and natural gas liquids. Chart produces mission-critical equipment used in the infrastructure buildout around natural gas globally, such as for commercial trucking fleets, rail, marine vessels, drilling rigs, mining, etc. Although the company recently lowered guidance for delays in China due to new fuel station regulations, we expect production from new facilities in China and the U.S. to ramp up over the next few years, resulting in strong earnings growth and margins expansion. We rate GTLS Buy with a $78 price target based on a 20.6x target multiple on our 2015E EPS, seeing the “gasification” of global energy supply as a mega-trend in the oilfield services industry.
Company Strategy Management has been strategically adding manufacturing capacity in lower-cost countries and near centers of end market demand, positioning itself for the LNG buildout in China and the U.S. which combined account for almost 75% of annual sales. The company has exposure to the entire LNG value chain, from liquefaction to distribution to storage to the end user, offering a vertically integrated solution to its customers. Orders and backlog providing strong earnings visibility to near term, with the backlog up 5% Y-Y and near record levels.
Outlook for 2015 We expect results to remain mixed in the near term, with the Energy & Chemical segment reporting lower Y-Y margins for an unfavorable mix while the Distribution & Storage margins benefit from higher Europe & North America LNG sales. Orders will likely remain strong with ongoing LNG buildouts in China and North America, with four LNG export terminals having received all necessary approvals in the U.S. while nine have been approved in Western Canada. Meanwhile, midstream projects are also likely to accelerate, with management seeing an increased demand for 100-450k gallon/day plants in the U.S. East Coast, Gulf Coast, West Coast and Canada. New flaring rules in the Bakken region could also stimulate demand for LNG liquefiers, with the company’s La Crosse, Wisconsin E&C facility now capable of producing a standard LNG plant in just 12-16 months.
October 14, 2014
106
Chart Industries
Key Thoughts and Potential Catalysts Management lowered its FY14 sales guidance to $1.22-1.27bn (from $1.25-1.30bn) for delays in Distribution &
Storage segment operations in China, resulting in lower EPS guidance of $2.85-3.15 from $3.00-3.40 previously. New regulations are causing a delay in shipment for IMCs or packaged skid mounted fuel stations, but management expect these new rules to be published shortly as national standards, with the company set to ship 50 permanent LNG fuel stations over the next 30 months. In addition, GTLS’ China business is diversifying beyond PetroChina with CNOOC, Sinopec, and third party entrepreneurs increasing quoting activity, with higher volumes to leverage recent manufacturing capacity expansion.
We expect Chart’s slightly higher capex ($70-80mm) to be funded from existing cash and cash from operation, noting the company’s healthy balance sheet and positive free cash flow gives it additional fire power to reduce debt and potentially return cash to shareholders.
LNG orders increased 18% Q-Q last quarter, but can swing widely based on the timing of large project awards. We expect strong companywide orders in 3Q, exceeding 1.0 book-to-bill, driven by LNG liquefaction equipment.
Historical Multiples
Source: ISI Energy Research, Bloomberg
3x
7x
11x
15x
19x
23x
27x
31x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
GTLS
SMID Cap Capital Equipment
GTLS current trades at 12.8x, a -7% discount to the group's 13.9x average but a
-22% discount to its historical 16.6x.
October 14, 2014
107
Chart Industries
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis We believe increased offshore drilling and continued privatization of search and rescue (SAR) services set a strong fundamental industry backdrop for HELI. Offshore transportation services are one of the main beneficiaries of offshore drilling projects moving into deeper and deeper waters further and further from onshore bases. The continued privatization of SAR is an added bonus as that work carries higher margins. However, one of HELI’s main competitive disadvantages is its balance sheet. High levels of rental and interest expenses hamper HELI’s growth opportunities as it is instead forced to partially redirect expansionary capex in order delever. We believe this diversion will cause the company to slightly lose market share as competitors with stronger balance sheets increase their aircraft count and emphasize growth in frontier regions. With that being said we do acknowledge that the company’s recent equity infusion leaves it in a much stronger position and other mechanisms (improvements in working capital, divestiture of non-core aircrafts) exist to increase free cash flow. Overall we believe the industry fundamentals and HELI’s deleverage mechanisms will overcome the growth limitation posed by the balance sheet issues, and so we initiate with a Buy rating and a $5.80 PT based on a 5.1x target multiple on our 2015E EBITDA.
Company Strategy HELI’s short-term focus is to maximize FCF in order to decrease fixed rental and interest expense by upgrading its fleet, divesting older aircraft and improving working capital.
Outlook for 2015 With production lines sold out until 2016 and helicopter supply tightening we expect rates to increase throughout most offshore oil and gas producing regions. We see further tightening in the market occurring during 2015 and 2016 as Petrobras issues tenders for 31 total aircraft (3-7 incremental aircrafts). The company has identified Canada, Brazil, Nigeria, Africa & Euro-Asia and the western North Sea as growth markets where it intends to grow its fleet. HELI expects to accept delivery of 12-15 new deliveries and divest some of its older, non-core aircraft.
October 14, 2014
111
CHC Helicopter
Key Thoughts and Potential Catalysts HELI’s August convertible preferred shares offering will accelerate plans to decrease net debt and reduce fixed
charges leading to an improved FCF profile. It does open the possibility for significant dilution however.
HELI expects mid to high single digit growth in revenue with mid-single digit growth in Helicopter Services and mid teen to low-20% growth in Heli-One revenue. EBITDAR is expected to grow in the high single to low double-digit thanks to mid-single digit in helicopter service rates. The helicopter count is expected to remain relatively flat. The company forecasts a free cash flow spend of $180-$210MM. In the long run, HELI expects to remain free cash flow negative until FY2017 and expects long-term revenue growth in the high single-digit to mid-teen range with EBITDAR margins in the high teens to mid-20% range.
The accelerated disposal of legacy aircraft will help the company in paying for 13-15 new deliveries which should improve the overall mix of the fleet and free cash flow generation. In addition management has outlined improvements in supply chain efficiency and a reduction in days sales outstanding and retables as additional tools it will use to increase FCF.
Historical Multiples
Source: ISI Energy Research, Bloomberg
4x
5x
6x
7x
8x
9x
'06 '07 '08 '09 '10 '11 '12 '13 '14
HELIOffshore Technology
HELI current trades at 6.8x, a 4% premium to the group's
6.5x average.
October 14, 2014
112
CHC Helicopter
Annual Income Statement, 2012-2015E ($ in millions, except per share)
Investment Thesis The recent weakness in Core Labs stock price following the Q2 guide down, Q2 financials and the recent energy sell off present long-term buying opportunities for one of the segment’s most technologically advanced companies. We remain very positive on deepwater fundamentals and believe the ongoing lull in offshore project startups and the decreased sentiment surrounding offshore E&P spending is only temporary, with a rebound meaning big business for the company’s reservoir description business. We also believe the shale revolution provides a strong backlog of future work for CLB’s Production Enhancement segment given the steep decline rates shale wells face. In addition we are confident about continued share buybacks ($93.6MM during Q3, or 1.5% of current market cap ain’t too shabby) through the next six quarters and increasing dividends as soon as late 2015 when we model the payback ratio to dip below 30%. We initiate with a Buy and an $151 PT. Company Strategy CLB focus on the more stable production and production enhancement components of E&P budgets minimize volatility in company revenues, while an emphasis on developing new technologies and acquiring complementary technologies and leveraging those products via its global distribution system makes for a strong margin growth story. Together these two strategies form the backbone of a stable, growing, high-return company.
Outlook for 2015 We expect CLB to continue its operational excellence in 2015 piggybacking off international growth, a slight resurgence in deepwater activity as operators resume their development of high impact hydrocarbon finds , and the continued development of high complexity horizontal drilling in NAM.
October 14, 2014
116
Core Laboratories
Key Thoughts and Potential Catalysts Reservoir description margins have been affected by recent low levels of deepwater activity in 4 of
last 5 quarters but the company is confident that its DW focus will increase reservoir description margins in the long-term.
New EOR Techniques will be able to generate higher margin revenues over the next decade-plus FlowProfiler and KODIAK-related technologies should generate increased levels of revenue, EBIT and
FCF in H2:14. 20% of revenue converted to FCF. NAM Activity will continue to increase for emerging unconventional oil plays and activity will remain
at reduced yet stable levels in established unconventional tight-oil and gas plays. CLB anticipates higher numbers of DW coring programs especially in DW GOM. HPHT reservoir fluid phase behavior projects is also expected to remain high. CLB's portfolio of Reservoir Management work in W. and E. African DW projects in Cote d'Ivoire,
Senegal, Tanzania and Mozambique has continued to increase. June Production Enhancement numbers were the company's strongest and those have continue to
improve through July. Geopolitical tensions in the Ukraine have actually benefited CLB as they have been called back to
revisit some previously done work in Germany and Poland. International revenue growth is expected to relatively low at 1-2% for '14, but the company is
excited about the possibilities for 2015 and beyond. Dependent on adaptation in horizontal well construction, CLB see its FLOWPROFILER product as a
potential $60MM opportunity.
Historical Multiples
Source: ISI Energy Research, Bloomberg
8x
12x
16x
20x
24x
28x
32x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
CLBNiche Offshore Technology Providers
CLB current trades at 21.2x, a 37% premium to the group's 15.3x average but in line with
its historical average.
October 14, 2014
117
Core Laboratories
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis One of the lowest cost offshore drilling contractors, Diamond operates a fleet of aging assets with a high mix of midwater floaters and standard specification jackups. The company has taken steps to high grade its fleet in recent years, acquiring some distressed spec ultra deepwater newbuilds in 2009/2010, ordering four UDW newbuilds and upgrading two deepwater units. However, a series of unforeseen events has plagued the shares in recent years, with investors increasingly concerned the dividend is at risk. The company indicated it may consider a dividend cut to take advantage of distressed assets in the current downturn, as it did twice in 2010. But with two newbuilds under construction still available, and debt levels rising, we think a dividend cut may be prudent to shore up the balance sheet. We rate the shares Sell with a $32 price target based on a 4.8x target multiple on our 2015E EBITDA.
Company Strategy CEO Marc Edwards recently outlined three main value drivers for Diamond Offshore: 1) investment excellence to include asset optimization and capital efficiency allocation, 2) commercial excellence centered around customer relationships, pricing, utilization and fleet positioning; and 3) operational excellence to minimize downtime and maintain discipline in operating expense and SG&A. With a new Chief Commercial Officer responsible for marketing and contract acquisition activities, the company is overhauling its supply chain to drive costs lower. Retiring older assets should lower stacking costs in the short term, with the company holding four units for sale currently while taking. Having taken delivery of recent newbuilds, Diamond plans to retire some older assets in the near term.
Outlook for 2015 With the Ocean Vanguard unexpected released early this summer by Statoil and the Ocean Star mobbing from Brazil to the U.S. GOM, Diamond currently has eight floaters available, including four 2nd and 3rd Gen units held for sale. We expect the company to bid the Star and other moored semisubs to Pemex, where it currently has three midwaters contracted, with the NOC likely renewing the Ocean Yorktown when it roll off contract in March. Diamond also have seven floaters rolling off contract with Petrobras in 2015, with the company waiting on final approval for the Ocean Valor and Ocean Courage in the $460-505kpd range (up slightly from the current $407-440kpd range) and the Ocean Baroness at less than $400kpd (vs. current $277kpd). With the Ocean Yatzy, Worker and Winner at risk of being released by Petrobras in the next six months, we expect the company to incur higher costs to mobe these units back to the U.S. GOM or new markets. Meanwhile, newbuild Ocean BlackLion remain available, currently scheduled for 2Q15 delivery as the company faces another year of large capex commitments.
October 14, 2014
121
Diamond Offshore
Key Thoughts and Potential Catalysts Diamond surprised the market but swapping the Ocean BlackRhino for the remainder of the Ocean
Confidence’s contract with Murphy, including options for a lower dayrate of $495kpd (from current $550kpd) in exchange for a three year term. While operating the BlackRhino in the U.S. GOM rather than in West Africa justifies a lower dayrate, we were surprised by the rig swap as management had previously indicated it was in advanced customer discussion for the Rhino.
Diamond has been growing its market share in Mexico, where it operates three jackups and three midwater floaters. We believe the company could place more midwaters in this market, as the NOC has shown a preference towards established operators, potentially expanding into the ultra-deepwater as the market expands.
With nine floaters contracted to Petrobras currently, Diamond has among the highest mix of assets in Brazil. Contract negotiations for three deepwater units have been lengthy at about a year, but are expected to be finalized shortly, helping shore up contract coverage over the next few years.
Diamond unexpectedly return cash to shareholders in the form of buybacks during 1Q14, taking advantage of market downturn with the repurchase of 1.86mm shares for $86.4mm. Majority shareholder Loews Corp. noted Diamond may have the change to buy rigs at distressed prices, though also stressing paying a dividend is also a top priority.
Historical Multiples
Source: ISI Energy Research, Bloomberg
3x
4x
5x
6x
7x
8x
9x
10x
'06 '07 '08 '09 '10 '11 '12 '13 '14
DOOffshore Drillers
DO current trades at 4.8x, a -20% discount to the group's 5.8x
average but a -19% discount to its historical 6.0x.
October 14, 2014
122
Diamond Offshore
Annual Income Statement, 2005-2015E ($ in millions, except per share)
Investment Thesis Order slippage and poor financial guidance have raised questions about Dresser’s business in recent years; however, the stock has done well from a combination of activist interest and M&A speculation. Long viewed as a potential M&A target, Dresser-Rand agreed to be acquired by Siemens for $7.6bn or $83 per share in an all cash deal on September 21st. We rate DRC Sell with an $83 PT, seeing no competitive buyers at this time.
Company Strategy Although CEO Vince Volpe has traditionally stressed the company is not for sale, sentiments appeared to have shifted in July when media outlets reported Siemens was preparing for a takeover of Dresser-Rand, driven by its desire to expand in the U.S. shale infrastructure buildout. Dresser does sell standardized high speed reciprocating equipment for pipeline buildouts, but it’s strength is in more highly engineered and customized equipment for large upstream, offshore, and LNG development projects. For example, the company is providing large diameter boosting stations for the West-East pipeline across China and has received orders for several miniLNG plants along the coastline. Unfortunately upstream and offshore development projects are prone to delays, particularly as IOC customers have been under pressure to improve returns in recent years, causing Dresser to miss its 2012 & 2013 bookings targets. But with a high 40% share of the global installed base of its traditional equipment, Dresser continues to generate stable to growing aftermarket revenues, which accounts for about two-thirds of operating income. Meanwhile the company has been expanding into new markets recently, booking its first projects from several new R&D initiatives at recent technology-driven acquisitions.
Outlook for 2015 Siemens expects to close its acquisition of Dresser-Rand in the summer of 2015, with each month’s delay starting March 1st adding $0.55/shr to the purchase price. Dresser should host a special shareholder meeting to vote on the deal by the middle of next year, but operationally 2015 could be significant for the company as well as it executes on the first order of several recent new technology initiatives. The company’s first LNGo unit should be fully operational by the start of the year, with demonstrated field performance from an existing installation potentially leading to more orders from other customers. Management estimate LNGo could generate $100mm in revenue in 2015, increasing over time as the technology expands internationally (China, Europe) and from aftermarket opportunities. Dresser will also be delivering its first compressed air energy storage (CAES) order in 2015 and testing its first subsea integrated compression system (ICS) with Statoil, accumulating thousands of hours of performance in the process of qualifying the compression & separation equipment with an important customer. Dresser also recently booked its first magnetic bearing technology order, but this as more of a 2016 event.
October 14, 2014
126
Dresser-Rand
Key Thoughts and Potential Catalysts Operationally Dresser is starting to see improvements in upstream bookings, with four offshore
projects booked in 2Q. With “well over $100mm” in new unit orders booked in July, the company raised its FY booking guidance to “at least” +10% Y-Y from 5-10% previously. We’re forecasting $400mm in bookings in 3Q, but see potential risk to our $98mm operating income estimates (vs. management’s $80-100mm guidance range) from a stronger US dollar that likely has a negative effect on DRC’s results.
CEO Vince Volpe is optimistic on FPSOs, seeing potentially 20 units built or contracted in 2014. An estimated 160 FPSOs will be ordered by the industry over the next five years, needing $15bn worth of compressor equipment and $15bn in power generation, with 20-25 orders per year qualifying as a good year as projects are prone to costly delays. However, Dresser’s mission critical equipment for compressing high pressure gas is less likely to face cost cutting pressure and the company booked five of six FPSO orders in 1H14.
Working capital improvements continue to be an important object for Dresser, but management recently eased away from its 15% of sales target by year end, citing it is more stubborn than expected. Net working capital is now expected to be flat-to-down slightly over the course of 2014 at an adjusted 22% vs. the historical 12% average.
Historical Multiples
Source: ISI Energy Research, Bloomberg
3x
5x
7x
9x
11x
13x
15x
'06 '07 '08 '09 '10 '11 '12 '13 '14
DRC current trades at 14.1x, a 54.% premium to its historical
8.5x.
October 14, 2014
127
Dresser-Rand
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis Dril-Quip is a vertically integrated manufacture of onshore and offshore equipment, best known for its leading market share in deepwater wellheads. The company also manufacturers subsea & surface trees, control systems and manifolds, as well as equipment for drilling rigs and floating production systems, though they are less of a driver for the stock. Not one to chase the large nameplate awards for trees, Dril-Quip view its sweet spot as in the 5-15 trees award range, preferring to target customers that maybe be neglected by the larger capital equipment providers when their order books are full. The company uncharacteristically lowered earnings guidance a few quarters back, citing a key customer not accepting delivery, raising concern a large frame contract may be at risk. But with a strong balance sheet and no debt, we believe the shares are attractively price as the company could be an acquisition candidate. We rate Dril-Quip Buy with a $126 price target based on a 19.8x target multiple on our 2015E EPS.
Company Strategy Lumped in with the negative offshore sentiment, DRQ argues that lower rig dayrate can be good for their business as it can motivate independents to pick up rigs to work in shallower water. Driven by the number of rigs working and the number of wells drilled, management has been adding manufacturing capacity worldwide, serving its customers from Houston, Aberdeen, Singapore, and Macae.
Outlook for 2015 The company recently completed the repurchase of $100mm in stock, with the Board authorizing another $100mm program that is likely to be fulfilled by the end of 2015 with the company generating substantial free cash flow. While uncertainty exist for the Petrobras wellhead frame, orders are likely to pick up after the elections and accelerate in 2015. Petrobras guaranteed 80% the frame ($650mm over four years) and ordered more than 100% of the prior award, but while contracts have been retendered for drilling and other services, equipment associated with a production wells are likely less at risk.
October 14, 2014
131
Dril-Quip
Key Thoughts and Potential Catalysts A strong U.S. dollar is likely to have unfavorable foreign currency transaction losses for the
company.
Petrobras rejected equipment in 1Q14, asserting it did not satisfy certain contractual requirements. While the NOC place incremental orders in the quarter, it is tracking well below the average for the 3 year frame. Taking only equipment it needs and letting DRQ keep the remainder on its balance sheet, the situation is unlikely to change until at least after the elections.
Dril-Quip appears to be picking up share in subsea trees, with 23 ordered year to date vs. the prior three year total of just nine trees. The company does not report its trees award to Quest Offshore each quarter.
With the most vertically integrated manufacturing system in key geography markets, DRQ has been adding machinery to existing roofline, growing the ratio of machinist to machine to almost 1.45x from about 1.1x three years ago. This allows the company to maintain stable margins that average well above subsea equipment provider peers.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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8x
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16x
20x
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28x
32x
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40x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
DRQNiche Offshore Technology Providers
DRQ current trades at 14.5x, a -5% discount to the group's 15.3x average but a -28% discount to its historical 20.4x.
October 14, 2014
132
Dril-Quip
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis Ensco is best positioned for a potential turnaround in offshore drilling in 2016, in our view. While the company continues to successfully navigate through the current downturn by 1) maintaining its high cash dividend and 2) continuing to high grade its fleet. With a fully available $2bn revolver and manageable newbuild capex, we believe Ensco’s $3.00/share dividend is safe, supported by available cash from potential asset sales. Ensco recently completed a fleet review under new CEO Carl Trowell, identifying five floaters to divest that will lower the average age of the remaining fleet to among the youngest in the industry. In summary, Ensco has one of the highest quality fleets, solid execution, and reasonable newbuild capex commitments that should enable the company to weather the downturn and maintain one of the highest dividends in the industry. An accelerated share buyback ($2bn authorized) could support the stock. We rate the shares a Buy with a $45 price target based on a 6.6x target multiple on our 2015E EBITDA.
Company Strategy In his inaugural debut, new CEO Carl Trowell identified three areas of strength and opportunity for Ensco: 1) develop and deploy new rig technologies and related services to drive performance and cost savings, 2) leverage the company’s global footprint and cost structure to drive industry leading margins higher, and 3) formulate a strategic direction for the next five-to-ten years with a wide range of customers in mind. We expect to hear more details on potential new initiatives in the near-to-medium term, but note Ensco was a pioneer in the fleet standardization strategy when it transitioned to a pure play offshore driller in 2007. The company entered the floater market with the construction of its first 8500 series semisub, fine tuning the rig design, construction schedule, and start-up into an efficient serial build program copied by its peers. The acquisition of Pride International greatly expanded the company’s fleet and geographic footprint, but also increased its exposure to lower spec commoditized assets. While the company has successfully divested select jackups in onesies and twosies over the years, Ensco recently completed a fleet review to take costs out of the system, taking impairment charges on eight floaters and identifying five for divestiture.
Outlook for 2015 With just one newbuild floater available in 2H15, we see relatively low risks to new assets going idle, but are concerned about potential contract gaps for several 8500 series in the U.S. GOM over the next six months, some of which could be mobed to international markets. In addition, the company plans to mobe the ENSCO DS-2 to Spain from Angola for stacking when it rolls off contract in October, with the high cost of relocating and stacking a DP drillship putting our cost estimates at risk. On the jackup side, Ensco has two older units idled in the US GOM and four newbuilds available, but its international rigs in Europe, Asia, and especially the Middle East are highly contracted to mid-2015 and beyond. We expect Saudi Aramco to renew three jackups rolling off contract in early 2015, as well as Pemex and Maersk to renew three and two jackups respectively throughout the year. We expect Ensco to maintain essentially flat Y-Y revenue, EBITDA and earnings in 2015, as the start-up of newbuilds (ENSCO 121 and 122 in 2014, ENSCO DS-8 and DS-9 in 2015) and reactivation of the ENSCO 5004, 5005 and 5006 in 2014 offset five floaters held for sale and lower dayrates on existing rigs. We forecast the company to remain modestly free cash flow positive in 2015, despite management guiding to almost $2bn in capex ($1.6bn for newbuilds), but note the company is well funded having recently priced $1.2bn of senior notes for general corporate purposes including newbuild construction.
October 14, 2014
136
Ensco plc
Key Thoughts and Potential Catalysts Since the company’s September 16 fleet status report, Stone Energy announced it has contracted
the ENSCO 8503 for 30 months commencing 2Q15 at $350kpd, in line with recent short term rates. We’re modeling two months of downtime for the 8503 upon completion of its current contract in early February, but view this contract as a potential indicator the market could be close to bottoming, with operators locking in rates for lengthy term.
Shareholders recently approved a capital reorganization proposal and proxy – unique to UK companies – and Ensco now has “the maximum flexibility to return cash though dividends and share repurchases.” With a $2bn share buyback program authorized and a $2bn revolver fully available, the company could aggressively execute its buyback program upon finalizing budgets for 2015, particularly with newbuild capex projected to fall sharply to only $400mm in 2016 from $1.6bn in 2015. We do not expect the company to order any additional newbuild floaters until the DS-10 is contracted.
While investors are concerned about a potential over supply of newbuild jackups, we believe Ensco’s four available newbuilds are less at risk as they are all heavy duty harsh environment (HDHE) units, which remain undersupplied in the North Sea especially. Ensco targets being a leader in premium jackups and we believe the company could divest some lower spec 250’ units in the US GOM.
Ensco has five floaters available for sale and management expects the ENSCO 7500 to be taken for drilling operations. We estimate the 7500 could fletch close to $200mm, not included in our cash flow assumption.
Ensco has relatively modest exposure to the costly Brazil market, with just four floaters contracted to Petrobras through 4Q16 and beyond. With the majority of its recent newbuild floaters working in Angola and the US GOM, we believe the company could mobe some 8500 series from the US GOM to markets in Asia and potentially to Brazil to work for non-Petrobras operators.
Historical Multiples
Source: ISI Energy Research, Bloomberg
2x
4x
6x
8x
10x
'06 '07 '08 '09 '10 '11 '12 '13 '14
ESVOffshore Drillers
ESV current trades at 5.7x, a -1% discount to the group's 5.8x
average but in line to its historical average.
October 14, 2014
137
Ensco plc
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis Ensign operates a fleet of 273 drilling rigs and 136 service rigs globally, with the fleet and revenue base fairly evenly distributed geographically. The Canadian driller source the majority of its revenue in the U.S., where revenue has grown by 22% annually since 2009. Internationally Ensign is the largest drilling contractors in Australia and has established strong footholds in Oman and Kurdistan. In additional to drilling services, the company has a relatively small Completion & Production Services segment, accounting for just 10% of revenue. Seeing relatively limited upside for the shares, we rate the shares Hold with a $16 price target based on a 5.0x target multiple on our 2015E EBITDA.
Company Strategy Ensign has been high grading its fleet, repositioning itself for the growth in horizontal unconventional drilling in North America and the increasing demand for high complexity horizontal wellbores, which now makes up almost 75% of the company’s drilling jobs vs. about 30% 20 years ago. Viewing dividend growth as an important value creation driver, the company has growth its quarterly dividend by 16% annually since 1995 and now pays a leading 3.45 for Onshore Drillers.
Outlook for 2015 The company plans to deliver 34 newbuild Automated Drill Rig (ADR) by the end of 2015, which should drive earnings growth, dayrates and utilization higher as the company expands the fleet worldwide. With a typical rig representing one-third of the total daily well costs, Ensign is likely to expand into complementary services, utilization its strong balance sheet with bolt-on acquisitions.
October 14, 2014
141
Ensign Energy Services
Key Thoughts and Potential Catalysts Canada activity exhibit significant seasonality, with 2Q the lowest quarter due to the annual spring
breakup. Softening land prohibit oilfield services equipment to move during this time of the year, resulting in lower margins from lower activity and higher planned maintenance costs with companies opportunistically scheduling maintenance during this period. Changes in the length, intensity, and start & stop of the break-up period can make results incomparable from year to year.
With more than half of its revenue generated outside of the U.S., a weakening U.S. dollar is likely to impact Ensign’s near term results.
With operations in Venezuela, the company is exposed to customer payment delay risks.
Historical Multiples
Source: ISI Energy Research, Bloomberg
2x
3x
4x
5x
6x
7x
8x
'06 '07 '08 '09 '10 '11 '12 '13 '14
ESI
Onshore Drillers
ESI current trades at 4.4x, a -7% discount to the group's 4.7x average but a -22%
discount to its historical 5.7x.
October 14, 2014
142
Ensign Energy Services
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis We believe increased offshore drilling and continued privatization of search and rescue (SAR) services set a strong fundamental industry backdrop for ERA. Offshore transportation services are one of the main beneficiaries of offshore drilling projects moving into deeper and deeper waters further and further from onshore bases. The continued privatization of SAR is an added bonus as that work carries higher margins. However, we believe ERA’s strategy and competitive profile set the company up to underperform its peers. Its fleet is comprised of mostly older, smaller helicopters which are incapable of operating in the deepwater/ultra deepwater space where profitability potential is greater on a per trip basis and activity seems poised to surge over the coming years. Additionally, we view the Alaskan market, where ERA derives 16% of its LTM Oil & Gas revenues, in a much more negative light compared to other offshore regions. For these reasons we believe the company will underperform its competitors and initiate with a Sell rating and a $19 PT.
Company Strategy ERA is in the process of attempting to upgrade its fleet with 14 heavy helicopters on order between now and 2017 and the option to order an additional 15 heavy helicopters and 4 medium helicopters. We agree with this strategy but do not believe it is material enough in the short-term to lift the company’s prospects. The company is also expanding and upgrading its Houma, LA base to increase future growth as well as safety capabilities. We feel the company still has several legs to travel on its journey to becoming a more focused oil & gas pure play.
Outlook for 2015 Even as the industry backdrop seems poised for accelerated growth, ERA’s limited large aircraft exposure limits the company’s opportunities. ERA’s fleet of 166 helicopters (including owned, join ventured, leased-in and managed helicopters) is comprised of mostly medium (37%, average age of 12.5 years) and light weight (58%, average age of 10.8 years) helicopters that are unable to command the same premium dayrates as their competitors’ newer, heavier fleets. We also feel the company has been too quick to expand and as a result finds itself operating in many regions without a critical mass. This, in conjunction with the companies various product line, has caused SG&A expenses as a percentage of revenue to be higher than its competitors.
October 14, 2014
146
Era Group
Key Thoughts and Potential Catalysts The company’s NAV model interprets company as significantly undervalued. The company calculates
its NAV per share (excluding maintenance capex as well as the fair market value of leased-in or managed helicopters) at $34.34.
Alaskan flightseeing business (3.4% of Q2 14 sales) generates no revenues during Q1 and Q2 due to seasonality.
Recent CEO departure.
Historical Multiples
Source: ISI Energy Research, Bloomberg
4x
5x
6x
7x
8x
9x
'06 '07 '08 '09 '10 '11 '12 '13 '14
ERAOffshore Technology
ERA current trades at 6.4x, a -1% discount to the group's 6.5x average.
October 14, 2014
147
Era Group
Annual Income Statement, 2010-2015E ($ in millions, except per share)
Investment Thesis Exterran is a leading natural gas compression company, providing products and services critical to the production, processing, transportation and storage of natural gas. The company operates the largest contract compression fleet in the U.S., adding capacity organically as well as through acquisitions, partly funded by the MLP Exterran Partners. Meanwhile, growing the contract compression business Internationally has been more difficult due to project delays. Exterran also reports Fabrications and Aftermarket segments, where it sells packaged compression units. We rate Exterran Hold with a $45 price target based on 6.6x our 2015E EBITDA.
Company Strategy Poised to take advantage of the U.S. natural gas infrastructure build-out (gas lifts), EXH has been growing its contract compression fleet in liquids basins while trimming back in traditional dry gas plays. The company recently restructured the business, consolidating pricing and purchasing across the basins, and has been growing the fleet organically, targeting low teens returns. However, with just 1MM HP of contract compression left to drop down to the MLP, the company is likely to fund additional acquisitions through the MLP. Meanwhile with gross margins improvement, EXH expects to eliminate the cost-cap reimbursement to EXLP by the end of this year.
Outlook for 2015 EXH expects the midstream market to pick up in 2H14, potentially driving the contract compression business higher in 2015. While gross margins have improved about 500bp over the last few years, we’re modeling relatively modest margin expansion of 80bp over the next year, seeing modest opportunity for pricing with the fleet averaging about 85% utilization (unchanged over the past two and half years.) Internationally the fleet is only 77% utilized, with pricing generally flat as well. While EXH has yet to see delays in the availability of components from OEM suppliers, the lack of a vertically integrated Fabrications segment could be a risk as the North America natgas buildout accelerates. Approximately 45% of the backlog is for NAM-based projects and labor cost inflation in key high growth basins are likely to intensify in the near term.
October 14, 2014
151
Exterran Holdings
Key Thoughts and Potential Catalysts Fabrications backlog rose sharply last quarter, as the company had solid bookings at 1.5x bill, the
highest in two years driven by strong demand across North America and in the Eastern Hemisphere.
With only a million HP sitting on the parent level available for drop downs, not all of which is contracted, Exterran is likely to seek further fleet growth through acquisitions.
Dry gas stops decelerated over recent quarters, but continues to more than offset organic HP additions in growth areas.
EXH could benefit from exports of condensates through the sale of stabilizers for distillation towers, offered by the Fabrication segment’s Production Equipment unit. However, pricing can vary with smaller units handling 5-5,000 Bbl/d selling for a couple hundred thousand to $1mm, while larger units handling 10k Bbl/d are over $1mm.
Historical Multiples
Source: ISI Energy Research, Bloomberg
4.5x
5.5x
6.5x
7.5x
8.5x
9.5x
'06 '07 '08 '09 '10 '11 '12 '13 '14
EXH current trades at 6.3x, a -55% discount to
its historical 6.6x.
October 14, 2014
152
Exterran Holdings
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis FMC Technologies design and manufacturers equipment for onshore and offshore production, though the company is best known for its highly engineered subsea systems including trees, manifolds, etc. The company recently expanded its subsea offerings to include ROVs and aftermarket services, though Subsea processing is the most exciting new area of growth for the company. The only company to have certain equipment installed currently, FTI is well position to take advantage of the industry’s moving key separation and boosting equipment from the platform to the sea floor. FTI also has a growing surface business, selling wellheads to key MidEast and Africa markets, as well as fluid control to production & completions providers. We rate the shares Buy with a $67 price target based on a 19.0x target multiple on our 2015E EPS.
Company Strategy The company recently pushed through several cost cutting initiatives, trimming back its operations in Europe and shortening leadtime and costs for fluid control in the Surface Technologies segment. Management target mid-teens subsea margins by the back half of 2014 and is on track to achieve $5 billion in orders despite no single large bookings, though expect bookings to strengthen in 2015. In the surface segment, orders for fluid control rebounded earlier this year as customers restocked depleted inventories, though the company had yet to see capital equipment orders as NAM production & completion services company add incremental capacity. Meanwhile, FTI is pushing forward a standardization initiative, partnering with four key offshore customers to develop, qualify and build equipment for U.S. GOM Lower Tertiary development.
Outlook for 2015 Despite few large subsea awards booked year to date, FTI has a near record backlog to work through over the next several quarters. Margins should get a boost from higher priced orders in the backlog and improving execution, as well as the growing services segment, now about 30% of segment revenues and at much higher margins. FTI should take delivery of its fourth intervention stack by early 2015, potentially launching construction of boat five and six by year end with partner EdisonChouest. In the surface segment, the company should see higher pump awards in fluid control, though wellheads may take a pause of international activity slows.
October 14, 2014
156
FMC Technologies
Key Thoughts and Potential Catalysts We believe 3Q subsea bookings will likely be strong, with the company receiving orders for five
subsea manifolds for Petrobras pre-salt field. Representing the balance of the 16 manifold award ordered the 2013 frame, FTI has booked a total of 19 manifolds to date for Petrobras pre-salt field. Meanwhile, the recently announced $280mm Wintershall award will be booked in 4Q.
Less impacted by offshore development delays than Dresser-Rand, FMC expects BP to sanction the Mad Dog 2 (GOM), Persephone (Australia) and Thunderhorse South (GOM) projects before year end. FTI is partner with BP in its 20k Project.
About nine named subsea processing projects were expected to be awarded this year, with five to six for boosting equipment, but only one project has been awarded to date and the rest are likely to be delayed, as large projects are prone to be. For example, Shell postponed the Ormen Lange compression project it has been working on since 2008, claiming “the updated reservoir analysis show that offshore compression timing is not critical to the ultimate recovery of the field.”
Historical Multiples
Source: ISI Energy Research, Bloomberg
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9x
13x
17x
21x
25x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
FTICapital Equipment
FTI current trades at 10.7x, a 22% premium to the group's
12.6x average but a -19% discount to its historical 19.3x.
October 14, 2014
157
FMC Technologies
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis Forum Energy Technologies provides consumables and capital equipment for the oil services industry, with exposure to all areas of operations but especially to North America and the horizontal well count. More than half of revenue comes from consumables – parts that need to be replaced every few months to every five years –with consumables historically accounting for 2/3 of the Drilling & Subsea segment. Orders can be lumpy for capital equipment companies, with the group generally trading on book-to-bill ratios with the backlog providing earnings visibility. But with most orders fulfilled within 30 days, Forum views the backlog as a negative indicator as its backlog is generally made up of orders that can’t be manufactured within six months. While Forum’s higher mix of consumables exposes the company to shorter cycle risks, i.e. the 2012/2013 slowdown in US pressure pumping when clients cannibalized existing equipment and worked down inventories, the next few quarters look promising with customers restocking Flow Equipment inventories and the company set to deliver record Drilling Technologies and Subsea Technologies orders. We rate FET a Buy with a $44 price target based on an 18.2x target multiple on our 2015E EPS.
Company Strategy Forum focuses on three avenues for driving organic growth: 1) consolidating operations, 2) product development, and 3) acquisitions where it competes against private equity in deals priced at 4-6x EBITDA. Formed through a series of acquisitions by SCF Partners, FET views M&A as a core competency but recently took a pause from acquisitions to focus on integrating six companies acquired since its April 2012 IPO. Management consolidated offices and manufacturing facilities, resulting in better absorption of fixed costs, and next plans to consolidate procurement to drive shorter cycle times and shorter lead times. In the near term Forum is reinvesting these savings into product development, though R&D remain modest relatively to the large caps at 0.5% of 2013 sales, with management focusing not on new technologies but expanding its range of offerings within existing product lines. Meanwhile, a recent acquisition of a Canadian wireline company demonstrates the company’s strategy of acquiring respected and developed brands it can scale up and expand globally, with Forum planning to add 10-40% capacity over the next 12 months. Forum is actively targeting new acquisitions in well intervention and downhole products (highest margin business line), but doesn’t expect to act on large deals.
Outlook for 2015 With customers restocking inventories, FET is ramping up capacity with a new pressure pumping consumables manufacturing center to be completed before year end. Existing facilities are running two-to-three shifts each, and the new facility and machinery should drive significant operating leverage in 2015 as the company sees a pick up for consumables (treating iron) for new pressure pumping capacity put into service over the past year. We also anticipates a new upgrade/repair/maintenance cycle for Forum’s high installed base of 400 active Perry™ ROVs. In contrast to OII’s higher mix of drilling-based ROVs, FET competes with FTI’s Schilling Robotics to supply workclass ROVs to vessel-based contractors like Subsea7 for use in installing record subsea equipment ordered in recent years. Meanwhile in the Production & Infrastructure segment, petrochem opportunities are expected to move ahead, a positive for Valve Solutions.
October 14, 2014
161
Forum Energy Technologies
Key Thoughts and Potential Catalysts Forum guided to 3Q14 EPS of $0.42-0.48, with risk to the downside if planned shipments don’t occur
in the quarter as expected. With the company scheduled to delivery record Drilling and Subsea capital equipment orders booked in the first half (27 ROVs ordered YTD is more than double the total booked last year), any issues in consolidating manufacturing facilities or supply chain could impact near term earnings momentum.
The company established a sustainable EBITDA margins target of 20%, which looks very achievable with margins up 300bp Y-Y to 19.4% last quarter. While stressing that maximizing margins is not its ultimate goal, investors may be disappointed if margins don’t continue to move steadily higher over time.
FET has been steadily paying down its revolver with healthy positive free cash flow. With total debt to EBITDA falling to 1.3x from 2.2x a year ago, well below the company’s 2-3x comfort zone, a dividend or buy back could be a near term catalyst.
Public offerings by majority shareholder SCF Partners (24mm shares or 26% stake) creates some overhang.
Historical Multiples
Source: ISI Energy Research, Bloomberg
3x
6x
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12x
15x
18x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
FET
SMID Cap Capital Equipment
FET current trades at 12.6x, a -9% discount to the group's 13.9x average and a -3%
discount to its historical 13.1x.
October 14, 2014
162
Forum Energy Technologies
Annual Income Statement, 2008-2015E ($ in millions, except per share)
Investment Thesis FI has fallen 47% over the past 12 months, due partially from self-inflicted wounds in its U.S. onshore business, but also due to investor pessimism across all sectors tied to offshore drilling activity. Though Frank’s is a strong way to gain exposure to the deepwater offshore market, the company does generate ~30% of its revenue from onshore tubular services. This favorable mix helps shield the company from the current slowdown in deepwater startups, especially as North American unconventional drilling continues to thrive. We see significant upside with the shares trading at a 23% discount to its historical 17.7x forward P/E multiple, well below its IPO price of $22 and only 13x consensus 2015E earnings). We rate the shares Buy with a $26 price target based on a 19.8x target multiple on our 2015E EPS, supported by potential dividend increases (currently paying 3.6% yield).
Company Strategy FI prides itself on being the industry-leading provider of engineered tubular services with a focus on the most complex jobs throughout the world, undertaken by a highly trained suite of employees using differentiated, customized and proprietary tools. Its growth strategy is centered on taking market share in the North Sea, the Middle East and SE Asia, as well as an increased rig count in West Africa and the Gulf of Mexico. Additionally, the company’s strong balance sheet ($444MM of cash and essentially no debt) has encouraged persistent questions regarding M&A activity. Frank’s is not against making a large splash if the right opportunity arises, but will more than likely continue to make smaller, tuck-in acquisitions primarily focused on new products and technology within well construction and tubular services order to enhance the company’s portfolio. If no feasible acquisition opportunities are identified, FI has repeatedly stated that it intends to return cash to shareholders via special dividends or an increase to its quarterly dividend.
Outlook for 2015 As the cost, complexity and critical nature of wellbore construction keeps increasing, FI is in a prime position to benefit as an industry leader. We expect 2014 EBITDA margins to decline to 38%, down from 41.5% during 2013, due to competitive U.S. land pricing and reduced offshore rig startups. Meanwhile, 2015 should see improvement as the company right sizes its U.S. business and offshore activity hastens, leading to sustainable margins in the 40% range.
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Frank’s International
Key Thoughts and Potential Catalysts Dividend growth/special dividend. As of 6/30/14, Frank’s had a cash balance of $443.7MM and no
debt. The company has repeatedly stated that if it cannot find ideally suited acquisitions, it will return cash to shareholders in the form of a special dividend or increases to the regular dividend. We project that the dividend will increase to $0.20/quarter from its current $0.15 per quarter.
FI is in the process of building out its tubular business for the jackup market, and though this will temporarily serve as a drag on margins (headcount and G&A increases without revenue recognition), we view this as a strong avenue of growth for the company, especially considering FI’s expertise in the offshore market. The casing process amounts to only 2-5% of the total well cost but is an integral part of the drilling process. An inadequately sealed well can potentially delay the process for multiple weeks while a sidetrack well is drilled. And thus the benefit for marginal savings by an operator is greatly outweighed by the risk of a poorly done job. As the search for hydrocarbons takes operators into harsher and harsher frontier environments (Arctic, HPHT), the need for longer, heavier, higher-quality tubing and FI’s proprietary equipment (elevators and spiders) becomes more apparent, thus playing into FI’s strengths.
U.S. land revenues have fallen as the company gives up market share to maintain margins. In addition, the company has suffered from decline in equipment and head count utilization due to its decentralized structure, which has hurt EBITDA margins. FI has appointed a Head of U.S. Land operations and believes it is well underway to resolving these issues.
As a public company for just fourteen months, FI is still experiencing growing pains with its financial forecasting. Adding to this difficulty is the fact that FI is the only public, pure-play casing running company; as a result FI may be hesitant to publicize certain facts and expectations which would alleviate investor fears due to competitor concerns. As the company transitions to a more detailed, bottoms-up budgeting process and improves on its accuracy, revenue and margin guidance should improve in precision, giving investors and analysts alike more confidence in guidance for the company.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
FINiche Offshore Technology Providers
FI current trades at 13.5x, a -11% discount to the group's 15.3x average but a -23% discount to its historical 17.7x.
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Frank’s International
Annual Income Statement, 2012-2015E ($ in millions, except per share)
Net income $351 $351 $237 $277D&A 66 78 89 105Deferred tax provision 1 4 3 0Provision for (recovery of) bad d (0) 13 (0) 0Gain on sale of assets (3) (40) (0) 0Changes in value of marketable (2) (4) (1) 0Other-CF (4) 8 20 0Change in working capital (65) (132) (87) (18)Cash from operations $345 $277 $262 $363
Investment Thesis We believe the offshore outlook remains fundamentally strong in spite of short term hiccups concerning floater rig deliveries and temporary excess supply of vessels. As the deepwater rig count continues to outpace the overall offshore rig count, the premium afforded to companies with first-class assets like Gulfmark should increase as larger and more complex equipment is required to make the longer trips from shore base facilities to offshore rigs and platforms. Additionally, energy reform in Brazil and the UK holds the possibility of significantly increasing offshore activity in those two regions, a major positive considering GLF’s market share in the regions. We rate Gulfmark Offshore Buy with a $35 price target based on a 6.0x target multiple on our 2015E EBITDA.
Company Strategy GLF chooses to keep a sizeable portion of its fleet in the spot market to exploit temporary shortages in OSV supply. As of 6/30/14, the company’s forward contract coverage for its fleet for the remainder of 2014 and 2015 is 56% and 20%, respectively. This strategy allows for significant upside during times of OSV undersupply, but also opens up the possibility of lower utilization during times of market oversupply.
Outlook for 2015 IOCs have temporarily reined in capital spending due to investor concerns about poor cash flow and have instead shifted their focus from large, capital-intensive projects towards lower cost onshore projects that generate quicker short-term returns. We view this trend as temporary and expect IOCs to return to large offshore exploration and development projects, particularly as LNG related spending rolls off and companies seek to increase their reserve to production ratios. What does this mean for GLF and other offshore levered companies? With ten percent of global reserves and half of the conventional discoveries over the past four years made in the deepwater space, it is clear that offshore drilling is an integral part of future oil supply plans. As a result we expect activity to continue to moderately grow through the remainder of 2014 and beyond. With a modern well positioned fleet, GLF is poised to benefit from the future exploration and development of offshore fields in the Gulf of Mexico, Brazil, the North Sea, and Southeast Asia.
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Gulfmark Offshore
Key Thoughts and Potential Catalysts According to ODS-Petrodata, the global PSV and AHTS fleet stands at 1,448 active vessels with an
additional 306 vessels under construction. Of the 3,269 vessels in service approximately 642 (20%)of them are over 25 years old with no DP capabilities, introducing the possibility of obsolescence and retirement for a significant portion of the fleet serving to reduce the OSV supply and thus increasing rates and utilization.
While the global service vessel fleet shrinks, 142 jackups and 92 floaters are under construction or planned, adding incremental capacity to the worldwide rig count and increasing demand for offshore service vessels. GLF predicts the delivery of eight North Sea floaters, five North Sea jackups, and 12 GOM floaters through 2015, adds 22%, 14% and 32% respectively to the rig count.
ODS-Petrodata count one rig undergoing acceptance testing, two rigs en route, two rigs under construction and five rigs either in the yard undergoing work or hot stacked with contracts slated to begin in the next six months. The commencement of these 10 contracts, as well as the departure of several competitor OSV vessels due to the temporary weakness, should cause significant market tightening that should benefit GLF due to the high number of vessels it operates in the spot-market.
The October 26th Brazilian election holds the possibility to significantly alter the dynamics of Brazil’s energy industry. Currently, Petrobras is legally required to be the lead operator with a minimum 30% stake in all new pre-salt fields, utilizing platforms and other equipment built in country, as well as sell gasoline below-market prices. These mandates have caused cost overruns and equipment shortages, placing immense financial burden on the company and discouraging foreign investments. A change in regime could change the course of direction in Brazil, lifting import restrictions and trade barriers, as well as further opening up the industry to foreign companies and issue offshore licenses at a faster pace. We believe these developments would lead to increased offshore activity in turn benefitting Gulfmark, as the company owns and operates four OSVs.
About 57% of revenues are derived from IOCs and NOCs, customers who are generally less sensitive to commodity price swings and more steadfast in their development plans, thus providing a more stable, predictable revenue source for the company. Additionally 12% of revenues are from the U.S. government for non-oil related work, providing further insulation from volatility in commodity prices.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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GLFOffshore Technology
GLF current trades at 5.9x, a -8% discount to the group's 6.5x average but a -15% discount to its historical 7.0x.
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Gulfmark Offshore
Annual Income Statement, 2005-2015E ($ in millions, except per share)
Investment Thesis Halliburton is our favorite stock in the group and one that we believe has considerable upside as the North American recovery continues, growth in Latin America accelerates, revenue expansion in the Eastern Hemisphere continues at a moderate pace, and returns to shareholders through buybacks and increased dividends unfold. Halliburton is also the least expensive of the large cap diversified companies. We rate the shares Buy with a $97 price target based on an 18.2x target multiple on our 2015E EPS.
Company Strategy Halliburton’s corporate and financial strategy is clear and consistent with the goals laid out almost four years ago. The company is 1) committed to outgrow the deepwater market by 25% through 2016, 2) planning to triple revenue from mature field work to $9 billion in 2016, and 3) add 500 basis points of margin expansion (without price increases) in North American unconventionals. Other financial targets include a 200 basis point improvement in North American margins by the end of 2014, into the low 20% range in the short-term and back to mid-20% eventually. The company expects international margins to rise to upper teens on average for 2014 and to normalize out in the low 20% range in in the next few years with revenue approaching 60% of the company’s total. Additionally the tax rate is expected to drop by 100-150 basis points, the company plans to reduce DSOs by 10 days (freeing up $1 billion in liquidity), returns should migrate back to 20% (ROCE) by 2016 (from 11% in 2013), use of cash for shareholder returns will move to 35%, and EPS of $7 per share in the next few years assuming market growth and some modest pricing gains.
Outlook for 2015 As the industry moves into 2015 the outlook for Halliburton is very bright. The company will benefit from its leading position in North America as liquid shale activity continues to grow, Eastern Hemisphere drilling plans move modestly higher, especially in most parts of the Middle East, Sub-Saharan Africa, Southeast Asia, and Latin America rebounds in both Mexico and Brazil.
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Halliburton
Key Thoughts and Potential Catalysts Halliburton is the least expensive large cap diversified stock in the group.
The company has a sizeable share buyback authorization and the Macondo liability is mostly gone.
Recent wins in Mexico and the unfolding Energy reform will be particularly beneficial to Halliburton as a leader in that market.
Sizeable contract awards in Ecuador are pushing the company further into mature field activity.
The re-contracting in Brazil will be highly accretive to margins.
Multiple re-rating is deserved.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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HALBig Four Average
HAL current trades at 10.8x, a -7% discount to the group's 11.7x
average but a -26% discount to its historical 14.8x.
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Halliburton
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis As the horizontal well count increases, laterals get longer, and pad drilling offers additional efficiencies for operators, we believe AC rigs (like HP’s FlexRig) will enjoy increased demand and the North American land drilling business will remains robust. As a result of higher rig demand, we expect dayrates will continue to climb, term lengths will increase, and utilization will remain high; even as the supply of AC rigs in the industry increases. Additionally, we believe an increased fleet size (4 deliveries per month) will allow HP to increase margins through operating leverage of fixed costs. Internationally, HP has a strong foothold in Argentina, which has the potential to be a strong market for the company given the optimism surrounding the Vaca Meurta Shale, with seven active rigs and six rigs in-transit for a project with YPF on five-year contracts. We rate the shares Buy with a $108 price target based on 6.0x our 2015E EBITDA. Company Strategy HP, with the most modern and capable land drilling fleet, remains at the forefront of the North American shale revolution. The company has built the most modern and capable land drilling fleet and in doing so offers its clients a value proposition unmatched by competitors. HP’s domestic fleet of 338 rigs (90% AC drive FlexRigs) allows for efficiencies unmatched by mechanical and SCR rigs. AC drive FlexRigs offer increased drilling productivity and reliability, greater rig move capabilities and a safer workplace leading to decreased well costs for operators, even at premium dayrates, and as a result will continue to replace older generation rigs. With an increased newbuild cadence of four rigs, HP will likely continue to lead the land rig market. Outlook for 2015 HP’s future outlook for 2015 is positive. We predict E&P capex budgets will increase 8-9% in 2015 setting a positive backdrop for the oilfield services industry as a whole. In regards to land drillers, we believe dayrates will continue to increase and we expect HP to gain a higher share of this growing pie as it most highly levered to premium AC than any of its competitors is growing its fleet at the fastest pace. HP has publically declared its intention to build four rigs per month through at least September 2015, with the possibility of increasing that cadence to five rigs per month, dependent upon demand remaining healthy and supply chain logistics. Internationally, we view HP’s foothold in Argentina as a possible game changer for the company in the long-term but do not expect much more growth in the immediate term (14 of HP’s 36 international rigs making it the company’s biggest international market).
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Helmerich & Payne
Key Thoughts and Potential Catalysts Average dayrates over the past seven quarters have stayed flat at approximately $28,000/day as
improving spot rates have offset the detrimental effect of term contracts signed during stronger markets rolling off into the spot market or being renewed at lower rates. HP stated that spot rates are still 4% below historical highs, and the company is optimistic it can exit FY15 at or above those levels. Anecdotally, we have been told by a private, high-spec land drilling company that the only impediment to $30,000 rates is the fact that operators have never signed contracts at those rates before.
The build out of approximately 500 rigs between 2012 and 2015 has increased concerns over an impending cliff for dayrates and utilization among certain investors. We feel those fears are overblown as North American horizontal drilling activity continues to remain robust, offering HP an opportunity to displace older rigs currently undertaking those jobs. There are over 1,000 mechanical and SCR rigs operating in the US, with 75% drilling horizontal wells, and an even larger amount of legacy rigs internationally. One last fact, talk of three year contracts for newbuilds and payback periods of 42-48 months for mid-teen returns give us additional room for optimism.
Vaca Viva. A survey by the EIA has estimated potential reserves in the Vaca Meurta shale at ~67.5 Bboe, making it the second largest shale formation in the world and turning the dead cow into the living cow. The potential is obviously there but regulatory headwinds remain with the current government energy policy (price controls and export taxes), the recent government debt default and Argentina’s nationalization of YPF from Repsol all serving as impediments for needed investment. We view large scale development of Argentina as unlikely to accelerate until after the 2015 presidential elections.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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HP
Onshore Drillers
HP current trades at 4.6x, a -1% discount to the group's 4.7x average but a -10%
discount to its historical 5.2x.
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Helmerich & Payne
Annual Income Statement, 2005-2015E ($ in millions, except per share)
Investment Thesis Hercules operates a fleet of 26 domestic and 12 international jackups, as well as 23 liftboats in West Africa. Following a long period of steady dayrate improvement in the U.S. GOM, rate momentum began to decelerate in 2014 and several of the company’s domestic jackups are now idle. We believe there are risks that several jackups could be cold stacked in the near term, adding to the pool of potential candidates for divestiture. Four of the company’s international jackups are currently idle as well, but HERO expects three to return to work in the next few months at slightly lower rates, as the industry absorbs more than 140 newbuilds over the next several years. Meanwhile, HERO’s liftboats are concentrated in West Africa and the Middle East, where offshore activity continues to grow. While we applaud some of HERO’s recent moves to high-grade its fleet, we think the unfolding bifurcation between new and older equipment poses a structural disadvantage to the company’s aging fleet. As a result, we rate the shares Sell with a $2 price target, based on a target multiple of 3.6x our 2015E EBITDA.
Company Strategy Over the past few years, Hercules has pushed through aggressive efforts to high-grade its fleet by: 1) selling four jackups year to date (250, 258, 2002, 2500), and 2) diversifying its revenue mix towards international markets and higher specification assets. Recent efforts include expansion into the North Sea and West Africa, where the company is currently marketing the Hercules Triumph, 260 and 267. The company is currently constructing newbuild Hercules Highlander, contracted to Maersk for five years at about $225kpd. Expected to go on rate by mid-2016 in the HPHT Culzean gas field, the Highlander significantly improves HERO’s earnings visibility for 2016 & beyond. We expect the company to continue divesting its cold stacked domestic jackups in the near term, as the company institutes various cost reduction measures in its domestic offshore segment to address near term demand weakness, such as deferring equipment upgrades and other capital projects. Labor reduction through natural attrition is expected to lower domestic offshore capex by almost 50% on idle equipment. Outlook for 2015 HERO expects the Hercules Triumph to be back on rate by the end of this year or early 2015, with potential North Sea weather delays pushing back the start to 2Q15. We’re modeling the 400’ jackup to be on rate by May at $175kpd, while two other available international jackups (267, 260) return to work over the next couple of quarters at $100s. Domestic activity is expected to pick up by year end following hurricane season and the company is tracking more than 30 rig prospects for short term work in the Gulf. New operators picked up leases during the March lease sale and decent 3D wide-azimuth seismic activity suggests stronger activity in 2015. Capital expenditures are expected to fall in 2015, likely for just maintenance capex and a 10% progress payment on the newbuild Highlander.
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Hercules Offshore
Key Thoughts and Potential Catalysts We’re forecasting HERO to report an EPS loss of $0.04 for 3Q14, on lower Q-Q utilization for all
three reporting segments. While the company expects domestic offshore weakness to persist through the hurricane season, we are concerned recent commodity price weakness could delay HERO’s higher mix of independent E&P operators restarting operations. Meanwhile, extended downtime on older jackups could motivate HERO to cold stack these units, several of which were built in the late 1970s and are likely to be retired.
The industry estimates about 10 jackups need to be retired per year, as the market absorb more than 140 newbuilds being delivered over the next few years. Several of these are expected to replace existing assets due for retirement, but approximately 25% are believed to be non-marketable as they are being built by unexperienced shipyards with untested equipment. HERO is doing its part by divesting four jackups year to date for $28mm, following 12 jackups sold the prior three years, as well as a fleet of inland and platform barges and submersible. The company continues to have a large fleet of cold stacked assets that are candidates for retirement, with proceeds to be reinvested in the fleet (80% of the Highlander payment is due at delivery in 2016).
Historical Multiples
Source: ISI Energy Research, Bloomberg
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'06 '07 '08 '09 '10 '11 '12 '13 '14
HEROOffshore Drillers
HERO current trades at 4.0x, a -30% discount to the group's
5.8x average but a -29% discount to its historical 5.7x.
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Hercules Offshore
Annual Income Statement, 2005-2015E ($ in millions, except per share)
Investment Thesis We believe the offshore outlook remains fundamentally strong in spite of the short term hiccups concerning floater rig deliveries to the GOM and temporary excess supply of OSVs in the region. As the deepwater rig count continues to outpace the overall offshore rig count, the premium afforded to companies with premium assets like Hornbeck should increase as larger and more complex equipment is required to make the longer trips from shore base facilities to offshore rigs and platforms. Additionally, energy reform in Brazil and Mexico holds the possibility of significantly increasing offshore activity in those two regions, a major positive considering HOS’ market share in the regions. We rate the shares Buy with a $52 price target based on a 6.5x target multiple on our 2015E EBITDA. Company Strategy HOS chooses to keep a sizeable portion of its fleet in the spot market to exploit temporary shortages in OSV supply. As of 6/30/14, the company’s forward contract coverage for its current and projected fleet of OSVs for the remainder of 2014 and 2015 was 61% and 25%, respectively. Also as of 6/30/14, HOS’ forward contract coverage for its current and projected fleet for the remainder of 2014 and 2015 is 69% and 20%, respectively. This strategy allows for significant upside during times of OSV undersupply but also opens up the possibility of lower utilization during times of OSV oversupply.
Outlook for 2015 IOCs have temporarily reined in capital spending due to investor concerns about returns and have instead shifted their focus from large, capital-intensive projects towards lower cost onshore projects which generate quicker short-term returns. We view this trend as temporary and expect IOCs to return to large exploration and development projects as LNG related spending rolls off and companies seek to increase their reserve to production ratios. What does this mean for HOS and other offshore levered companies? With ten percent of global reserves and half of the conventional discoveries over the past four years made in the deepwater space, it is clear that offshore drilling is an integral part of future oil supply plans. As a result we expect activity to continue to moderately grow through the remainder of 2014 and beyond. HOS, with a modern, best-in-class fleet, is extremely well positioned to benefit from the further exploration and development of the Gulf of Mexico’s and Brazil’s offshore fields.
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Hornbeck Offshore
Key Thoughts and Potential Catalysts According to IHS-Petrodata, the global PSV fleet stands at 1,448 active vessels with an additional 306
vessels under construction. Of the 1,448 vessels in service approximately 212 (15%) of them are over 25 years old with no DP capabilities, introducing the possibility of obsolescence and retirement for a significant portion of the fleet serving to increase rates and utilization.
In addition to a smaller worldwide service vessel fleet, 142 jackups and 92 floaters are either under construction or planned for construction. Though some of these rigs will serve as replacements, many will be incremental to the worldwide rig count leading to increased demand for offshore service vessels.
According to IHS-Petrodata, there is currently one rig undergoing acceptance testing, two rigs en route, two rigs under construction and five rigs either in the yard undergoing work or hot stacked with contracts slated to begin in the next six months. The commencement of these 10 contracts as well as the departure of several competitor OSV vessels due to the temporary weakness will cause a significant tightening of the market which should see HOS benefit due to the high number of vessels it operates in the spot-market.
About 76% of Hornbeck’s 2013 revenues were generated domestically with the vast majority coming from the Gulf of Mexico where 57% of HOS’ total vessels and 85% of HOS’s U.S. vessels operate, as of Q2 2014. We consider the U.S. Gulf to be the strongest offshore region due to its robust permitting activity, projected increases in active drilling rigs, stable political/operating environment stability and vast potential resources and thus view it as the ideal region for service vessel operators.
Reform to Mexico’s energy sector is well underway and the hopes are that opening the industry to foreign investments will lead to increased deepwater activity. Mexico’s deepwater potential is enormous with over 50% of the country’s 52.6 Bboe of prospective resources located in the deepwater space. Currently, Mexico’s offshore activity is mostly limited to the shallow water market being served by new gen OSVs, but the deepwater space, with its longer transit times, has significantly more revenue potential. HOS recognizes the potential opportunity and is currently pursuing additional organic and acquisitive fleet growth in Mexico, which HOS can add to its existing asset base with no hindrance from Mexican seafaring laws (unlike other non-Mexican competitors). Additionally, the nationalization of Oceanografia following allegations of fraud has caused short-term supply disruptions further benefitting HOS.
The October 26th Brazilian election holds the possibility to significantly alter the dynamics of Brazil’s energy industry. Currently, Petrobras, Brazil’s national oil company, is legally required to be the lead operator with a minimum stake of 30% in all new pre-salt fields, use oil platforms and other heavy equipment built in Brazil and sell gasoline at below-market prices. These mandates have caused cost overruns, equipment shortages thus placing an immense financial burden on the company and discouraging foreign operators. These factors, enacted by current President Dilma Rousseff and her predecessor Luiz Inácio Lula da Silva (of the same political party: Workers’ Party) and allegations of corruption, also leveled at the current administration, have stymied Brazilian activity. If elected, Aecio Neves, the opposition candidate, is expected to undo, at least partially, many of these import restrictions and trade barriers as well as further open up the industry to foreign companies and issue offshore licenses at a faster pace. We believe these developments would lead to increased offshore activity in turn benefitting Hornbeck where the company owns and operates four OSVs. So
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far, just the possibility of Neves’ election has increased the equity value of Petrobras and the foreign exchange rate of the Brazilian Real, exhibiting the promise his election would hold.
About 57% of revenues are derived from IOCs and NOCs, customers who are generally less sensitive to commodity price swings and more steadfast in their development plans thus providing a more stable, predictable revenue source in the face of oil price swings. Additionally 12% of revenues are from the U.S. government for non-oil related work, providing further insulation from volatility in commodity prices.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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HOSOffshore Technology
HOS current trades at 4.6x, an -28% discount to the group's 6.5x average and
a -28% discount to its historical 6.5x.
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Hornbeck Offshore
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Upstream $133 $138 $133 $145 $137 $171 $174 $189 $201 $211 $222 $233Other 15 17 na na na na na na na na na naTotal revenues $148 $154 $133 $145 $137 $171 $174 $189 $201 $211 $222 $233
ExpensesUpstream $56 $59 $59 $65 $69 $71 $77 $83 $89 $93 $97 $101Other 7 7 na na na na na na na na na naTotal Expenses $63 $66 $59 $65 $69 $71 $77 $83 $89 $93 $97 $101
Upstream 57% 57% 55% 55% 50% 58% 56% 56% 56% 56% 56% 57%Other 54% 56% na na na na na na na na na naCompanywide 57% 57% 55% 55% 50% 58% 56% 56% 56% 56% 56% 57%
Investment Thesis A pure play land drilling contractor with a fleet consisting of only AC rigs operating in the Permian? What’s not to love. There are AC rigs and there are ShaleDrillers. ICD’s aptly named fleet consists of 1,500-hp AC rigs all of which are bi-fuel capable with pad optimized omnidirectional walking capabilities, making it one of, if not the most, the premier drilling fleets. As the horizontal well count increases, laterals get longer, and pad drilling offers additional efficiencies for operators, we believe AC rigs (like ICD’s ShaleDriller) will enjoy increased demand and the North American land drilling business will remains robust. As a result of increased rig demand, we expect spot rates will continue to climb, term lengths will increase, and utilization will remain high all leading to better margins; even as the supply of AC rigs in the industry increases. Additionally, we believe an increased fleet size (more than doubling in size) will allow ICD to increase margins through operating leverage of fixed costs. Company Strategy ICD, with one of the most modern and capable land drilling fleet, remains at the forefront of the North American shale revolution. The company has built the most modern and capable land drilling fleet and in doing so offers its clients a value proposition unmatched by competitors. ICD’s ShaleDriller fleet allows for efficiencies unmatched by mechanical and SCR rigs. AC drive ShaleDrillers offer increased drilling productivity and reliability, greater rig move capabilities and a safer workplace leading to decreased well costs for operators, even at premium dayrates, and as a result will continue to replace older generation rigs.
Outlook for 2015 ICD’s future outlook for 2015 is positive. We predict NAM E&P capex budgets will increase 10% in 2015 setting a positive backdrop for the oilfield services industry as a whole, we wouldn’t be surprised to see a higher increase in the Permian as companies enter developmental phase in the basin. In regards to land drillers, we believe dayrates will continue to increase as the benefits offered by premium AC rigs are better understood by the market.
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Independent Contract Drilling
Key Thoughts and Potential Catalysts Continuing improvements in U.S. land pricing. ICD’s gross margins per rig averaged $9.3K per day
during Q2. Commentary from recent competitor conference calls suggest that spot rates have at least 5% upside from current leading edge levels of $26-$28K/d and ICD’s 2015 margin exit rate guidance of $11K/d-$12.5K/d suggest dayrates have significant upside. Anecdotally, we have been told by a private, high-spec land drilling company that the only impediment to $30,000 rates is the fact that marketers have never signed contracts at those rates before. `
Oversupply? The current build out of approximately 500 rigs between 2012 and 2015 has increased concerns over an impending cliff for dayrates and utilization amongst certain investors. We feel those fears are overblown as North American horizontal drilling activity continues to remain robust, offering ICD an opportunity to displace older rigs currently undertaking those jobs. ICD is particularly well insulated since it operates exclusively in the Permian Basin, the hottest NAM shale play where only 49% of horizontal wells are drilled by AC rigs, and its equipment is all state of the art. One last fact, talk of three year contracts for newbuilds and payback periods of 42-48 months for mid-teen returns give us additional room for optimism.
Economies of Scale. – ICD currently has nine rigs in operation, with a tenth rig currently mobilizing after being fitted with an omnidirectional walking system. ICD’s 11th rig is scheduled for completion in December and the company plans to deliver seven and nine newbuilds during 2015 and 2016, respectively. As the fleet grows EBITDA margins should also increase as fairly consistent G&A expenses will be spread over a larger revenue base and opex related to training costs and mobilization fees should decrease on a per rig basis as ICD achieves partial economies of scale.
Adjacent basins provide opportunities for expansion. ICD has stated that it will eventually look to expand to regions outside the Permian and specifically mentioned other areas of Texas, Louisiana, New Mexico and Oklahoma as potential areas. The company has historically worked in both the Eagle Ford and the Mid-Continent. We believe ICD would do well in both of these oil provinces as AC rigs drill only 41% of the horizontal wells in aggregate, affording the company a strong opportunity to displace older rigs.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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12x
'06 '07 '08 '09 '10 '11 '12 '13 '14
ICD
Onshore DrillersICD current trades at 7.5x, a 57%
premium to the group's 4.7x average.
October 14, 2014
198
Independent Contract Drilling
Annual Income Statement, 2012-2015E ($ in millions, except per share)
Investment Thesis We believe the company’s Ocean Bottom Services Segment has the potential to significantly change the company’s fortunes. It is the fastest-growing segment within the company with ~400% growth since 2006 and is more skewed towards the development and production phase of the E&P lifecycle thus outperforming exploration focused segments. However, the company still has underperforming lines that we believe inhibit the company from reaching its full potential and should be divested. Though the stock does look cheap at current levels, unprofitable business lines and significantly reduced exploration activity levels lead us to initiate the company with a Hold rating and a $3 PT. Company Strategy In an attempt to better position itself for a resumption in seismic activity the company is diversifying itself across higher value areas of the E&P lifecycle while managing the business conservatively and focusing on cash generation. The company is also in the process of restructuring its systems and data processing businesses for profitability. Outlook for 2015 We believe the company’s Ocean Bottom Services Segment has the potential to significantly change the company’s fortunes. It is the fastest-growing segment within the company with ~400% growth since 2006 and is more skewed towards the development and production phase of the E&P lifecycle thus outperforming exploration focused segments. However, the company still has underperforming lines that we believe inhibit the company from reaching its full potential and should be divested. Though the stock does look cheap at current levels, unprofitable business lines and significantly reduced exploration activity levels lead us to initiate the company with a Hold rating and a $3 PT.
October 14, 2014
202
ION Geophysical
Key Thoughts and Potential Catalysts IO is systematically moving away from equipment sales (sold its marine source product line) and
gradually shifting to E&P solutions, where it expects to generate 80% of its revenue during 2014, up from 45% of 2009 revenues. As part of this shift it made Calypso exclusive to OceanGeo and is leveraging capex to develop next gen solution for Ocean Bottom Services.
Historical Multiples
Source: ISI Energy Research, Bloomberg
2x
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6x
8x
10x
12x
14x
'06 '07 '08 '09 '10 '11 '12 '13 '14
IO current trades at 2.1x, a -69% discount to its historical 7.1x.
October 14, 2014
203
ION Geophysical
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis Key’s extensive product lines give the company exposure to the entire well life cycle as well as various geographic regions within the U.S. As a result KEG stands to benefit significantly from the improving dynamics in the U.S. land market. There are some short-term headwinds though as well intervention demand, KEG’s bread and butter, has lagged behind drilling and completion activity. Slightly offsetting these headwinds is KEG’s completion products (Coiled Tubing and Fishing and Rentals). Mexican exposure has also served as a hindrance for the company, though activity in the region should return following Mexico’s energy reform. All in, we are bullish about KEG’s prospects if the company executes its strategy properly, though exact timing remains difficult to predict. We rate the shares Buy with a $26 price target based on a 5.0x target multiple on our 2015E EBITDA.
Outlook for 2015 As laterals get longer and the stage count per well continues to increase, KEG’s completion driven business will perform strongly. The real opportunity for Key comes from its production services business which is responsible for 60% of the company’s revenues and could see similar growth to the completion business. Most North American liquids basins experience first year decline rates in excess of 50%, to offset that decline operators have been drilling new wells. As most plays enter the development stage, we believe workover activity will increase in relationship to new drilling activity as inventories deplete and operators look for new ways to increase production. Internationally, Mexican reform is progressing well and round one bids for unconventionals and onshore activity are expected in January and February and data rooms are opening in March and April, respectively.
October 14, 2014
207
Key Energy Services
Key Thoughts and Potential Catalysts Changes in Organizational Structure. The company has experienced several setbacks over the past
couple quarters including possible violations of the Foreign Corrupt Practices Act in Russia and Mexico and a slow response in reducing the company’s fixed cost base in Mexico following the downturn in activity. To combat and prevent many of these issues from repeating, KEG has changed its historically centralized management structure to a direct reporting structure where each line of business reports directly to the CEO. Linking management and revenue generating employees should give management a better grip on operations and improve execution of the company’s strategy.
Rig Services. Although NAM land activity has surged over the past few years, KEG has not benefitted as much as the drilling and completion levered companies. KEG has felt the brunt of E&P operators decision to prioritize drilling new wells and adding inventory via capex instead of spending opex on well interventions focused on repair and maintenance, as a result production markets continue to lag drilling and completion demand. We believe the capex versus opex competition will move back into balance, possibly hastened by depressed commodity prices, which should revitalize KEG’s Rig Services segment (48% of Q2:14 revenue).
Mexico. KEG continues to rotate rigs out of Mexico, and we predict operations in the region will remain challenged through the rest of 2014 as PEMEX again limits capital spending during its energy reform process. We believe the prospects for 2015, especially in the north Chicontepec region where KEG is most active, are exciting. Part of the formation will be operated exclusively by PEMEX with the remainder being run by incentivized contracts and partnerships. This gives KEG the opportunity to expand its customer base in the area beyond its traditional customer (PEMEX). Furthermore, if optimism surrounding the potential of the Eagle Ford in Mexico turns into concrete development activity, KEG stands to benefit as it already has a foothold with PEMEX.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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3x
4x
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7x
8x
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10x
11x
'06 '07 '08 '09 '10 '11 '12 '13 '14
KEG
Production & Completion Services
KEG current trades at 4.9x, a 2% premium to the group's 4.7x average but
a -4% discount to its historical 5.1x.
October 14, 2014
208
Key Energy Services
Annual Income Statement, 2006-2015E ($ in millions, except per share)
Investment Thesis As the largest distributor of PVF (Pipe, Valves and Fitting Products) to the energy industry, MRC is well positioned for the ongoing acceleration of NAM activity. We believe this is proven by the company’s record Q2 backlog of $1.125B. Internationally, the company’s recent acquisition spree has increased its international profile and has provided the company with another avenue of growth. We initiate with a Buy and a $30 PT
Company Strategy MRC is a well-diversified energy behemoth offering integrated supply chain services to its customers in the downstream, midstream and upstream markets. MRC strives to add value to its customers by offering cost savings, technical assistance, warehouse and logistics management, inventory consignment, and customized IT solutions. With ~25% of revenues from both the downstream and midstream segments and slightly less than 50% of revenues from the upstream segment the company makes it a point to remain well diversified across each segment . Geographically, 87% of revenues are from NAM (14% Canada vs. 86% USA) with the remainder coming from Asia and Europe. We view this mix positively as we predict NAM capex will outpace growth from the ROW. We believe the company will eventually extend its reach in the Middle East and South America markets as prospects for those markets are very strong, we view an entry via acquisition as likely strategy considering the company’s past acquisitions.
Outlook for 2015 As NAM capex across the three energy sub-sectors outpaces spending growth in the rest of the world, we expect 2015 to be another year of record backlog for MRC as well as record earnings, characterized by higher margins thanks to this year’s record backlog.
October 14, 2014
212
MRC Global
Key Thoughts and Potential Catalysts Projected increased spending by Williams (WMB), one of MRC’s bigger midstream customers, could
catalyze growth for MRC in the segment. The upstream arena should experience the strongest growth during 2014, management noted that the segment’s core business could grow ten percent YoY.
Historical Multiples
Source: ISI Energy Research, Bloomberg
7x
8x
9x
10x
11x
12x
'06 '07 '08 '09 '10 '11 '12 '13 '14
MRC
DNOW
MRC current trades at 7.7x, a -3.% discount to its historical
8.0x.
October 14, 2014
213
MRC Global
Annual Income Statement, 2008-2015E ($ in millions, except per share)
Investment Thesis As a pure play contract driller, Nabors should benefit from strengthening activity in its core U.S. land market, where activity and pricing is inflecting higher. The company is also expanding Internationally, particularly in the Middle East and Argentina, where demand is strengthening for NBR’s high spec newbuild PACE-X rigs. We added upside from ownership interest in CJES shares post the merger with Nabor’s C&P segment, we rate NBR Buy with a $29 price target based on a target multiple of 6.0x our 2015E EBITDA.
Company Strategy Nabors is transitioning to a pure play global contract drilling company with the planned merger of its Completions & Productions business to C&J Energy Services. The company will receive $940mm cash and retain a 53% stake or 62.5mm shares of the new C&J, valuing the transaction at $2.86bn or about 8x our 2014E EBITDA. Owning shares of the new C&J allow NBR shareholders to benefit directly from C&J’s growing international expansion and potential valuation uplift, while eliminating the highly cyclical C&P segment allows Nabors to streamline its operations around its core competency. The company combined multiple engineering organizations into a single group, which should lower capex and concentrate human and financial capital over time. The transaction also free up capital for expansion of NBR’s high-spec AC fleet (95% utilization). Having received significant awards for 62 rigs (40 PACE-X) since 2012, Nabors is aggressively building land drilling rigs on spec and plans to build four per month by January for both domestic and international deployment. The company also has some shallow water assets (barges, jackups), but these are likely to be divested over time, with proceeds returned to shareholders in the form of both a higher regular dividend and share repurchases.
Outlook for 2015 Shareholders are expected to vote on the proposed NCPS and CJES merger later this year, with the deal closing before year end and be immediately accretive to earnings. We estimate the recent $250mm share repurchases account for an extra $0.05-0.10 to our 2015E EPS estimate. With plans to build four PACE-X rigs per month by January, Nabor’s PACE-X fleet count should ramp up sharply from almost 35 at the end of this year (vs. just one in 1Q13). We believe another dividend increase and more share repurchases are likely in 2015, as the company continues to generate significant cash from operations, but expect the year to be relatively uneventful for Nabors as management executes on its recent strategic transformation. The company has relatively modest exposure to geographically sensitive areas with six rigs in Russia, three in Iraq/Kurdistan and two in Yemen of 119 international rigs currently. New rigs are going to relatively safe Saudi Arabia and Argentina, as the company continues to high grade the Lower 48 with new AC rigs for pad drilling.
October 14, 2014
217
Nabors Industries
Key Thoughts and Potential Catalysts Nabors operates in 25 international countries and the new Global Alliance Agreement with C&J
Energy Services serves to accelerate the company’s international expansion by leveraging NBR’s existing footprint and relationships. While the company retains a 53% stake in the new CJES, Nabors is not required to contribute capital for CJES’s fleet growth or geographic expansion, which should allow NBR’s capex to fall from $1.8bn in 2014. Meanwhile NBR shareholders retain upside potential in CJES shares through possible cash distribution and/or public offering of its 62.5mm shares.
We forecast NBR to generate significant free cash flow in 2015, freeing cash to further lower debt (total debt currently 2.3x LTM EBITDA) and return to shareholders (not yet incorporated in our estimates). In addition to a 50% increase in its regular dividend effective this quarter, the company recently repurchased $250mm of stock or about 10% of shares outstanding. We believe additional share repurchases are likely with shares trading down sharply in recent months and the company poised to collect $940mm in cash from the C&J merger.
Historical Multiples
Source: ISI Energy Research, Bloomberg
2x
3x
4x
5x
6x
7x
8x
9x
'06 '07 '08 '09 '10 '11 '12 '13 '14
NBR
Onshore Drillers
NBR current trades at 4.3x, a -8% discount to the group's 4.7x average but
a -18% discount to its historical 5.3x.
October 14, 2014
218
Nabors Industries
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis NOV is a large cap capital equipment provider for the oil services industry, with its primary product line being drilling rigs used in all environments. The company pioneered the offshore drilling “kit”, working with shipyard to package equipment used in drilling from the top drive to BOPs. Plans to expand into floating production platforms have been slow, due to the nature of these large investments. However, the company appears to be winning market share with its land drilling and production & completions equipment. While choppiness in the offshore rig markets will likely weigh on new order in the near term, the company is working on a record backlog that should yield strong cash flow. NOV recently announced a large buy-back program that should be highly accretive to the stock. We believe NOV is one of the best ways to invest in the oilfield equipment revolution, rating the shares Buy with a $101 price target based on a 14.9x target multiple on our 2015E EPS.
Company Strategy The company recently announced a $3bn share repurchase program over three years, funded by U.S. cash or borrowing from time-to-time; however, we think the pace will be even faster with the company generate substantial cash build over the next several quarters. With a larger installed base of NOV built-rigs, the company is seeing growing demand for aftermarket parts and services, with revenues increasing in the low single digits range and steady margins for the foreseeable future.
Outlook for 2015 Despite a near record backlog, margins have been flat due to an unfavorable mix and higher cost from capacity expansion, though NOV expects pricing increases and manufacturing efficiencies from new capacity additions could provide “modest” margins expansion in 2015. Orders are likely to remain low with the offshore floating rig market downturn extending into 2016, though NOV may see orders for rigs with Arctic capabilities, 20k PSI, or for invention and well construction activity. Demand for jackups is expected to remain steady, though there are currently very few floater deliveries scheduled for 2017. Demand for land rig is expected to remain strong for the next several quarters, though not enough to offset falling floater demand. NOV’s wellbore technology segments is also adding significant roofline capacity and machinery investments, targeting downhole tools, instrumentation and solids control.
October 14, 2014
222
National Oilwell Varco
Key Thoughts and Potential Catalysts NOV’s Rig Systems segment average normalized margins in the low 20% range, with aftermarket
margins very steady in the high teens. While new capital equipment orders can swing from quarter to quarter, the company continues to build a large installed base for its aftermarket services.
Bookings in the Completion & Production segment should continue to improve, with growing demand for well intervention and stimulation equipment, as well as improved revenues for FPSOs.
NOV closed five M&A deals in the first half of 2014 for $110mm, paying an average of less than 6x TTM EBITDA. The company continues to pursue a number of smaller transactions, though are unlikely to pursue larger deals as it seeks to optimize the balance sheet and capital structure to enhance shareholder value.
NOV expects to share detailed strategic plans with investors in November.
Historical Multiples
Source: ISI Energy Research, Bloomberg
3x
8x
13x
18x
23x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
NOVCapital Equipment
NOV current trades at 10.7x, a -15% discount to the group's
12.6x average but a -19% discount to its historical 13.3x.
October 14, 2014
223
National Oilwell Varco
Annual Income Statement, 2005-2015E ($ in millions, except per share)
Investment Thesis Noble is a diversified offshore contract driller, with a balanced fleet of 19 floaters and 12 jackups. The majority of the fleet is considered high spec, averaging 12 years old. A high mix of newer drillships are in US GOM earning above average margins, but the company also has several older but upgraded semisubs in the region at risk of going idle. Brazil risk has been reduced with company mobbing recently released units to Eastern Hemisphere, but with others following same strategy is finding it difficult to put those assets to work. The jackup fleet is very solid, with high exposure to top customers in the Eastern Hemisphere. We expect the company to weather through the downturn and maintain its dividend, with newbuild commitments wrapping up timely, but remain cautious as there are uncertainties about the potential next step for the company, particularly if the company pursues a potential MLP IPO or M&A activities. We rate the shares Buy with a $25 price target based on a 7.2x target multiple on our 2015E EBITDA.
Company Strategy Noble Corp. recently completed its strategic transformation into a high specification offshore contractor. The company is now in harvest mode and about to start-up the last of its fourth Gusto P10000 newbuild drillship on a 3-yr contract in the U.S. GOM. Noble will take delivery of the final two F&G JU-3000N newbuild jackups next year, one of which is uncontracted, but the company will have largely completed its newbuild program with just one until under construction for 2016 delivery. Longer term Noble plans to divest five standard specification assets it retained for strategic reason, leaving it with an even greater mix of premium assets but similar jackups and floaters mix. The company could expand its fleet through potential M&A, possibly funded by an MLP, or a newbuild backed by a contract.
Outlook for 2015 Noble staunchly defends it will at least maintain its current $1.50 annual dividend (8% yield), as the company expects to turn free cash flow positive early in 2015 with just two newbuild jackups being delivered. Given the sharp share price correction, we believe reactivation of the share repurchase program is increasingly likely, though it will require shareholder approval at the April Annual General Meeting. If the market downturn persist, M&A could also be likely, with Noble targeting premium assets in select locations with select customer exposure, possibly funded by a potential MLP. Operationally the company is optimistic for a market recovery in 2016, but expects dayrates to adjust lower before the bottom is realized, signaled by more rigs going back to work. While Noble has just one semisub contracted to Petrobras in Brazil (Dave Beard through April 2016), the NOC could possibly call the market bottom by taking more rigs than expected in an upcoming tender. With a highly contracted drillship and jackup fleet, Noble has little availability outside of five semisubs (Danny Adkins, Max Smith, Noble Driller, Paul Wolff, and Homer Ferrington) in 2015, two in the U.S. GOM and the other three in Eastern Hemi.
October 14, 2014
227
Noble Corp
Key Thoughts and Potential Catalysts Noble’s October 9th fleet status report detailed incremental downtime for the Globetrotter I and
later contract starts for the Amos Runner and David Tinsley, putting management’s 2014 unpaid fleet operational downtime target of 5% at risk. We’re modeling 3Q14 contract drilling costs near the midpoint of management’s $375-425mm guidance range, but note consensus estimate implies costs closer to $385mm. Last quarter management noted it was seeing “early signs” of support in the floater market with a slight pickup in activity, but this appears to have faded as few term contracts were announced in 3Q.
Noble believes 25% of jackups under construction won’t make it to the market and we believe the company is well protected from a potential supply-driven downturn having divested the majority of its standard specification assets to Paragon Offshore. With the exception of a few units working for key Middle East customers, almost all of Noble’s jackups were built in 2009 or more recently. We expect all three (of 15) units rolling off contract over the next 12 months to remain active at attractive dayrates, seeing potential upside from the final F&G JU-3000N newbuild Noble Sam Hartley starting up ahead of our 2H15 target at rates above our $183kpd estimate.
We’re modeling all three (of 11) available semisubs (Paul Wolff, Max Smith, Homer Ferrington) to earn zero rate indefinitely but make no assumptions about potential capex needs to upgrade these rigs in the near term. We’re concerned the Noble Driller and Paul Romano may experience extended gap time when they roll off contracts at year end, particularly as the company lost out on a recent Pemex midwater tender and has no exposure to the region currently, which could make it more difficult for Noble to gain share in the post-reform deepwater market (likely a 2017-2019 event).
Having completed its spin-off of Paragon Offshore, NE is re-evaluating the MLP structure. We view an MLP IPO as unlikely in the next 12 months.
Historical Multiples
Source: ISI Energy Research, Bloomberg
2x
4x
6x
8x
10x
'06 '07 '08 '09 '10 '11 '12 '13 '14
NEOffshore Drillers
NE current trades at 6.4x, an 10% premium to the group's
5.8x average and a 7% premium to its historical 5.9x.
October 14, 2014
228
Noble Corp
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis North Atlantic Drilling is an offshore drilling contractor specializing in harsh environment. The company has a fleet of six floaters (five semisubs, one drillship) and five jackups, several of which are contracted to Rosnef in a multi-year multi-rig package.
Company Strategy In August 2014, North Atlantic entered into agreement with Russia’s largest oil producer, Rosneft to sell a 30% ownership stake in exchange for approximately 150 land drilling rigs and accompanying five-year contracts for six rigs. Adding $4.1bn to the backlog, the transaction is expected to close in 4Q14. Majority shareholder Sea drill will continue to own more than 50% of NADL, as well as providing managerial services.
Outlook for 2015 NADL is more than 90% sold out in 2015, with exposure only in the West Venture and West Phoenix when they roll off contract with Statoil and Total in July and October 2015, respectively. We’re modeling both semisubs to stay on rate, with the West Venture incurring 50 days for five-year certifications. Management indicated it is in the process of ordering two jackups for 2017 delivery, suggesting orders could be placed in the next few quarters.
October 14, 2014
232
North Atlantic Drilling
Key Thoughts and Potential Catalysts The company estimates that 100s wells need to be drilled in Russia over the next decade, signing an
Investment & Cooperation Agreement with Rosneft for onshore & offshore markets through 2022. Plans to acquire 150 land rigs with 5+ year contracts on each rig should be finalized shortly, with the companies working in the integration phase currently. NADL plan to record cash proceeds from the transaction, likely to repay the drawn credit facility and secure more drilling capacity.
The company continues to monitory sanctions.
Historical Multiples
Source: ISI Energy Research, Bloomberg
3x
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5x
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7x
8x
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'06 '07 '08 '09 '10 '11 '12 '13 '14
NADLOffshore Drillers
NADL current trades at 5.1x, a -11% discount to the group's 5.8x average.
October 14, 2014
233
North Atlantic Drilling
Annual Income Statement, 2011-2015E ($ in millions, except per share)
Investment Thesis Spun off from National Oilwell Varco’s Distribution business, NOW Inc. is a leading distributor of oilfield equipment and supply chain management services to the upstream, midstream, downstream and industrial markets. The company offers a diverse range of products including MRO supplies, pipes, valves, fittings, mill and industrial supplies, tools, safety products, and artificial lift systems. DNOW also provides supply chain services including inventory and warehouse management, logistics, business processing and business process and performance metrics reporting. DNOW leverages the scale of its customers’ collective demand for supplies through a network of more than 300 branches worldwide, serving customers in over 90 countries around the world and in turn providing a highly diversified revenue stream. With the shares trading at a premium to MRC Global, we rate DNOW Hold with a $30 price target based on a 17.3x target multiple on our 2015E EPS.
Company Strategy With a clean balance sheet, NOW Inc. plans to consolidate the oilfield distribution industry, which consists of several regional players. Management has a target list of more than two dozen targets, though we expect the purchase price is similar to NOV, which traditionally pays about 6.0x TTM EBITDA. With about 50% of the company’s cash situated outside of the U.S., we believe the company is likely to target international expansion in the Middle East and Asia.
Outlook for 2015 Efforts to integrated DNOW, overhaul the company’s sourcing methodology, consolidate facilities, and a new single ERP system are expected to product significant margin expansion in 2015-16, with the company targeting +8% EBITDA margins by year end 2015.
October 14, 2014
237
NOW Inc.
Key Thoughts and Potential Catalysts NOW Inc’s business model is highly scalable with low fixed costs and minimum capital requirements.
Pricing remains competitive, with companies increasing looking to lower costs by improving operating efficiencies.
The company guide to mid-to-high single digit growth, and is taking steps to improve working capital, targeting 60 DSO.
Spin related costs negatively impacted results the last few quarters, but is expected to wind down to just $4mm of incremental costs in 3Q14.
Historical Multiples
Source: ISI Energy Research, Bloomberg
7x
8x
9x
10x
11x
12x
'06 '07 '08 '09 '10 '11 '12 '13 '14
DNOW
MRC
DNOW current trades at a 19% premium to MRC
October 14, 2014
238
NOW Inc.
Annual Income Statement, 2006-2015E ($ in millions, except per share)
Investment Thesis Ocean Rig is a deepwater offshore contractor, operating a fleet of two harsh environment semisubs and 11 high specification drillships. The company has three ultra-deepwater drillships under construction available, with the first Ocean Rig Santorini scheduled for June 2016 delivery while the other two other units for 2017 delivery were ordered earlier this year. The majority of ORIG’s fleet is contracted through 2016 and beyond, however, the company has two drillships rolling off contract with Petrobras within the next six-to-eight months while the Eirik Raude rolls off its current contract in the Falkland Island at the end of 2015. With more than 70% of available days in 2015 contracted and the two Petrobras rollovers in advanced discussions for long term contracts, the company recently initiated a $0.19 quarterly dividend. Meanwhile, plans to create an MLP structure with three existing units has been repeatedly delayed, though we expect the transaction to occur by mid-2015 or earlier. With a highly contracted fleet operating at among the highest gross margins for the group and potential cash monetization from a potential MLP, we rate ORIG a Buy with a $34 price target based on a 7.2x target multiple on our 2015E EBITDA.
Company Strategy Spun off from DryShips in 2011, Ocean Rig is a pure play deepwater contract driller, with a young fleet of high spec assets that operate at very high >95% operating efficiency. While the company has accumulated significant debt from its fleet addition in recent years, management has taken all necessary steps to create an MLP structure that should monetize the existing fleet and provide cash to delever and increase distribution to shareholders. The only issue now is a matter of timing the IPO, as initial plans call for the MLP to begin with one-third interest in three existing units (still yet to be finalized), with ORIG maintaining 85% of the MLP’s cash flow. With a smaller fleet and pipeline of newbuilds than RIGP or SDLP, the company plans to drop down assets with minimum four-year term and at fractional interest of 20-40% over time, with the first drop down to take place six months after the IPO and another at the one year anniversary.
Outlook for 2015 We expect contract renewals for the Ocean Corcovado and Mykonos to be announced before the end of this year, with Petrobras keeping both units employed until 2018 which should extend the company’s contracted status to 86% in 2015. Management indicated it is also in discussion with Total to extend the Olympia, the only other unit with 2015 availability, through 2016. Meanwhile, plans to launch an MLP IPO has been repeatedly delayed, but we believe the transaction will happen by mid 2015 as management sees significant valuation uplift with driller MLP peers trading as much as $1.2bn EV per UDW unit recently vs. the company’s implied sub $450mm EV per UDW unit currently.
October 14, 2014
242
Ocean Rig
Key Thoughts and Potential Catalysts Management indicated it is seeing increased interest for the Ocean Rig Santorini, its next available
newbuild scheduled to be delivered in June 2016, for projects in the U.S. GOM, Brazil, West Africa, and the Black Sea.
Ocean Rig estimates the cash flow breakeven for its ultra deepwater rigs is about $350kpd, which includes $10kpd for principal repayment and $90kpd for cash interest expense. With an average dayrate for the fleet at $516kpd, the company generates $60mm of annual free cash flow per unit and $540mm on a 9-fleet basis, poised to increase with three newbuilds under construction.
Petrobras is expected to renew the Ocean Rig Corcovado and Mykonos, which is already outfitted with dual activity drilling. Management estimate the Mykonos recently completed a well 29% faster than an older single-activity drilling unit, providing substantial cost savings for the NOC. Dayrates for Petrobras renewals are estimated in the $460-505kpd range for newer units and less than $400kpd for older assets, with Petrobras widely expected to call the market bottom for the industry.
Historical Multiples
Source: ISI Energy Research, Bloomberg
3x
5x
7x
9x
'06 '07 '08 '09 '10 '11 '12 '13 '14
ORIGOffshore Drillers
ORIG current trades at 6.0x, an 3.% premium to the group's 5.8x average but a -19% discount to its
historical 7.4x.
October 14, 2014
243
Ocean Rig
Annual Income Statement, 2008-2015E ($ in millions, except per share)
Investment Thesis Oceaneering is a pioneer in underwater robotics, contracting ROVs for drill support services and vessel-based services. With a higher mix of its ROVs on new ultra deepwater rigs, OII has relatively lower risks from floaters rolling off contract, with upside from vessel works for subsea equipment installation. The company adds about 20 new ROVs to its fleet each year, all fully contracted by oil & gas operators, while retiring 12-15 units annually. While the majority operating income is sourced from ROVs, management views the Subsea Products segment as its main source for growth. Subsea hardware and tools focus on the construction side, for the life of the field, while the umbilicals market remains more than 2x oversupplied. With Douglas-Westwood forecasting an 80% pickup in subsea systems spending over the next five years, we rate OII shares Buy with a $93 price target based on a 19.8x target multiple on our 2015E EPS.
Company Strategy The majority of OII’s ROVs operate in the U.S. GOM and Africa, with the company sharply trimming back its Brazil exposure a few years back. ROV has 60% market share in the drill support market, but this is likely much higher among ultra deepwater rigs as the company wins the majority of ROV awards on newbuild rigs. With cash building, OII prioritize the use of cash for organic growth, bolt-on acquisitions, dividends, and share repurchases. The company recently increased its regular quarterly dividend and has been buying back stock opportunistically.
Outlook for 2015 The longer term outlook for OII remains positive, with global demand driven by deepwater drilling support, field development, as well as inspection, maintenance and repair (IMR) activity. Average ROV dayrates on hire continues to trend higher with customers not pushing back on pricing, offsetting a pause in fleet utilization at about 85%. However, Subsea Products backlog is likely to trend lower as the company executes the large Angola project for BP, with margins expect to improve Y-Y.
October 14, 2014
247
Oceaneering
Key Thoughts and Potential Catalysts Management guided to 3Q EPS of $1.10-1.15, with all segment revenue up Y-Y.
OII ROVs have been contracted on 19 of 21 recent newbuilds, with the company maintaining very high market share on the newest ultra deepwater rigs.
When a rig goes off rate, operators have the option to pay for ROV equipment to be taken off the rig. OII is more likely to leave the equipment on the rig if it is likely to be picked up by a new customer, but would demobe if the rig is going to be cold stacked. The small ROV crew immediately goes off payroll, eliminating all costs except depreciation.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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OIINiche Offshore Technology Providers
OII current trades at 13.5x, a -11% discount to the group's 15.3x average but a -21% discount to its historical 17.1x.
October 14, 2014
248
Oceaneering
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis States is a SMID cap capital equipment provider. The company has been restructuring its business, selling off the accommodations unit and refocusing on completion & drilling services at the well site and offshore products. With exposure to both the key U.S. land basins and the global offshore We rate the company Buy with a $71 price target based on a 16.5x target multiple on our 2015E EPS.
Company Strategy Now a smaller more focused company, OIS is seeking new M&A opportunities, targeting tuck-in acquisitions to expand its technology offering or into new geographic markets. Having added new capacity in India, Thailand, Tulsa, Vietnam, the U.K. and Brazil over the last two years, the company is now likely to target smaller private companies in the $40-75mm range, though management has indicated it may look towards further share repurchases if it cannot find attractive deals.
Outlook for 2015 Book to bill in Offshore Products has been, with the company maintaining a record backlog at likely higher margins. Less exposed to offshore development delays or weakness in the offshore rig construction market as only 10% of revenue is from rig construction, OIS produces connectors and other pipeline equipment for both deepwater and shallow water environments. The company’s well site operations is highly levered to North America land drilling, with isolation tools, well testing and flowback, wireline, and coiled tubing, just to name a few of the company’s offerings. OIS’s fleet of fit-for-purpose land rigs include 34 semi-automatic units, operating primarily in West Texas and the Rockies. Drilling services utilization should continue to improve steadily over time, though a 10% drop in utilization is equivalent to about a $5,400/day drop in cash margins. We’re modeling the company to grow revenue and expand margins in both operating segments, though expect margins to remain below their historical peaks.
October 14, 2014
252
Oil States International
Key Thoughts and Potential Catalysts With Well Site Services, OIS expects demand for completion services to strengthen, somewhat offset
by slightly lower contribution from drilling services with utilization sliding to 85% from 91% last quarter. Management guided for margins to improve sequentially in this segment to 32-34%.
Revenue from Offshore Products is expected to range $250-260mm in 3Q14, with margins slipping to 20-22% from 22.4% last quarter.
Interest expense drops substantially in 3Q, with a substantial of the company’s debt transferred to Civeo, the former Accommodations business.
The company aggressively bought back stock over the last quarter, with the average share count dropping to 50.4mm from 53.1mm the prior quarter, a 5% decline and adding $0.05 to our 3Q EPS estimates. While OIS did not extend the share repurchase program, continued weakness in stock makes it a strong possibility the company will likely keep buying back shares
Historical Multiples
Source: ISI Energy Research, Bloomberg
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OIS
SMID Cap Capital Equipment
OIS current trades at 14.1x, in line with the group's average but a 110% premium to its historical 6.68x.
October 14, 2014
253
Oil States International
Annual Income Statement, 2007-2015E ($ in millions, except per share)
Investment Thesis PACD is developing a solid reputation for operational and technological excellence. The company is an ultra-deepwater pure play with a growing asset base and strong customer relationships. While the ultra-deepwater market is currently undergoing a supply-driven softening, we continue to think long-term fundamentals remain attractive. We rate the shares Buy with a $12 price target based on 7.2x our 2015E EBITDA.
Company Strategy With among the youngest fleet of ultra deepwater drillships, Pacific Drilling benefits from lower maintenance and operating costs for a standardized fleet of 10-12k ft. drillships from Samsung Heavy Industries. All six active floaters are working in the Golden Triangle, allowing the company to post almost the strongest gross margins for offshore contract drillers at almost 60% last quarter. Revenue and EBITDA should ramp up in the near term from the start-up of the newest drillship Pacific Sharav and the Pacific Bora rolling onto a higher dayrate of $586kpd vs. $474kpd previously; however, the next newbuild Pacific Meltem faces uncertain contract risk as the $600mm drillship remains available but is undergoing final testing in the shipyard for early 4Q14 delivery. While the company has traditionally built on spec, management is deferring further fleet additions until it secures commitment for at least one of two uncontracted newbuilds, with the final Pacific Zonda likely at least three months delayed from its current 1Q15 expected delivery.
Outlook for 2015 Management indicated the Meltem could start work in 1Q15 through direct negotiations, and we are modeling the 12k ft capable drillship to start work in February at a rate of $505kpd. We believe Pacific’s newest drillship could be picked up by Petrobras at similar rates as the Pacific Mistral, which we are modeling to renew for 3-years following its current 3-year $458kdp contract in February. Our estimates are likely below consensus as we’re modeling downtime in 2015 for the Mistral for managed pressure drilling upgrades, but expect the loss in revenue to be offset by the Sharav and Meltem, while margins remain relatively steady as costs are capitalized. With an $800mm undrawn credit facility available and positive operating cash flow, Pacific should have adequate financial flexibility for its remaining $940mm in newbuild commitments and new 2015 cash distribution. Shareholders approved the $0.17 quarterly dividend commencing 1Q15 and management expects to fund it with cash from operations. With the final newbuild payment scheduled for mid-2015, we forecast Pacific’s free cash flow to ramp up sharply for debt reduction, with management targeting 3.0-3.5x EBITDA and 40-50% net-debt-to-cap within five years (vs. the current 5.5x and 50% respectively).
October 14, 2014
257
Pacific Drilling
Key Thoughts and Potential Catalysts Pacific narrowed its 3Q14 operating fleet revenue efficiency to 93.5-94.5% from 93-96% in its
October 3rd fleet status report, suggesting the company incurred greater unexpected downtime during the quarter vs. the strong 97.1% revenue efficiency booked in 2Q. While the full year guidance range of 90-93% remains unchanged, we see risk to the downside as the recent start-up of newbuild Pacific Sharav is likely to experience greater shakedown in its initial few quarters of operation.
Petrobras’ renewal of the Pacific Mistral has been delayed by several quarters, with the NOC likely re-negotiating for more favorable terms in recent quarters as industry dayrates continue to trend lower. With Petrobras reportedly renewing all six ultra deepwater floaters and potentially taking two-to-three incremental units, we believe Petrobras could signal a market bottom for UDW dayrates but see a potential recovery as still several quarters away.
The company expects to generate $365mm and $535mm in cash from operations in 2014 and 2015, above our $300mm and $450mm estimates, suggesting potential upside for accelerated debt reduction and/or return of cash to shareholders. Shareholders need to approve the dividend annually during the May general meeting
While Pacific let the option for a 9th drillship lapse in 4Q13, we expect the company to order another newbuild before the end of 2015. Only two floaters have been ordered year to date from non-Chinese shipyards, suggesting hungry shipyards are likely to continue to offer high spec floaters in the low $600mm range for 2018 delivery.
Historical Multiples
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PACDOffshore Drillers
PACD current trades at 5.9x, an 1.% premium to the group's 5.8x average but a -33% discount to its historical 8.9x.
October 14, 2014
258
Pacific Drilling
Annual Income Statement, 2009-2015E ($ in millions, except per share)
2009 2010 2011 2012 2013 2014E 2015ERevenues
Direct dayrate revenues $955 $1,262Amortization of deferred revenues 106 77Other 0 0Total revenues $0 $0 $65 $638 $746 $1,061 $1,339
Investment Thesis Spun out of Noble Corp in July 2014, Paragon Offshore has a fleet of 39 standard specification assets (6 floaters, 33 jackups). While the average age of PGN’s jackup fleet is almost 35 years old, many aspects of each rig has been replaced in recent years, with the fleet age more comparable to 15 year old vessels. Although the industry has become increasingly concerned about potential over supply in the jackup market, Chinese shipyards account for 55 of 98 available newbuilds under construction, about half of which has unproven Chinese equipment that is not competitive in the global market and likely to sit idle in the yard without a contract. With only 39% of the jackup fleet and 66% of floaters committed thus far in 2015, investors are understandably concerned about near term earnings visibility. We see no risk to the $0.125 quarterly dividend for now (8% yield), but expect margins to deteriorate as the company is likely to experience gaps between contracts for several units rolling over in the next six-to-12 months.
Company Strategy Paragon Offshore staunchly defends the superior operating efficiency and safety record of its asset base, citing a higher average fleet utilization and operational downtime of only 2% vs. the industry’s 4-5% and 8% for newbuilds. With global decline rates accelerating, management sees no change in demand over the next five years for experienced assets and crews, with Mexico and the North Sea the two brightest markets currently. A low annual maintenance capex of only $70-190mm and no newbuild commitments leaves PGN with significant free cash flow to return to investors. The company recently instituted a regularly quarterly dividend of $0.125 per share and repurchased $60m of senior notes on the open market at an attractive discount of 85.7%. The Board authorized another $40m of debt repurchases that is likely to be executed in the next six months with cash from operation, as PGN maintain financial flexibility for potential acquisitions in the future. Seeing itself as a natural consolidator for the industry, the company identified 50+ used rigs with existing infrastructure for potential acquisitions, likely targeting multi-rig deals in under-represented markets (i.e. India/Asia). However PGN is unlikely to act in the next 12-18 months as it does not anticipate a jump in incremental demand, suggesting cash in 2015 are likely to be returned to shareholders in the form of a dividend increase, share repurchases and/or early debt retirement.
Outlook for 2015 The company forecast lower cost inflation in the near term, a positive side effect of the current weakness in the industry, with margins to remain relatively flat in the low 50% range. We’re modeling contract drilling margins to deteriorate modestly in 2015, as the company will likely experience gaps for several units rolling off contract over the next few quarters. Paragon has two floaters scheduled to roll with Petrobras and both units are unlikely to continue working. We’re modeling the DPDS1 (5k ft drillship built in 1979) to go off rate for 45 days before rolling onto a new contract at a 10% discount, while the MSS2 (4k ft semisub built in 1977) is released in October upon the completion of its current $270kpd contract. In addition, we’re conservatively modeling 90 days of gap time for three MidEast jackups rolling off contract in the next 12 months, as logistics (i.e. visas for crews) could cause start-up delays. On the bright side we expect Pemex to renew all seven of 10 active jackups rolling over in the next six months at the same rate, but make no assumption the available L1116 returns to work. Potential upside could also come from two jackups rolling off contract in the North Sea in January, as we’re currently modeling 31 days of downtime each before returning to work at flat rates.
October 14, 2014
262
Paragon Offshore
Key Thoughts and Potential Catalysts Unlikely to comfort jittery investors, we expect Paragon to report a messy quarter in its first as an
independent company, with earnings falling sequentially for one-time non-operating costs and an unusually high tax rate of 48-52%. Although the company instituted a $0.125 quarterly dividend (8% yield), we expect PGN shares to remain under pressure until earnings visibility for 2015 and 2016 improves. The company has several jackups and floaters at risk of going idle over the next 12 months, and we’re conservatively modeling more than 450 and 90 incremental non-revenue days for the jackup and floater fleet respectively (representing 4% of available days each).
Already one of the largest operators in Mexico, reform could present Paragon with opportunities to expand through acquisitions or mobilization of nearby idle assets. We expect Pemex to renew all seven of 10 active jackups rolling over in the next six months, as the NOC ramp up its rig count to 70 by year end 2015 and 80 by year end 2016 from 50 currently (44 jackups, 6 floaters). With 13 jackups ready stacked in country including three newbuilds delivered in the past year, management believes some Mexican contractors are not set-up to operate.
Despite instituting a $152mm annual dividend, Paragon retains ample financial flexibility for potential acquisitions and recently retired $60m of senior debt on the open market. While some investors may have been disappointed with the conservative starting dividend, preferred by rating agencies, management plans to grow the dividend steadily over time. We believe the dividend is safe despite risk to earnings in the near term, but prefer cash be used opportunistically to retire debt or buy back stock, with the shares trading at a significant discount to the group (3.7x EV/EBITDA vs. group average 5.7x).
Historical Multiples
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PGNOffshore Drillers
PGN current trades at 3.5x, a -38% discount to the group's
5.8x average.
October 14, 2014
263
Paragon Offshore
Annual Income Statement, 2012-2015E ($ in millions, except per share)
Investment Thesis We are positive on PKD as we believe the trajectory for utilization within the U.S. rental tools business remains upward sloping, international rental tools is set to enjoy stronger utilization and pricing after transitory issues in Q2, GOM barge drilling activity and rates will continue to increase and utilization for international drilling increases in the long run. Pricing for domestic rental tools is a major question mark but believe increased activity is a sign that pricing inflection is coming. We rate the shares Buy with a $7 price target based on a 4.0x target multiple on our 2015E EBITDA.
Company Strategy PKD aims to add value for its customers by providing innovative, reliable and efficient services across the rental tools, international land drilling and GOM barge drilling businesses. It’s key priorities in its rental tools business is to seek further activity and pricing gains on rising U.S. land drilling activity, expand its position in the high margin GOM offshore market, and to improve revenues and margins in its international business through structural changes. On the drilling side PKD aims to maximize the company benefit from additions and enhancements to its barge rig fleet, sustain high international rig fleet utilization and complete regional redeployments, and increase the scale with new rigs and operations and maintenance contracts in core international regions. The company has strong exposure to the Middle East and Central Asia where footage drilled is expected to increase 34% markets, providing the company with a very strong growth opportunity.
Outlook for 2015 Recent downward movement in oil prices give us some pause on the barge and rental tools side but we believe long-term picture remains intact and thus are not overtly worried. The barge drilling business could even see a bump in utilization as customers renew contracts after potentially delaying them due to hurricane season. The international drilling picture remains positive in the long term as most of Parker’s customers are major NOCs and IOCs who possess longer investment horizons and are less sensitive to short-term commodity price swings, but geopolitical issues may cause delays and idling.
October 14, 2014
267
Parker Drilling
Key Thoughts and Potential Catalysts PKD is targeting long-term margins in the mid to upper 30% range for International Rental Tools and
expects to see some improvement during 2H14, up from a base of 12% for 1H14. To accomplish this PKD recently hired new business leaders, allocated senior operation leadership from within PKD, and completed most of its facility moves and refurbishments during 2Q14. Domestically, the August operational report showed a 260 basis point month over month improvement to 92.9% for tubular goods utilization, the highest level in the past 12 months. The ops report also showed increased rental tools inventory which we believe is indicative of PKD’s confidence in penetrating new shale plays as well as the unfolding expansion in the working floater count in the GOM (25% of domestic rental revenues and a more favorable margin profile).
According to the August operational report, dayrates continue to increase which we view as representative of the tightening within the market (of which PKD has a 50% market share) as well as a favorable business mix (the lower depth 12B barge going uncontracted before being upgraded in January ‘15). Utilization through August during Q3 fell 1200 bps to 78%, but we expect this to rebound after the upgrades to rig 12B and the rig returns to work in January. Additionally, we believe the decrease in utilization was partially due to customers choosing not to contract rigs during Hurricane season in order to avoid potential exposure to storms. Finally, our numbers contain significant upside if gas prices were to return to the $5/Mcf range as gas reserves in the shallow water GOM are typically found at much deeper depths than oil, thus enabling barge drillers to charge premium dayrates. We are not calling for an immediate spike in gas prices but do believe the potential exists for a strong gas cycle in 2016 and beyond.
The near term outlook is much choppier than it was just three months ago due to the recent security issues in Kurdistan where two rigs from Tunisia were expected to mobilize to and Russian sanctions open the possibility of delaying work for Parker. We still expect the Tunisian rigs to eventually mobilize to the region but the timing of the move has been delayed. IN relationship to Russia, we are unsure what the exact implications are but we expect more color on the Q3 conference call. On a positive note, we expect one and possibly two of PKD’s Colombian rigs to return to work in that country.
Historical Multiples
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PKD
Onshore Drillers
PKD current trades at 3.1x, a -33% discount to the group's 4.7x average but
a -24% discount to its historical 4.1x.
October 14, 2014
268
Parker Drilling
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis As the horizontal well count increases, laterals get longer, and pad drilling offers additional efficiencies for operators, we believe AC rigs (like PTEN’s APEX Rigs) will enjoy increased demand and the North American land drilling business will remains robust. As a result of increased rig demand, we expect spot rates will continue to climb, term lengths will increase, and utilization will remain high; even as the supply of AC rigs in the industry increases. Additionally, we believe an increased fleet size (2 deliveries per month) will allow PTEN to increase margins through operating leverage of fixed costs. Pumping seems to now be serving as a tailwind for the company as it has been able to push pricing in several areas and increases its fleet size, though only enough to offset cost increases.
Company Strategy PTEN, with large, modern land drilling fleet, remains at the forefront of the North American shale revolution. The company has built a capable land drilling fleet and in doing so offers its clients a value proposition unmatched by competitors. PTEN’s fleet of 139 APEX rigs (~65% of total fleet) allows for efficiencies unmatched by mechanical and SCR rigs. AC drive FlexRigs offer increased drilling productivity and reliability, greater rig move capabilities and a safer workplace leading to decreased well costs for operators, even at premium dayrates, and as a result will continue to replace older generation rigs. On the pumping front, the company’s operations are split between Texas and Appalachia two very strong pumping markets.
Outlook for 2015
PTEN’s future outlook for 2015 is positive. We predict E&P capex budgets will increase 10% in 2015 setting a positive backdrop for the oilfield services industry as a whole. On the land drilling side of the business, we believe dayrates will continue to increase as the benefits offered by premium AC rigs are better understood by the market and that PTEN’s APEX rigs will continue to displace older rigs. PTEN has publically declared its intention to build two rigs per month through at least June 2015. On the pressure pumping side, much of the additional capacity coming to market is serving as spare and replacement capacity and so we expect marketed utilization to remain high, though maybe not as high as current levels of 90%, and for pricing to also increase.
October 14, 2014
272
Patterson-UTI Energy
Key Thoughts and Potential Catalysts Continuing improvements in U.S. land pricing. Average dayrates over the past four quarters have
increased almost $1K/d on a per rig basis; we believe that will continue to improve as leading edge dayrates of $26-$28K/d (with upside from current levels) push contract terms up. Anecdotally, we have been told by a private, high-spec land drilling company that the only impediment to $30,000 rates is the fact that marketers have never signed contracts at those rates before.
Oversupply? The current build out of approximately 500 rigs between 2012 and 2015 has increased concerns over an impending cliff for dayrates and utilization amongst certain investors. We feel those fears are overblown as North American horizontal drilling activity continues to remain robust, offering PTEN an opportunity to displace older rigs currently undertaking those jobs. There are over 1,000 mechanical and SCR rigs operating in the US, with 75% drilling horizontal wells. One last fact, talk of three year contracts for newbuilds and payback periods of 42-48 months for mid-teen returns give us additional room for optimism.
Pressure Pumping fundamentals improving. North American fundamentals are rapidly improving as utilization exceeds 90% in North America, service intensity increases, horsepower required on location increases and crew sizes/costs increase. A combination of these factors is responsible for the pricing inflection that has recently begun. PTEN expects to increase its HHP count to 1.1MM by June 2015 through acquisitions and new orders.
Historical Multiples
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PTEN
Onshore Drillers
PTEN current trades at 3.6x, a -23% discount to the group's 4.7x average but
a -21% discount to its historical 4.6x.
October 14, 2014
273
Patterson-UTI Energy
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis Precision operates a fleet of contract land drilling rigs in the U.S. and Canada, ideally situated across the most active NAM regions. International expansion has been slower, with the company operating just 11 rigs and targeting Kuwait and Mexico for incremental growth. Precision’s alliance with Schlumberger should position it to take advantage of the 16% annual growth in unconventional horizontal development driving the U.S. land rig count higher. The company is also the largest well service provider in Canada, with a growing presence in the U.S. We rate PD Buy with a $16 price target based on a 6.0x target multiple on our 2015E EBITDA.
Company Strategy Traditionally a leading contract driller in Canada, the company has been expanding in the U.S. and Internationally, though International expansion has been slower. The company has been winning market share in the Marcellus and Bakken, as well as the Permian and Niobrara. Precision has an alliance with Schlumberger, marrying Precision’s field execution and customer interface with Schlumberger’s tools, technology, training and engineering support.
Outlook for 2015 The company is ramping up newbuilding activity, with plans to add 18 rigs in 2014 and 15 in 2015, with 30% of the growth targeting its U.S. operations while the balance goes towards Canada and the Middle East. Having shortened lead-times for newbuild rigs, the pace of deliveries should accelerate to two-to-three rigs per month. The company plans to deploy 3-4 rigs per year Internationally. PD also upgraded about 20 rigs in 2014, which should command higher dayrates and utilization in 2015. While the company anticipate ongoing demand for its high spec Tier 1 rigs from the proposed LNG buildout in Western Canada, dayrate growth are expected to remain relatively modest. However, recent cost control initiatives should drive margins.
October 14, 2014
277
Precision Drilling
Key Thoughts and Potential Catalysts PD has grown international revenues at a compounded quarterly growth rate of 29% from ~$6MM
in Q1 2012 to $46MM during Q2 2014. The company has six rigs in Mexico where it focuses on IPM support and seven rigs (nine rigs deployed) in the Middle East (Kurdistan, Kuwait and Saudi Arabia) where it focuses on HPHT drilling for customers with specialized needs. We view both of these markets as very strong, high margin markets, especially given the expectations for increased capital spending in both Mexico and the Middle East.
PD is the best position driller for Western Canadian LNG and Duverney.
PD has a large mix of Tier 1 and Tier 2 rigs, making up 66% and 28% of the fleet respectively. The company’s high performance Tier 1 super series rigs are designed to be horizontal drilling machines, with small footprint and walking/skidding systems. Horizontal activity account for 86% of the company’s U.S. and 93% of the company’s Canada operations.
Historical Multiples
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PD
Onshore Drillers
PD current trades at 4.1x, a -12% discount to the group's 4.7x average but
a -21% discount to its historical 5.3x.
October 14, 2014
278
Precision Drilling
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis RPC Inc. is a SMID cap production and completion services provider, serving primarily U.S. land-based independents in unconventional basins. Leveraged to the oil and natural gas liquids, a growing mix of U.S. activity, the company is focused on returns while maintaining among the lowest debt-to-capital ratio of its peers at just 11%. The company offers a full suite of products and services, with the majority of revenue driven from pressure pumping followed by downhole tools and coiled tubing. Seeing little holes in its product and service offerings, we rate RES Buy with a $23 price target based on 6.0x our 2015E EBITDA.
Company Strategy With a high exposure to the Permian and the Eagle Ford, RES’s pressure pumping fleet is ideally situated in the strongest U.S. land basins. Operating the brand name of Cudd Energy Services, RES has a fleet of 710K HHP and is the 8th largest provider in the U.S. land market. Downhole tools are an increasingly important revenue contributor, providing strong margins in multi-stage completions. Coiled tubing account for 9% of RPC’s revenue, with industry utilization and pricing falling dramatically in recent quarters from equipment over capacity. Meanwhile, rental tools and workover services are a relatively small contributor to RES’s top line.
Outlook for 2015 Completion service intensity continues to grow, driven by higher rig efficiency and pad drilling, resulting in more frac stages and more proppant used per stage. The company recently announced a 28% increase to its pressure pumping fleet over the next 12 months.
October 14, 2014
282
RPC Inc.
Key Thoughts and Potential Catalysts RES increased its quarterly dividend by 23% annually over the last 16 years and is likely to increase
the dividend again in 2015. Stock buybacks have been more infrequent.
Due to the high revenue mix of pressure pumping and downhole tools, RES average higher return on invested capital than its production & completion services peers.
Historical Multiples
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RES
Production & Completion Services
RES current trades at 4.5x, a -4% discount to the group's 4.7x average but
a -17% discount to its historical 5.5x.
October 14, 2014
283
RPC Inc.
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis RDC is a diversified offshore contract driller, operating a fleet of 30 jackups, one drillship and has three drillships under construction. While the company has traditionally been known as an efficient shallow water contractor, averaging very low operational downtime that often falls below its 2.5% target, Rowan recently expanded into the ultra deepwater market with its first newbuild drillship. The company plans to operate all four contracted floaters with less than 5% operational downtime after a six months to one year break-in period, while renewing focus on cost control and overhauling maintenance procedures. With a high mix its jackups under long term contracts in the Middle East and North Sea, we believe Rowan is mostly insulated from the unfolding supply-driven weakness in the jackup market. With among the strongest earnings and cash flow visibility over the next several years, we rate RDC Buy with a $41 price target based on a 6.0x target multiple on our 2015E EBITDA.
Company Strategy Over the past several years, Rowan has been transitioning into a pure play offshore contract drilling services company, divesting its manufacturing segment, while repositioning its jackup fleet and expanding into the ultra deepwater market with four newbuild drillships. The company started operations of its first drillship, Rowan Renaissance, earlier this year and expects to have the second, Rowan Resolute, operating in the U.S. GOM by year end, while the 3rd and 4th unit will be delivered in the next six month and working on long term contracts by the end of 2015. Longer term the company plans to grow the ultra deepwater fleet to six or seven units, but is taking a pause from ordering newbuilds on spec in the current market. Meanwhile, Rowan has been expanding its high spec jackup fleet into new geographic markets, entering Norway with the Skeie Drilling acquisition in 2010, and Southeast Asia in 2011. The company wants to expand into West Africa next, where it currently operates its first UDW drillship, but is unlikely to build high spec jackups in the near term as returns are less attractive than for ultra deepwater floaters (target 12% IRR). With an attractive mix of 19 high spec and 8 premium jackups, out of a fleet of 30, Rowan is well positioned to take advantage of potential distressed asset sales in the near term, though the company believe only 23 of 123 available newbuild jackups are truly competitive with Rowan’s assets.
Outlook for 2015 Rowan expects to renew all three jackups rolling off contract with Saudi Arabia in the near term, keeping the exposure to the Kingdom at a very high level of 9 of the company’s 27 cantilever jackup fleet. With the company’s Norway fleet also highly contracted to 2016 and beyond, Rowan has fairly limited availability with its Southeast Asia and US GOM fleet, where the markets for lower spec units are seeing pressure on term and rates. But in contrast to Hercules which currently has a high mix of cold stacked and idle jackups, we expect Rowan’s jackups to experience little gap in between contracts as they tend to work for larger E&Ps less influenced by short term commodity price weakness. Meanwhile, all four of Rowan’s UDW drillships are expected to be on rate by early 3Q15, providing significant earnings growth for the next several quarters, as we expect the floater market to improve before the first unit is available in April 2017. With a $1bn revolving credit facility fully available and newbuild capex winding down sharply, management expects to realize significant cash build starting in 2H15 and recently initiated a modest $0.10 quarterly dividend that it plans to grow in 2015. Opportunistic share buy backs are also a possibility in late 2015, when the company has more financial flexibility while maintaining an investment grade rating.
October 14, 2014
287
Rowan Companies
Key Thoughts and Potential Catalysts On July 21, “friendly” activist Blue Harbour disclosed it is now Rowan’s second largest shareholder
with 6.45% stake. Though the hedge fund’s intentions and recommendations remain to be seen, recent activists in offshore drilling has pushed for more aggressive return of cash to shareholders.
We do not expect new CEO Tom Burke to change the strategic direction of the company, but instead make his mark on the company’s renewed focus on cost control. Although the company has beat on cost the last seven quarters, this has been discounted by the Street as it was partly driven by delayed repair & maintenance expenses. Management plans to overhaul maintenance systems in the near term and capitalize consumables as inventories instead of its traditional method of expensing them, which could generate $300mm in cost savings over time.
We believe Rowan is unlikely to pursue an MLP in the near-to-medium term given its small floater fleet has generally shorter term contracts of three years (vs. dropdowns averaging five year terms) and the company already has very low tax rate in the high single digits. Despite its $3bn newbuild drillship program, leverage is in line with the industry while the company’s total debt/EBITDA should fall naturally below the company’s 3x target as earnings ramp up with the start-up of the UDW drillships. We expect the company to delever slowly over time, seeing no immediate need for capital from a potential MLP structure.
Historical Multiples
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'06 '07 '08 '09 '10 '11 '12 '13 '14
RDCOffshore Drillers
RDC current trades at 4.5x, an -21% discount to the group's 5.8x average and a
-19% discount to its historical 5.6x.
October 14, 2014
288
Rowan Companies
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis The industry bellwether remains one of our favorite stocks in the group as the company is the best positioned and primary beneficiary of the multi-year deepwater, subsea, and global E&P spending upcycle that remains in its early days. Best in class execution and returns, ramping cash flow and share buybacks, and a narrow premium to the group all make Schlumberger one of the most attractive stocks we cover. We rate the shares Buy with a $129 price target based on a 19.8x target multiple on our 2015E EPS.
Company Strategy Schlumberger is targeting revenue growth in excess of industry growth (7-8%), incremental margins higher than 40%, new technology to represent more than 25% of sales and integration to represent over 30% of sales, a 10x increase in equipment reliability, a 100% increase in asset utilization, productivity from employees to rise by 20% and a reduction in inventory of 25% and support costs by 10% -- all by 2017. If accomplished this should drive 2017 EPS into the $9-$10 range, a ROCE of over 20%, and free cash flow conversion of greater than 75%.
Outlook for 2015 Schlumberger’s key strengths of people, size and footprint, M&A capabilities, and flawless execution should help the company attain outsized earnings growth in 2015 as the international markets continue to march higher, Latin America rebounds, and the North American cycle pushes forward.
October 14, 2014
292
Schlumberger
Key Thoughts and Potential Catalysts The stock currently trades at a ~30% discount to its historical average despite superior growth, best
in class returns, a robust buyback program and significant earnings upside from current levels.
CEO Paal Kipsgaard has laid out ambitious but achievable goals to recreate/remold/re-energize the Schlumberger machine.
The company’s technology and integration focus is clearly designed to create a step change in drilling and completion activity.
Seismic could be a headwind in 4Q.
With the most exposure to Russia Schlumberger will be more impacted by the decline in the ruble and the sanctions than others.
Historical Multiples
Source: ISI Energy Research, Bloomberg
5x
10x
15x
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30x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
SLBBig Four Average
SLB current trades at 14.3x, a 22% premium to the group's
11.7x average but a -26% discount to its historical 19.5x.
October 14, 2014
293
Schlumberger
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis We believe the offshore outlook remains fundamentally strong in spite of the short term hiccups concerning floater rig deliveries in the GOM and temporary excess supply of vessels. As the deepwater rig count continues to outpace the overall offshore rig count, the premium afforded to companies with quality assets like CKH should increase as larger and more complex equipment is required to make the longer trips from shore base facilities to offshore rigs and platforms. Additionally, energy reform in Brazil, Mexico and the UK holds the possibility of significantly increasing offshore activity in those three regions, a major positive considering CKH’s fleet exposure in the regions. CKH’s steady investor
Company Strategy CKH’s investment and operational approach highlights four main strategies. The company focuses on risk adjusted return on equity and capital, maintaining capital discipline, investing in long-term appreciation all why staying flexible and pursuing diversification. The company prides itself on the fact that they are not just operators but opportunistic investors focused not on profit but on returns.
Outlook for 2015 Beyond offshore marine services which are explored above, CKH also operates in shipping services and inland river services. Our outlook on shipping services is mild. We recognize the benefit CKH stands to gain due to the retirement of competitor’s older vessels due to incremental regulations as well as increased demand for vessels thanks to increased domestic gas and oil production, our optimism is tempered by the amount of excess capital being put to work. We are more optimistic about inland river as increased domestic crude production from ND is being transported and stored in terminals and barges along the MS river to gulf coast refineries.
October 14, 2014
297
SEACOR Holdings
Key Thoughts and Potential Catalysts Attrition. According to ODS-Petrodata, the global PSV fleet stands at 1,448 active vessels with an
additional 306 vessels under construction. Of the 1,448 vessels in service approximately 212 (15%) of them are over 25 years old with no DP capabilities, introducing the possibility of obsolescence and retirement for a significant portion of the fleet serving to increase rates and utilization.
Global Rig Growth. In addition to a smaller worldwide service vessel fleet, 142 jackups and 92 floaters (according to ODS-Petrodata) are either under construction or planned for construction. Though some of these rigs will serve as replacements, many will be incremental to the worldwide rig count leading to increased demand for offshore service vessels.
Temporary OSV Supply Overhang in the GOM. According to ODS-Petrodata, there is currently one rig undergoing acceptance testing, two rigs en route, two rigs under construction and five rigs either in the yard undergoing work or hot stacked with contracts slated to begin in the next six months. The commencement of these 10 contracts as well as the departure of several competitor OSV vessels due to the temporary weakness should cause a significant tightening of the market.
Brazilian elections. The October 26th Brazilian election holds the possibility to significantly alter the dynamics of Brazil’s energy industry. Currently, Petrobras, Brazil’s national oil company, is legally required to be the lead operator with a minimum stake of 30% in all new pre-salt fields, use oil platforms and other heavy equipment built in Brazil and sell gasoline at below-market prices. These mandates have caused cost overruns, equipment shortages thus placing an immense financial burden on the company and discouraging foreign operators. These factors, enacted by current President Dilma Rousseff and her predecessor Luiz Inácio Lula da Silva (of the same political party: Workers’ Party) and allegations of corruption, also leveled at the current administration, have stymied Brazilian activity. If elected, Aecio Neves, the opposition candidate, is expected to undo, at least partially, many of these import restrictions and trade barriers as well as further open up the industry to foreign companies and issue offshore licenses at a faster pace. We believe these developments would lead to increased offshore activity in turn benefitting GulfMark where the company owns and operates four OSVs. So far, just the possibility of Neves’ election has increased the equity value of Petrobras and the foreign exchange rate of the Brazilian Real, exhibiting the promise investors believe his election would hold.
Mexican reform. Reform to Mexico’s energy ministry is well underway and the hopes are that opening the industry to foreign investments will lead to increased deepwater activity. Mexico’s deepwater potential is enormous with over 50% of the country’s 52.6 Bboe of prospective resources located in the deepwater space. Currently, Mexico’s offshore activity is limited to the shallow water market being served by new gen OSVs, but the deepwater space, with its longer transit times, has significantly more revenue potential. Additionally, the nationalization of Oceanografia following allegations of fraud has caused short-term supply disruptions further benefitting CKH.
October 14, 2014
298
SEACOR Holdings
Historical Multiples
Source: ISI Energy Research, Bloomberg
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8x
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'06 '07 '08 '09 '10 '11 '12 '13 '14
CKHOffshore Technology
CKH current trades at 7.2x, a 11% premium to the group's 6.5x average but a 29% premium to its historical 5.6x.
October 14, 2014
299
SEACOR Holdings
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis Seadrill as a unique opportunity in offshore driller, pioneering a complex capital structure with holdings in several entities (North Atlantic Drilling, Seadrill Limited Partners, Sevan Drilling). Despite a high debt level, the company pays a high dividend (17%) and continues to aggressively grow the fleet. However the company has not been immune to the recent downturn, with the shares trading off sharply with investors concerned the dividend may be at risk. With CEO Per Wullf defending the high dividend for the foreseeable future, likely supported by future drop downs to the MLP, we rate SDRL a Buy with a $40 share price based on a 10% target dividend yield.
Company Strategy CEO Per Wullf defends the company’s high dividend for the foreseeable future, likely supported by additional drop downs to the MLP SDLP. The company’s 2014 and 2015 capex is also fully funded with contracted assets, secured bank financing, ECAs, bonds, TLBs and MLP dropdowns. Longer term the company plans to expand into the Mexico ultra deepwater market, where it currently operates one rig for Pemex, but targeting IOCs. Not shying away from more newbuilds despite the current downturn, Seadrill is having conversations with customers for 2015 deliveries and could place incremental orders for 2017/2018, financed by cash on hand or equity for the initial 20-30% down payment.
Outlook for 2015 Seadrill’s floater and jackup fleet is almost 80% and 75% sold out in 2015, giving management confidence it can support the dividend with cash from operations. Petrobras is expected to renew two ultra deepwater floaters, which should improve the company’s contracted status. Average uptime for the fleet has been high in the mid 90s for floaters, but management target a high 90s run rate for both floaters and jackups, which would be among the highest in the industry.
October 14, 2014
303
Seadrill Limited
Key Thoughts and Potential Catalysts Management guided to 3Q EBITDA roughly in line or just above 2Q’s $641mm on a consolidated
basis, and we are modeling $639mm with slightly higher costs for downtime in Brazil and the U.S. GOM. The company does not provide estimated downdays on a fleet by fleet basis in its fleet status report.
With one vessel running at 98% uptime, Seadrill’s Brazil JV is developing a PLSV newbuild program.
Seadrill expects all 6-Gen floaters to have managed pressure drilling over time, with the Tellus the first likely unit to be converted for a cost of $18-35mm.
With the most exposure in newbuild floater availability, management was notably more optimistic last quarter than three months ago, indicating conversations were commencing with customers for 2015 deliveries. Seadrill has two floaters being delivered later this year, as well as four in 2015, all of which are available.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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4x
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8x
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13x
'06 '07 '08 '09 '10 '11 '12 '13 '14
SDRLOffshore Drillers
SDRL current trades at 9.9x, a 70% premium to the group's 5.8x average but only a 1% premium to its historical 9.8x.
October 14, 2014
304
Seadrill Limited
Annual Income Statement, 2005-2015E ($ in millions, except per share)
Investment Thesis A recent spinoff of Chesapeake Energy (CHK), SSE is a geographically diverse oilfield company mainly levered to the drilling and completion segments of the well life cycle, also with limited exposure to the production segment as well through its fluids and rental businesses. SSE is in the progress of transforming its current 86 rig drilling fleet from older, mostly mechanical rigs to a more technically AC rigs. SSE has committed to adding 6 AC drive PeakeRigs by year end 2014 and 10 additional rigs during 2015 and plans to divest its older, “tier 3” rigs by year end 2015. In doing so, premium rigs will comprise 42% of the company’s fleet, up from 24%, allowing the company to benefit from the ongoing trend in horizontal drilling that emphasizes the efficiencies in productivity, reliability and safety offered by AC rigs. SSE’s other main business is its pressure pumping fleet where it operates the 14th largest U.S. pressure pumping fleet with 360K HHP and adding a 10th fleet by year end which will increase the HHP count to 400K. We believe pressure pumping will continue to enjoy strong utilization with prices accelerating beyond just offsetting costs. We view both company’s main businesses in an increasingly optimistic light and so rate SSE Buy with a $26 PT based on a target multiple of 5.0x our 2015E EBITDA.
Company Strategy SSE is well levered to the North American shale revolution. The company has built a capable land drilling fleet and is in the process of further upgrading it. It is also growing its pressure pumping fleet into a bigger force which may allow for margin increases through scalable G&A expenses. We believe SSE’s biggest concern remains its relationship with CHK which currently accounts for 82% of the company’s revenues, a downturn in CHK’s activity will severely hamper the company’s activity.
Outlook for 2015 SSE’s future outlook for 2015 is positive. We predict E&P capex budgets will increase 10% in 2015 setting a positive backdrop for the oilfield services industry as a whole. On the land drilling side of the business, we believe dayrates will continue to increase as the benefits offered by premium AC rigs are better understood by the market. On the pressure pumping side, much of the additional capacity coming to market is serving as spare and replacement capacity and so we expect marketed utilization to remain high, though maybe not as high as current levels of 90%, and for pricing to also increase.
October 14, 2014
308
Seventy Seven Energy
Key Thoughts and Potential Catalysts Average dayrates over the past four quarters have hovered between $23K/d and $23.5K/d on a per
rig basis; we believe that will continue to improve as leading edge dayrates of $26-$28K/d (with upside from current levels) improve contract terms. Anecdotally, we have been told by a private, high-spec land drilling company that the only impediment to $30,000 rates is the fact that marketers have never signed contracts at those rates before.
The current build out of approximately 500 rigs between 2012 and 2015 has increased concerns over an impending cliff for dayrates and utilization amongst certain investors. We feel those fears are somewhat valid for SSE as a large percentage of their rigs are lower-spec mechanical and SCR rigs. With over 1,000 mechanical and SCR rigs operating, and 75% of those rigs drilling horizontal wells, a strong possibility exists that many of them will be displaced as additional AC rigs are deployed, though the company’s relationship with CHK will artificially protect some of its rigs. This will issue should subside as the company’s percentage of AC rigs continues to increase.
North American fundamentals are rapidly improving as utilization exceeds 90% in North America, service intensity increases, horsepower required on location increases and crew sizes/costs increase. A combination of these factors is responsible for the pricing inflection that has recently begun. SSE has conservatively guided for flat pricing but does expect additional stages completed per active spread.
As of 6/30/14 82% of SSE’s YTD revenue came from CHK. The company’s long-term target is to decrease that amount to 50%. We believe the company’s transition is well underway as it has increased its contract drilling revenues from outside customers to 42% from 9% at the beginning of 2012.
Historical Multiples
Source: ISI Energy Research, Bloomberg
2x
3x
4x
5x
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8x
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10x
11x
'06 '07 '08 '09 '10 '11 '12 '13 '14
SSE
Production & Completion Services
SSE current trades at 4.4x, a -5% discount to the group's 4.7x average.
October 14, 2014
309
Seventy Seven Energy
Annual Income Statement, 2011-2015E ($ in millions, except per share)
Investment Thesis Superior is a SMID cap diversified services company, highly leveraged to the U.S. land market with the acquisition of Complete Production Services. Traditionally known as a U.S. GOM plug & abandonment company, the company is also selectively growing its key international markets. While still a relatively small part of its business representing just 15% of total revenues, transfer of coiled tubing into Argentina, Middle East and Asia markets can help improve asset utilization and returns for the company. With significant operating leverage potential as activity improves, we rate SPN shares Buy with a $39 price target based on a 14.9x target multiple.
Company Strategy The company recently divested some operations in the Subsea & Technical Solutions segment, which should reduce margins variability and lower G&A spend. With cash building, Superior recently instituted a regular quarterly dividend and accelerated share repurchases, retiring 5.2mm shares for $164mm year to date. Hurt by the pullback in coiled tubing activity in Mexico, the company is more cautious on Mexico’s reform that some of its peers, preferring to wait to work for IOCs rather than rush to win share with Pemex. However, the company is bidding on Pemex’s tender for five modern stimulation vessels targeting shallow water developments, competing with SLB, HAL, BHI and Island Offshore.
Outlook for 2015 Management called for an inflection point in U.S. land activity in 2Q14, driven by higher activity in the Permian, but has been more cautious on pricing, with revenue driven by higher equipment efficiency and activity. While smaller production & completion services companies have been ordering pressure pumping HP, SPN still has idle capacity on the sideline. Needing only four-to-six weeks for a fleet to be fully stacked, SPN view sand to be an important factor in how capacity is deployed in the near term as mines are backed up currently.
October 14, 2014
313
Superior Energy Services
Key Thoughts and Potential Catalysts Superior provides limited guidance, which combines with a rather unique reporting structure
detailing regional revenue within each segment, makes it compare to compare results with peers.
While peers have been rushing to order new pressure pumping equipment, SPN suspects not all equipment is for incremental capacity but instead to replace equipment worn down during the recent market weakness. SPN maintains high maintenance standards and its three idle fleets is in perfect condition to return to work, needing only labor. Management expects one of these idle fleets to return to work by year end.
SPN prefers to enter new international market with rental tools, establishing a foothold through small acquisitions, and then pulling through additional product and service offerings. Management estimates the international market opportunity for its business is about $35bn, of which it has less than $1bn market share currently, and target Argentina, Brazil, Colombia, Australia, Indonesia, Malaysia, Saudi Arabia, Kuwait, and India as its core markets for international expansion.
Historical Multiples
Source: ISI Energy Research, Bloomberg
3x
7x
11x
15x
19x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
SPN current trades at 11.2x, a -6% discount to its
historical 11.9x.
October 14, 2014
314
Superior Energy Services
Annual Income Statement, 2010-2015E ($ in millions, except per share)
Investment Thesis We are confident that TS will benefit from the increase in global capex, but timing does remain an issue over the next 18-24 months. Though we are confident about the long-term fundamentals in both Brazil and Saudi Arabia, we expect inventory levels to decrease in both countries as Petrobras continues to suffer from project delays and Saudi Aramco reduces their Oil Country Tubular Goods (OCTG) inventory. The reduction in sales to Saudi Aramco will hurt both margins and revenues as that product mix tends to lean towards premium products. With that being said we do see some strong tailwinds, including the recent ITC decision regarding protective tariffs for producers of U.S. OCTG and strong medium to long-term growth projections for TS in LAM. The convergence of these factors lead us to rate the stock Hold with a price target of $43 based on 14.9x our 2015E EPS.
Company Strategy TS’ mission is to deliver value to its customers through product development, manufacturing excellence, and supply chain management. The company accomplishes this by encouraging continuous improvement amongst its employees by sharing knowledge across a single global organization. Customers include most of the world’s leading oil & gas companies as well as engineering companies engaged in constructing oil & gas gathering, transportation and processing facilities. The company’s principal products include casing, tubing, line pipe, and mechanical and structural pipes and so its results are tied to new well construction.
Outlook for 2015 Following the ITC confirmation, we see upside to TS’ guidance of zero percent revenue growth YoY as we now expect higher U.S. sales but wouldn’t be surprised to see margin degradation as TS sells a higher mix of low-end API product.
October 14, 2014
318
Tenaris
Key Thoughts and Potential Catalysts In late August the International Trade Commission confirmed The U.S. Department of Commerce’s
decision to impose duties on the import of Oil Country Tubular Goods (OCTG; i.e. drill pipe and casing) from six countries including: South Korea, India, Taiwan, Turkey, Ukraine and Vietnam. Imports from these countries represented 29% of U.S. OCTG demand. U.S. sales represented 45% of TS’ revenues and so this provides a very strong boost to the company as both pricing and volume should improve U.S. producers.
TS is bullish that PEMEX energy reform will increase activity across Mexico’s shale and deepwater plays. Current spending in Mexico has been crippled as PEMEX activity has temporarily ceased. TS is also optimistic about the possibilities in Argentina where management believes that development of the Vaca Muerta shale will begin in the medium-term and serve as a strong growth opportunity for the company. These positive developments will be offset by a reduction in Brazilian inventory levels as Petrobras limits short-term financial spending, though we believe long-term fundamentals remain strong there as well.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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16x
20x
24x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
TSCapital Equipment
TS current trades at 11.7x, a 15% discount to the group's
12.6x average but a 12.% premium to its historical 13.0x.
October 14, 2014
319
Tenaris
Annual Income Statement, 2010-2015E ($ in millions, except per share)
Investment Thesis Tetra is a SMID cap diversified oil and gas services provider, offering a full range of products and services such as fluid management, production testing, compression and offshore services. Tetra is the market leader in a variety of niche markets that span the entire well life cycle, from drilling and completion through to the abandonment stage. The company has a strong global presence and derives roughly 30% of revenues from international operations. Approximately 65% of revenues are derived from onshore applications, with the balance earned offshore. Divided into three segments, the company also has a stake in a compression MLP that should provide cash and a valuation lift in the years to come. We rate the shares Buy with a $16 price target based on a 16.5x target multiple.
Company Strategy The company recently implemented various cost cutting initiatives, attacking the business’s cost structure and corporate SG&A spend. Operating margins are expected to exit the year in the low double digits, we’re modeling 10% currently, but reined in free cash flow target from $80mm to a more realistic $60-70mm. A lower tax rate is the next objective.
Outlook for 2015 Production Testing margins are expected to average low-to-mid teens in 2015, though the historical 20s peak are unrealistic without Mexico activity coming back. Having closed the CSI acquisition recently, distribution per unit is expected to growth from their current annualized rate by 12-14%, with the company likely to reach the high 50/50 splits by year end 2015. This could provide additional valuation lift for TTI shares, as the market tend to value GP cash flow at 20-30x.
October 14, 2014
323
Tetra Technologies
Key Thoughts and Potential Catalysts Management guided to FY14 EPS of $0.50-0.60, with Production Testing margins to exit the year in
low double digits with no help from pricing.
With the vast majority of CSI contracts MLP-able, we expect the company to drop down compression contracts to Compressco within the next 12-18 months.
The company’s Fluids segment should see a pick-up in demand from U.S. GOM activity and U.S. land completions, with water management having a record month in May.
The Production Testing business is now right sized at 50% U.S. / 50% International.
The Offshore Services segment exhibit significant seasonality, with delays in activity for weather and other unusual items.
Historical Multiples
Source: ISI Energy Research, Bloomberg
2x
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26x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
TTI current trades at 11.1x, a -17% discount to its
historical 13.5x.
October 14, 2014
324
Tetra Technologies
Annual Income Statement, 2010-2015E ($ in millions, except per share)
Investment Thesis We believe THR’s has favorable tailwinds across each end market in which it operates in (energy, chemical, power, commercial/other)resulting from growing customer capex budgets. The company’s highly engineered products comprise a small portion of total project costs, but are critical to the efficient, safe and continuous operation of projects/facilities thus making the likelihood of losing business by lower prices, lower quality competitors very unlikely. This protective barrier along with the high switching costs (switching complications and compatibility concerns) once installed create a vibrant after market for the company. We believe the critical nature of the company’s products coupled with a strong management team set the stage for a long-term growth story and so we initiate with a Buy rating and a $25 PT.
Company Strategy THR aims to drive growth through alliances with major customers and suppliers and pursue value added acquisitions.
Outlook for 2015 We believe THR’s prospects for 2015 are strong based on the organic growth opportunities presented by the commercial and steam-to-electric conversion markets. We are also bullish on the company’s opportunities to leverage its installed base and expand its recurring revenue stream. Furthermore, minimal ongoing maintenance capex, high free cash flow generation and a flexible cost structure lead us to believe that the company’s history of financial results are replicable in the long term, especially given the strong growth profile and minimal capital requirements.
October 14, 2014
328
Thermon Group
Key Thoughts and Potential Catalysts We believe the company’s net debt will fall to zero within the next four quarters opening up the
possibility of significant shareholder returns through a new dividend, reduction of debt and in turn interest expense, a major acquisition, or a combination of all three. We believe this will be the next near-term catalyst for the stock.
Historical Multiples
Source: ISI Energy Research, Bloomberg
1x
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19x
22x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
THR
SMID Cap Capital Equipment
THR current trades at 16.0x, a 15% premium to the group's 13.9x average but a -15% discount to its historical
18.8x.
October 14, 2014
329
Thermon Group
Annual Income Statement, 2010-2015E ($ in millions, except per share)
Investment Thesis TDW is the largest OSV operator in the world and is well positioned to benefit from the expected offshore rig count growth. We think OSV fundamentals as a whole are strong in the long run but do have concerns regarding a slowdown in North Sea activity as well as weakness in the AHTS market. Additionally, we believe the shares are fairly valued at 6x 2015E EBITDA and so initiate on TDW with a hold and a $37 PT.
Company Strategy TDW prides itself on an exemplary safety record, disciplined deployment of cash as its newbuild/enhancement program finishes and is instead shifted to the ROV business, consistent dividend payments and opportunistic share repurchases when FCF allows for it.
Outlook for 2015 We expect this operating record to continue but do not expect FCF to turn quick enough for a large share repurchase or increase in dividend that will warrant an increase in multiple. Additionally TDW has lower operating leverage than its two main competitors and so will not benefit as much through the upturn.
October 14, 2014
333
Tidewater
Key Thoughts and Potential Catalysts According to IHS-Petrodata, the global AHTS and PSV fleet stands at 3,272 active vessels with an
additional 460 vessels under construction. Of the 3,269 vessels in service approximately 642 (20%)of them are over 25 years old with no DP capabilities, introducing the possibility of obsolescence and retirement for a significant portion of the fleet serving to reduce the OSV supply and thus increasing rates and utilization.
In addition to a smaller worldwide service vessel fleet, 142 jackups and 92 floaters are either under construction or planned for construction. Though some of these rigs will serve as replacements, many will be incremental to the worldwide rig count leading to increased demand for offshore service vessels.
With ten percent of global reserves and half of the conventional discoveries over the past four years made in the deepwater space, it is clear that offshore drilling is an integral part of future supply plans. TDW, with a global, modern fleet (average age of 6.9 years for its 244 “new” vessels), is extremely well positioned to benefit from the further exploration and development of W. Africa and Brazil’s pre-salt fields and other offshore frontiers.
As of 6/30/14, TDW has only 2 ROVs and 33 vessels remaining under its newbuild program and expects to spend only $730MM in aggregate capex during FY2015-FY2017, versus ~$1.5B spent in aggregate capex during FY2012-14. The significant reduction in projected capex coupled with higher operating cash flow should lead to an increase in free cash flow, which we believe will be used to either hasten the retirement of debt or return cash to shareholders.
TDW has a fledgling ROV business with six vessels in service and two more on order. Commercial operations are underway with additional opportunities expected in America, Sub-Sahara Africa, Europe and the Americas. TDW is currently experiencing minor-startup losses but expects to be cash breakeven by the second half of FY15; we believe this segment will eventually be accretive to margins.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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'06 '07 '08 '09 '10 '11 '12 '13 '14
TDWOffshore Technology
TDW current trades at 6.3x, an -2% discount to the group's 6.5x average but a -4% discount to its historical 6.6x.
October 14, 2014
334
Tidewater
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis With a fleet of 95 jackups and floaters, Transocean is the largest offshore contract driller and most at risk to dayrate declining with a majority of its floating rigs available in 2015. More negatively impacted by the current market downturn than its peers, management aggressively sought to raise capital through asset sales and financial engineering, raising more than $2bn in proceeds from asset sales and $420mm in net proceeds from the recent RIGP IPO. We expect the company to generate cash from sale of interest in existing rigs and drop downs to RIGP in the near term, but see a potential divestiture of Transocean’s eight U.K. semisubs as Caledonia Offshore as unlikely to generate cash in an IPO, while dividend growth is increasingly unlikely due to the prolonged floater downturn. Though the company has largely closed the book on several of its legal issues, we view Transocean’s fleet a significant issue and rate the shares Sell with a $27 price target based on 6.0x our 2015E EBITDA.
Company Strategy During its November 2013 analyst day, Transocean outlined three areas of focus for generating shareholder value: 1) maximizing financial flexibility, 2) reinvestment in the fleet, and 3) returning capital to investors. The company believes the market places a premium on a sustainable and growing dividend, while financial flexibility is necessary to compete for the long term in a cyclical industry. Having divested 63 rigs for more than $2bn in proceeds in recent years, Transocean plans to accelerate its efforts to divest lower spec commodity floaters, including one of the largest midwater and lower generation deepwater fleet in the industry. Targeting a fleet mix of 60% floaters (UDW, harsh environments) and 40% jackups within five years, Transocean rejected its traditional strategy of not adding incremental market capacity and ordered two speculative ultra deepwater drillships for 2017 and 2018 delivery. The company estimates its fleet renewal strategy will require $1.5-2.0bn in annual capex over the next five to ten years, partly funded by an annual cash proceed of $1bn from RIGP through an equity and/or debt issuance. While also emphasizing debt reduction with a recent $207mm early redemption, the company plans to achieve $800mm in margin improvement from cost savings ($300mm from shore-base initiatives) and operational efficiencies ($500mm from 55% higher revenue, 45% lower costs), and is working on a three-year initiative with Shell to develop more reliable subsea control systems to reduce downtime.
Outlook for 2015 Transocean views the 2014 market as like 2002/2004 time period and expects the market to be stagnant over the next 14-20 months, though remains bullish on long term fundamentals as growing global energy demand is likely to be sourced from deepwater and harsh environment resources. We expect the company to keep making modest progress on its revenue efficiency metric, now at its highest level since early 2008, but expect utilization levels to fall as the list of available floaters is likely to grow from the current three (of 34) ultra deepwater, three (of 12) deepwater, and six (of 21) midwater. Having divested its standard specification units, Transocean’s high spec jackup fleet is relatively well contracted with just the GSF Galaxy III (of 10 units) available, while the first of five available newbuilds are scheduled for 1Q16 delivery. Having achieved most of its $300mm shore-based initiatives, the company expects to close the EBITDA margin gap to its peers by the end of 2015. We expect Transocean to divest additional interest in the initial three rigs to RIGP by January, with potential drop down of the Deepwater Invictus before year end.
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Transocean Inc.
Key Thoughts and Potential Catalysts We expect Transocean to release a more detailed fleet status report later this month, disclosing the
high spec jackup Galaxy III is now idle, as well as the ultra deepwater GSF Explorer, Deepwater Discovery, and GSF C.R. Luigs. Our estimates currently do not adjust for the transfer of 47% stake of three existing rigs (Discoverer Inspiration, Discoverer Clear Leader, Development Driller III) to RIGP, with 3Q likely a messy quarter for the transaction that closed on July 31st.
With an activist investor and a stated goal of a sustainable and growing dividend, Transocean is under pressure to propose a higher 2015 dividend in November, to be voted by shareholders at the April Annual General Meeting. We believe a higher dividend would be imprudent at this time, particularly without substantial cash flow from RIGP or IPO proceeds from Caledonia Offshore.
Management plans to establish Caledonia in 4Q14 and separate the company at a later date, either through a direct sale to the public or private buyer, spin or public offering. Made up of eight U.K. North Sea midwater floaters (Sedco 704, Sedco 711, Sedco 712, Sedco 714, Transocean John Shaw, Transocean Prospect, GSF Arctic III, and J.W. McLean), the objective is to “maximize the value of these assets in the context of their capability, age, cash flow, backlog, and unique market in which they operate.”
Historical Multiples
Source: ISI Energy Research, Bloomberg
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RIGOffshore Drillers
RIG current trades at 5.8x, a 1% premium to the group's 5.8x average but a -14%
discount to its historical 6.9x.
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339
Transocean Inc.
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis Trican is a small cap production and completion services company, with operations in Canada, the U.S. and select international countries. The company offers a full suite of services to maximize well recovery, including fracturing, cementing, coiled tubing, and others, and is poised to benefit from industry trends of increasing fracturing intensity per well. We believe Trican is one of the best ways to gain leverage to the Western Canada LNG export cycle and rate the shares Buy with a $17 price target based on a 7.0x target multiple on our 2015E EBITDA.
Company Strategy The company has a number of initiatives under way to boost margins, but continues to battle rising costs for transportation, wage inflation, diesel and a weaker Canadian dollar. As a result, margins expansion is more likely to be driven by new pricing implemented in May, partially to offset higher costs. The company anticipates that 60% of customers will be on the new pricing book in the third quarter, with the balance implemented by year end. Margins in Canada tends to peak in 4Q, however, TCW’s U.S. business average more than a 10% point gap in margins and the company target double digit U.S. EBITDA margins by year end, a 1400bp improvement Y-Y.
Outlook for 2015 The outlook for Canada’s upcoming winter drilling season looks strong, with TCW forecasting 10% Y-Y increase in activity and higher pricing from LNG-related work. Trican’s U.S. operations are strategically placed in South Texas, the Bakken and Marcellus shale, but the company is likely to expand into the Permian shortly by mobilizing existing inactive fleets from South Texas. But in contrast to peers that are raising budgets for incremental fleet growth, Trican is lowering its capital expenditures on a year over year basis, making no change to its 2014 plans for now. The company continues to look for opportunities to deploy additional equipment from idle fleets over the next year.
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Trican Well Service
Key Thoughts and Potential Catalysts As with other Canadian operators, 2Q tends to be the weakest quarter for TCW, as a wet ground
makes it difficult to move equipment from one well site to another. Favorable weather in April could prove to be difficult comps in 2015, pending weather and other uncontrollable factors.
The company’s core pressure pumping and industrial services activities are concentrated in Canada and the U.S., as well as Russia, Kazakhstan, Algeria, and Saudi Arabia.
A third of Trican’s fracturing fleets are fueled by a combination of natural gas sourced on site and diesel, which can generate significant cost savings for customers.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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TCW
Production & CompletionServices
TCW current trades at 5.6x, a 17% premium to the group's 4.7x average but
a -23% discount to its historical 7.3x.
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Trican Well Service
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Investment Thesis We believe that Vantage is a good way to gain exposure to ultra-deepwater drilling market and the international jackup market. Vantage has a solid management team and a strong international track record with various top-tier clients and is well positioned to accelerate debt (a strategic priority) reduction in 2014 and 2015. However, we maintain a selective approach to the offshore drillers currently and think there are better opportunities at current levels in the group. We rate the shares Hold with a $1 price target based on a 6.6x target multiple on our 2015E EBITDA.
Company Strategy Vantage specializes in high specification offshore drilling rigs, with a fleet of four jackups and four drillships operating globally. All four drillships are Daewoo Shipyard’s DSME 12000s, with the first unit delivered only four years ago and the 4th and final unit to be delivered in 3Q15. While the Cobalt Explorer remains uncontracted, the other three drillships are contracted through 2015 and beyond, providing significant earnings visibility and cash flow for the company during the current market downturn. On the jackup side, Vantage has a fleet of Baker Marine Pacific Class rigs delivered by Singapore’s PPL Shipyard in 2008/2009. All four units are working in the Eastern Hemisphere (Southeast Asia, West Africa) but scheduled to complete existing term contracts in the next 12 months. Confident it will not be incurring significant gap between contracts for its first available jackup, the company accelerated debt reduction efforts and is poised to exceed its FY 2014 debt reduction target of $175mm. Another $200mm is targeted for 2015, though with $2.7bn outstanding, Vantage has a long way to go before its net debt/EBITDA ratio falls to the industry’s 2-3x average.
Outlook for 2015 The Aquamarine Driller is scheduled to roll off its $155kpd contract with Petronas Carigali next month and we’re modeling the 375’ jackup to roll onto a new contract at the same rate following a two week gap. We make the same assumptions about the other three jackups rolling over in 2015, but make no incremental down day assumptions for the floater fleet in 2015. Currently working in Equatorial Guinea, the Titanium Explorer is expected to mobe to the US GOM later this year. We see risk the mobe could drag into the start of the 1Q and are conservatively modeling the 12,000k ft drillship to resume operations in early January. Although we’re modeling Vantage to remain cash positive in 2015, paying down debt steadily as expected, the company will take delivery of the Cobalt Explorer late next year and has significant newbuild commitments to be financed with new debt. Possible shipyard delays could push the final $540mm payment into 2016.
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Vantage Drilling
Key Thoughts and Potential Catalysts Vantage has one newbuild drillship available, the Cobalt Explorer scheduled to be delivered in 4Q15
but likely to be about three months delayed. We expect a term contract to be announced in the next 12 months, likely at only $500kpd, with the rate potentially lower with management trading $5-10kpd for each year of incremental term.
Management guided to 3Q14 EBITDA of $90-105mm, we are in line at $102mm but expect 4Q guidance to fall sequentially with both the Titanium Explorer and Tungsten Explorer scheduled for mobe in the quarter. We forecast 4Q EBITDA to fall to just $88mm but expect the company to remain cash flow positive to fund its $50m quarterly debt reduction target.
Vantage plans to put its share of the Sigma JV’s $65mm refund guarantee into the construction cost of the Cobalt Explorer, with more funds available potentially as Sigma seek additional compensation from STX shipyard. Meanwhile, a favorable ruling from the lawsuit Vantage Drilling Company vs. Hsin-Chi Su a/k/a Nobu Su could also recover actual and punitive damages for the company to be applied to further debt reduction and newbuild commitments.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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'06 '07 '08 '09 '10 '11 '12 '13 '14
VTGOffshore Drillers
VTG current trades at 6.6x, a 14% premium to the group's 5.8x average but only a 4%
premium to its historical 6.3x.
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349
Vantage Drilling
Annual Income Statement, 2007-2015E ($ in millions, except per share)
Investment Thesis A new version of Weatherford is slowly emerging after four years of significant pain and suffering. This new Weatherford is more focus, disciplined, has higher returns, will generate cash, and is an attractive stock in our view; for investors and potential suitors. We rate the shares Buy with a $29 price target based on a 16.5x target multiple on our 2015E EPS.
Company Strategy Starting in 2013 the company shifted strategies completely and is now evolving into an organization that has a disciplined focus on capital efficiency, cash harvesting, and operational excellence. Weatherford is well down the path of shedding non-core assets, evolving into a leaner, better positioned company with core strengths, de-leveraging, derisking, maximizing margins, reducing costs, and lowering capital intensity.
Outlook for 2015 The company’s outlook is improving for 2015 as evidence of cost-cutting should emerge, the balance sheet and corporate structure will be cleaner, the organization more focused and disciplined and the earnings leverage more evident. Weatherford’s core businesses of well construction, artificial lift, and formation evaluation should outgrow the market will the company’s stimulation business is undergoing a solid rebound.
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353
Weatherford
Key Thoughts and Potential Catalysts The third quarter cash build is likely to be significant with the sale of the company’s pipeline
inspection business and its Russian and Venezuelan land rigs completed for a total of $750 million.
The almost $500 million of annual cost that were removed in 1Q and 2Q should be evident in 3Q results.
Weatherford has maintained its free cash flow target of $500 million for this year.
The IPO/Spin-off of the company’s remaining land rigs should occur in early 2015.
The Iraqi business, which had been a serious drag, is now minimal.
The “noise” that has plagued Weatherford in the past appears to now be behind the company.
Historical Multiples
Source: ISI Energy Research, Bloomberg
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28x
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
WFTBig Four Average
WFT current trades at 10.8x, a -7% discount to the group's
11.7x average but a -31% discount to its historical
15.9x.
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354
Weatherford
Annual Income Statement, 2004-2015E ($ in millions, except per share)
Company Description Aspen Aerogels is a company that designs and manufactures high-performance
aerogel insulation used in large scale energy infrastructure projects. Insulation is critical in maintaining the optimal temperature of piping and storage tanks, in turn protecting the plant and equipment from risk of fire and other harmful elements. Aspen manufactures aerogel insulation in blanket form that is more durable and effective in a wider range of temperatures than traditional insulation, and also reduces the risk of corrosion under insulation. Aerogel is a low density solid with low thermal conductivity, and is functional from -200C to 650C. Aspen has a broad geographic footprint with an installed base that spans more than 40 countries. The company generates roughly one third of revenues in the U.S. and one third in the Asia Pacific. Europe accounts for about 18% of revenues, with the balance made up by Canada and Latin America. Thus far the company has initial installations in approximately 30% of the world’s refineries, and has served 24 of the 25 largest refining companies, including ExxonMobil, Petrobas and Chevron.
Products
Aspen’s aerogel blankets are made from two core materials, Pyrogel and Cyrogel, which are then used by many of the largest oil producers, refiners and petrochemical companies. The products are produced in a single manufacturing facility located in Rhode Island. Aspen’s business is divided into two segments: Products and Research Services. The Products unit ultimately defines the company and accounts for approximately 95% of revenues.
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359
Atwood Oceanics
Company Description
Atwood Oceanics is an up-and-coming offshore contract driller engaged in the drilling and completion of exploratory and development wells. The company has a diverse drilling fleet that consists of two ultra-deepwater drillships, two ultra-deepwater semisubmersibles, three deepwater semisubmersibles, and five jackups. The company has been pursuing an aggressive newbuild program, having received five units in the past two years. Two ultra-deepwater drillships are under construction (neither under contract) and an additional high-specification jackup expected to be delivered within the next two years. While historically a shallow-water operator, Atwood has been increasing its leverage to the ultra-deepwater, while continuing to focus on the Asia Pacific market, and to a lesser extent, West Africa.
Ultra-deepwater
Atwood has two ultra-deepwater semisubs and two ultra-deepwater drillships, with an additional two to be delivered in early 2015 and late 2016. The company expects both drillships will be contracted prior to their respective delivery dates. The Atwood Advantage commenced drilling in the Gulf of Mexico in April 2014 and is contracted through April 2017, while the Atwood Achiever was delivered in late August of 2014 and will soon embark on a three-year drilling program in Morocco.
Deepwater Atwood has a fleet of three deepwater semisubmersibles. The Atwood Flacon and
Atwood Eagle are operating offshore Australia and are contracted through March 2016 and September 2016, respectively. The Atwood Hunter is contracted through November 2014 in Equatorial Guinea.
Jackup The company has a fleet of five high specification jackups, including three 400-foot
water depth Pacific Class jackups working in Southeast Asia in one of the most promising offshore basins. The fleet is rounded out by the Atwood Aurora, a 350-foot water depth jackup operating offshore West Africa, and the 400-foot water depth Atwood Beacon, operating in the Mediterranean Sea. The fleet is largely booked into 2015 with the exception of the Atwood Mako, which is currently contracted for follow on work in Thailand through December 2014.
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360
Baker Hughes
Company Description Baker Hughes is one of the largest diversified oilfield services companies in the world,
with a rich tradition of technological innovation that stretches back over 100 years. Baker has developed an exceptional product reputation introducing some 1,700 product lines over the years. The company’s strength lies in its cutting edge tools, equipment and product offerings, including drill bits, specialty chemicals, electric submersible pumps and completion tools. Baker’s international presence has been expanding in recent years, and the company now has operations in over 80 countries. The company’s operations are categorized by four regional segments: North America, Middle East/ Asia Pacific, Europe/ Africa/ Russia Caspian, and Latin America. Baker has significant exposure to North America, as the region accounted for nearly half of total revenues. Baker’s geomarket structure was implemented in 2009, the latest among its big four counterparts, so there may be some lingering growing pains.
Segments
Baker’s oilfield products and services are separated into two categories: Drilling and Evaluation and Completion and Production. The Drilling and Evaluation segment aims to assist clients locate the wellbore and maximize the efficiency of the entire drilling process. Primary products and services include drill bits, drilling services, wireline services, rotary steerable systems (SSE), measurement-while-drilling (MWD), surface-data-logging, logging-while-drilling (LWD), and drilling and completion fluids. Drilling services (includes both conventional and rotary steerable systems used to drill directionally and horizontally) is the segments biggest revenue driver, accounting for nearly 40% of segment revenues. Completion & Production (C&P) generates the bulk of the company’s revenue, accounting for roughly 60% per annum. Baker occupies a market leading position in completion equipment, specialty chemicals, and electric submersible pumps. Additional products and services include pressure pumping, completion systems, wellbore intervention, artificial lift, and tubulars The pressure pumping business in the segments primary earnings driver, accounting for nearly half of the segment’s revenues. Baker also operates an Industrial Services segment that consists primarily of downstream chemicals, and process and pipeline services businesses. The segment is mostly comprised of assets from the B&J Services acquisition in 2010. The unit contributed only 6% of revenue in 2010.
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361
Basic Energy Services
Company Description
Basic Energy is a diversified oilfield services company that offers products and services for every stage of the well’s life cycle, from initial drilling to abandonment. The company has a significant presence in most major shale plays in the U.S., but its core market is the Permian Basin, the source of approximately 45% of revenues. In addition to upgrading its existing offerings, Basic has completed a string of acquisitions in recent years, extending both their geographic footprint and product offerings.
Fleet
The company operates in 4 primary business segments: 1) Completion and Remedial Services; 2) Fluid Services 3) Well Servicing; and 4) Contract Drilling. Completion and Remedial Services – The completion and remedial services segment is the most profitable unit, accounting for approximately 40% of revenues and an analogous gross margin. The segment operates a fleet of pumping units used for cementing, acidizing, fracturing and workover work. Additional offerings include coiled tubing units, snubbing services, thru-tubing, cased-hole wireline units, air compressor packages, fishing tools and rental equipment, and nitrogen units. Fluid Services – Basic has fleet of roughly 1,000 trucks used for the transportation and disposal of fluids used in fracturing and drilling activity. Segment also includes portable frac and test tank rentals and oilfield wastewater disposal wells. Well Servicing – Provides workover work, service work, completion work, and plugging and abandonment of completed wells. Consists of approximately 420 rigs, with nearly half operating in the Permian Basin. Contract Drilling – Consists of a fleet of 12 drilling rigs (6 mechanical) in the Permian Basin; contributes less than 5% of revenues.
October 14, 2014
362
Bristow Helicopters
Company Description Bristow Group is a leading provider of helicopter services to the worldwide offshore
energy industry. The company principally charters helicopters to clients for the transportation of personnel and time-sensitive equipment to offshore production platforms and drilling rigs around the world. The largest markets include the North Sea, Nigeria, and the U.S. Gulf of Mexico. Bristow’s broad client base includes major integrated, national and independent offshore energy companies, with Chevron and ConocoPhillips the two largest clients, combining to account for nearly 20% of annual revenues. Helicopter Services segment are conducted through five primary business units: Europe, North America, West Africa, Australia, and Other International, which extends through most of the other major offshore energy producing regions of the world. Europe is the largest segment, accounting for roughly 40% of annual revenues.
Fleet
Bristow currently has a diverse fleet of helicopters, consisting of 28 different sub-fleet types, though the company plans to simplify its fleet to just five types within the next ten years. Bristow’s helicopter fleet includes approximately 350 wholly owned helicopters and another 150 that are owned and operated by unconsolidated affiliates. Roughly three quarters of the aircrafts are used for transportation purposes, with the balance used for training purposes. The majority of the fleet are large (16-20 max. passenger capacity) or medium (12-13) sized helicopters, which are capable of traveling faster, further and with greater payloads than small helicopters. Medium and large helicopters are thus often preferred in international, deepwater locations where offshore facilities tend to be remote, whereas small helicopters tend to operate primarily over the shallow waters offshore the Gulf of Mexico and Nigeria. SAR aircrafts are generally medium or large helicopters. Bristow also provides sector search and rescue services (SAR) to private sector clients in Australia, Canada, Norway, Russia, and Trinidad, and public sector services in the U.K. In 2013, the company was awarded a ten-year contract to provide SAR services to the entire U.K., in which they will provide 20 aircrafts to ten bases. In addition, the company offers technical services to commercial and military outfits through its Scotland-based flight training unit, Bristow Academy.
October 14, 2014
363
C&J Energy Services
Company Description C&J is one of the largest completion and production services companies in North
America. Core focuses include hydraulic fracturing, coiled tubing services and wireline services. C&J has grown organically and through a series of acquisitions since 2012, which have increased both the breadth of the company’s product offerings and its geographic reach. Notable transactions include the recently announced merger with Nabors’ Completion & Production Services business (subject to shareholder vote; expected to close by year-end), which includes over 650 workover rigs, 1,500 fluid management trucks and over 800,000 HHP of pressure pumping capacity. C&J shareholders will own approximately 47% of the combined entity, which will led by the C&J management team. The deal significantly increases C&J’s presence in many major basins across the U.S. and Canada, particularly the Rockies and the Marcellus. Operations are principally located in the North America, though C&J has been gradually expanding internationally, and has established a growing albeit not yet profitable operation in the Middle East.
Fleet
The new C&J has three primary business units: 1) Completion Services; 2) Vertically Integrated & Other Services; and 3) Production Services. Completion Services Completion services includes hydraulic fracturing, coiled tubing, wireline services and cementing. Significantly strengthened by the Nabors deal, the combined fleet offers roughly 1.1MM HHP, with over 30 coiled tubing units and over 100 wireline trucks. Hydraulic fracturing has traditionally been C&J’s primary source of earnings, accounting for approximately 60% of revenues in 2013 and 70% in 2012. Vertically Integrated & Other Services Includes equipment manufacturing, specialty chemicals, downhole tools and directional drilling. Production Services Offers fluid management services, workover and well servicing and other specialized services. The company is capable of serving a large and diverse customer base, supported by the largest fluid services fleet in the industry with roughly 1,500 trucks in addition to over 650 workover rigs, operating in the major shale plays across the U.S.
October 14, 2014
364
Calfrac Well Services
Company Description Calfrac Well Services is the seventh largest pressure pumper in North America. The
company operates in Canada, the U.S., Russia, Mexico, and Latin America, and offers range of specialized services including hydraulic fracturing, coiled tubing, cementing and other well stimulation services. Fracturing accounts for more than 90% of revenues and remains the company’s core competency. Calfrac’s worldwide fleet consists of 1.2MM hydraulic horsepower (HHP), 39 fracturing spreads, 31 cementing crews and 35 coiled tubing crews. The company has been investing in new specialized equipment while concurrently rebuilding and restoring older equipment and as part of a multi-year fleet overhaul program that will deliver an additional 155K HHP in 2015. Calfrac is the second largest pressure pumper in Canada, occupying roughly 18% of market share in terms of HHP. Their Canadian operations comprise mainly fracturing and coiled tubing services and are carried out by a fleet of 17 fracturing spreads totaling 384K HHP and 17 coiled tubing crews.
Fleet
Calfrac’s U.S. operations are centered in the Bakken, the Marcellus and the Eagle Ford, the latter only recently entered with the purchase of Mission Well Services in 2013. The U.S. fleet consists of 660K HHP across 15 fracturing spreads, and also features 18 cementing crews, and 8 coiled tubing crews. Calfrac’s Russian fleet has 7 fracturing spreads with 70K HHP and 7 coiled tubing crews. Approximately 35% of their fracturing work in Russia was focused on horizontal drilling in 2013, a number that figures to grow as the pace of adoption quickens. In Latin America, the company provides fracturing services to clients in Mexico and cementing services to customers in Colombia. Calfrac maintains operating bases in Argentina, Mexico and Colombia. The Latin America fleet has 103K HHP, with 13 cementing crews and four coiled tubing crews.
October 14, 2014
365
Cameron International
Company Description Cameron is a leading provider of flow equipment products, systems and services to
the oil and gas industry. CAM has a significant international presence, with operations in over 300 locations around the world, and more than two thirds of revenue generated internationally. The company offers a comprehensive array of products and services involved in the downstream, midstream and upstream segments, both onshore and offshore. However, more than 40% of revenues are derived from deepwater projects, an area the company continues to invest in. Cameron also owns a 60% stake in OneSubsea, a joint venture with Schlumberger that provides products and services for the subsea oil and gas market. Cameron operates through three primary business segments; 1) Drilling & Production Systems (DPS); 2) Valves & Measurement (V&M); 3) Process & Compression Systems (PCS). In addition to the proprietary goods and services offered by each segment, CAM has significant aftermarket offerings, which provides a more stable revenue stream less prone to cyclicality.
Product Segments
Drilling & Production Systems (DPS) The DPS segment includes businesses that provide systems and equipment used to drill, control pressures and direct flows of oil and gas wells. DPS products include drilling equipment packages, blow out preventers, drilling risers, top drives, draw works, complete wellhead and Christmas tree systems, and subsea production systems. DPS revenues jumped 60% in 2013 following the acquisition of several businesses. Valves & Measurement (V&M) Provides valves and measurement systems primarily used to control, direct and measure the flow of oil and gas from individual wellheads through flow lines, gathering lines and transmission systems to refineries, petrochemical plants and industrial centers for processing. Products include an array of valves, actuators, chokes, and measurement products. Process & Compression Systems (PCS) Includes businesses that provide separation equipment, heaters, dehydration and desalting units, gas conditioning units, membrane separation systems, water processing systems, reciprocating and integrally geared centrifugal compression equipment.
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Carbo Ceramics
Company Description CARBO Ceramics is a leading provider of proppants that are used in the hydraulic
fracturing process. The three types of proppants used in hydraulic fracturing include ceramic, resin-coated sand and raw sand. CARBO is the world’s largest provider of ceramic proppants, but has expanded operations in 2013 to include the sale of raw frac sand. Additional operations include the sale of fracturing simulation software and fracture design services. Halliburton and Schlumberger are major customers, each accounting for over 10% of revenues. Roughly 80% of revenues are generated within the United States, with the balance from Canada, China, Russia, Mexico and Africa, among others. The company has six production plants located in Georgia, Louisiana, Alabama, China and Russia, and a sand processing plant in Wisconsin. Domestic distribution is facilitated by rail (2,000 leased railcars by YE 2014) and international by sea. CARBO utilizes a just-in-time delivery method so that customers do not have to maintain cumbersome inventories. Efficient distribution and delivery is key to maintaining profit margins, especially as the industry increasingly shifts towards lower margin sands.
Fleet
The company manufactures several proppants that are designed for a variety of well conditions, with the newer blends catering to deeper and more complex well designs. Ceramic proppants are engineered products that offer the highest conductivity and are priced accordingly. Sand is the least expensive and conducive proppant, more suited for shorter fractures. CARBO’s nascent raw sand operation has increased dramatically since its inception in 2013, as recent demand trends have favored the cheaper ceramic alternative. Northern White sand (raw sand) accounted for roughly one third of revenues through 1H14, though ceramics continues to account for the majority of revenues.
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367
Chart Industries
Company Description Chart Industries is a global manufacturer of highly engineered cryogenic equipment
used throughout the LNG supply chain, including separation, liquefaction, purification, production, storage, and end use. More than half of the end-use applications are energy related, with the balance used for biomedical and general industrial purposes. The company’s core focus is on cryogenic systems and equipment. Products offerings include vacuum insulated containment vessels, heat exchangers and cold boxes. Chart has a large global footprint, enhanced by manufacturing plants in North America, Europe and Asia and more than 2,000 customers worldwide. More than half of revenues are generated outside of North America, a third of which derive from Asia and roughly 15% from European nations.
Fleet
Chart operates in three segments; Energy & Chemicals (E&C); Distribution & Storage (D&S); and Biomedical. All three segments rely on Chart’s cryogenic and low-temperature storage expertise. The D&S unit is Chart’s primary earnings driver, accounting for more than half of annual revenues. The E&C and D&S segments produce mission critical LNG equipment (distinguished by end-market) which is used in the separation, liquefaction, purification and storage of natural gas. Products include cold boxes, heat exchangers, and natural gas processing systems. The Biomedical operations are driven by the sale of medical respiratory products for hospitals, nursing homes and long-term care facilities. Additional products include cold storage systems and oxygen generating units.
October 14, 2014
368
CHC Helicopters
Company Description CHC Group is a leading provider of commercial helicopter services to the offshore oil
and gas industry. CHC has a fleet of roughly 250 aircraft operating in most of the major offshore markets around the world. CHC Group is one of the two (Bristow the other) global providers of helicopter services, with over 70 bases in approximately 30 countries around the world. Despite their vast geographic footprint, the company is rather levered towards the North Sea region where the company derives roughly 50% of its revenues. The company operates in two segments, Helicopter Services, which transports personnel to offshore sites and provides search & rescue service; and Heli-One, which provides maintenance, repair and overhaul (MRO) services to both CHC’s own fleet (roughly 2/3 of segment revenue) and, to a lesser extent, an external client base in Europe, Asia and North America. Helicopter services remain the company’s core focus, generating roughly 90% of the company’s total revenues.
The Heli-services fleet consists of heavy and medium helicopters designed to serve deepwater and ultra-deepwater locations, which are usually located in remote locations unsuited for smaller aircraft. The helicopters are primarily used to transport crew members between offshore locations and bases onshore, which occurs frequently and usually on a pre-set schedule. The company has committed to a multi-year of purchase 28 new helicopters to service deepwater and ultra-deepwater locations, as exploration and drilling efforts continue to move farther offshore.
October 14, 2014
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Core Laboratories
Company Description Core Laboratories is a leading provider of proprietary and patented reservoir
description, production enhancement, and reservoir management services. Core Lab’s operational focus is on crude oilfield development projects, aiming to assist clients maximize production returns. The company targets the production and production enhancement components of oil company’s budgets, which tend to be more stable than other aspects of the capital budget. Core has an expansive geographic footprint, with offices in more than 50 countries around the world, with a presence in every major oil producing region. The company focuses on both innovating new technologies and on international expansion via acquisitions that add new services or technologies or enhance their presence in certain markets.
Segments
Core has three primary operating divisions: Reservoir Description, Production Enhancement, and Reservoir Management. Reservoir Description accounts for nearly 50% of Revenues, followed by roughly 42% for Production Services. Reservoir Management is the lowest grossing segment, contributing less than 10% of total revenues in 2013. The Reservoir Description segment involves the characterization of petroleum reservoir rock, fluid and gas samples. The company offers a host of laboratory-based services that characterize properties of crude oil and petroleum products and help determine probable versus proven reserves in-place. Production Enhancement includes products and services designed to minimize formation damage and maximize flow rates. The company offers field-based products and services that are used during well completions, perforations, stimulation, and production. Approximately two thirds of revenue is generated in North America. The Reservoir Management segment conducts multi-client geological and petrophysical studies to create rock property databases. By combining and integrating information from the reservoir description and production enhancement services, Core Lab’s is able to assist customers increase production and recovery from reservoirs.
October 14, 2014
370
Diamond Offshore
Company Description Diamond Offshore is a leading offshore contract driller, with a total fleet of 44
offshore drilling rigs, including five rigs under construction. The company’s fleet is relatively old and three of its mid-water semisubmersible drilling rigs cold stacked. The Ocean Vanguard, which had its contract terminated with Statoil in June due to technological aspects of the rig, is currently ready stacked. The company has been undergoing a fleet renewal program in recent years however, with a focus on upgrading their deepwater and ultra-deep capabilities (the majority of their vessels are currently rated to operate in the midwater). The company expects two ultra-deepwater drillships for delivery by the end of 2014 and three for 2015 and beyond, one of which is rated for harsh environments. A significant relationship exists with Petrobas, which has accounted for more than a third of the firm’s revenue in each of the past three years.
Floaters
The company has a fleet of 38 floaters, including five that are under construction. The average age of the floater fleet is 33 years old. The fleet is comprised of 33 semisubmersibles and five drillships, four of which are currently under construction. The semisub fleet is mostly rated to work in the midwater (1,200’ to 5,000’) and primarily serves the Gulf of Mexico and Brazil. The drillships are all rated to work in the ultra-deepwater (>7,500’), and four of the five have been delivered within the past two years or are under construction.
Jackups Diamond Offshore has six jackups, on average over thirty years old, deployed in the
Gulf of Mexico and Ecuador. Five of the six jackups are currently under contract, including three with Pemex.
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371
Dresser-Rand
Company Description Dresser Rand is one of the largest suppliers of infrastructure equipment to the global
energy industry. Product offerings include centrifugal and reciprocating gas compressors, gas and steam turbines, gas expanders, and diesel and gas engines. The company has two business units, new units and aftermarket parts and services, which contribute evenly to the total revenue mix. Dresser owns dozens of established and well-known brands that serve the downstream, midstream and upstream segments of the global energy industry. Dresser’s geographic footprint spans 150 countries and is bolstered by a physical presence in 32 countries, enabling rapid response times – of particular importance for aftermarket activities.
Fleet
The business is divided into two segments; 1) new units, and 2) aftermarket parts and services. New units include both standardized equipment and highly engineered, client-specific solutions, which contributes the lion’s share of the segment’s revenues. Sales, cyclical by nature, tend to be strongly correlated to the overall level of capital spending. The company attempts to minimize the adverse margin impact of cycles by employing a flexible manufacturing model, which reduces the amount of outsourced work during downturns. The aftermarket parts and services segment includes engineering, installation, project management, repairs and refurbishments. Sales tend to be more stable, as its offerings are generally necessary for operations of end users and have predictable useful lives. Despite nearly equivalent top line contributions, the aftermarket parts and services unit is higher margin business and accounts for roughly 70% of operating profits.
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372
Dril-Quip
Company Description Dril-Quip, Inc. designs and manufactures offshore drilling and production equipment
specifically designed for deepwater, harsh environments and severe service applications. The company has a successful history of innovation, introducing several technologically advanced products that have become the industry standard in certain niche markets. Dril-Quip’s core products include subsea and surface wellheads; subsea and surface production trees; subsea control systems and manifolds; mudline hanger systems; specialty connectors and associated pipe, drilling, and production riser systems; and wellhead connectors and diverters. The company also offers onsite installation of its equipment, retrieval services, reconditioning services and equipment rentals. Approximately three quarters of revenues are generated through product sales, with services generating the remainder.
Segments
DRQ has a strong global presence, supported by manufacturing locations in Houston, Singapore, Scotland, and Brazil, in addition to a dozen sales, service and reconditioning facilities located around the world. Operations are divided into three geographic segments: Western Hemisphere (including North and South America), Eastern Hemisphere (including Europe and Africa); and Asia-Pacific (including the Pacific Rim, Southeast Asia, Australia, India and the Middle East). More than half of total revenues are derived from the Western Hemisphere. The Eastern Hemisphere has the most balanced revenue mix, with services accounting for more than 20% of revenues.
October 14, 2014
373
Ensco plc
Company Description Ensco plc is one of the largest offshore contract drillers, with amongst the most
diversified fleet of floaters and jackups operating globally. The company acquired Pride International in 1Q11, greatly increasing its floater fleet and geographic footprint. Since then the company has pushed forward with high grading its fleet, ordering 13 floaters and 7 jackups since 2010, while slowly divested lower spec commoditized assets including five floaters currently held for sale. The company has three floaters under construction, only one of which is uncontracted, and four 400’ heavy duty harsh environment (HDHE) jackups available in late 2015 and beyond.
Floaters
Excluding five units held for sale, Ensco has a fleet of 24 floaters. The average age of Ensco’s floater fleet is 14 years currently, but will fall to just nine years with management’s planned asset sale. Including three units under construction, Ensco has a fleet of 10 drillships all rated to work in the ultra-deepwater (>7000’ water depth). The remaining fleet of semisubs are rated mostly to work in the midwater (1,500’ to 7,000’). Combined, Ensco has 18 ultra-deepwater, five deepwater and just one midwater floater – ENSCO 5004 is contracted to Mellitah Oil & Gas through January 2017.
Jackups Including four jackups under construction, Ensco has a fleet of 46 jackups, the largest
of the offshore drillers in our coverage universe. Seven of these jackups are rated to work in harsh environments, including all four recently build 120 series. With plans to become a leader in the premium jackup market, we expect Ensco to continue to high grade its jackup fleet, which currently averages 26 years old. The company recently ordered two jackups for the Middle East (140 series) and has options for two more, where its current fleet of 10 units average 31 years but the majority are under long term contract with Saudi Aramco.
October 14, 2014
374
Ensign Energy Services
Company Description Ensign Energy, together with its subsidiaries, is one of the largest land-based drillers
and well servicing providers in Canada. The company specializes in directional and horizontal drilling, and provides a myriad of additional services, including well servicing, production testing, wireline services and equipment rentals. Though the bulk of the company’s operations are located in Canada and the U.S., Ensign has a vast geographic footprint that spans South America, the Middle East, Africa, Southeast Asia and Australia. The company has been growing rapidly through a sizeable newbuild program and a string of acquisitions, notably the asset purchases from Departure Energy Services and Enviro Group in 2013. Ensign operates through two primary business units: Drilling & Rig Services and Completion & Production Services. The former accounts for approximately 90% of revenues.
Contract Drilling Services
Ensign’s land drilling fleet consists of over 300 contract drilling rigs and 135 service rigs. Though the majority of the drilling rigs are currently conventional, more than one hundred of them are Automated Drill Rigs (“ADR”), a number that figures to grow as the company continues to upgrade its fleet. The ADR is a self-moving, highly efficient rig designed for horizontal drilling, and can be deployed up to three times faster than a conventional rig, significantly reducing well development time and thus operator costs. The company plans to deliver 34 newbuild ADR’s by the end of 2015. The company is also currently building a 2,000-horsepower version of the ADR (currently 1,500 HP), as well as the Automated Service Rig (“ASR”), a fully automated service rig designed specifically to service high pressure wellbores.
Completion and Production Services
Ensign, through its fleet of over 100 well servicing rigs and nearly 100 frac flow units, provides services for all stages of well servicing, including completions, abandonments, and production workovers. Enisgn is also one of the largest suppliers of underbalanced drilling and managed pressure drilling services as well as production testing and wireline completion services. The company’s oilfield rental equipment business was effectively doubled following a significant asset purchase from the Enviro Group of Companies in 2013.
October 14, 2014
375
ERA Group
Company Description Era Group Inc. is a global provider of helicopter services to the offshore petroleum
industry. The company is primarily involved with transporting personnel to and from offshore installations. Additional operations include Search & Rescue services, dry-leasing helicopters to third-party operators, air medical services, and flightseeing tours. Era operates mainly in the U.S., where they derive more than three quarters of their total revenue. Their greatest presence is in the Gulf of Mexico, accounting for 60% of revenues, followed by Alaska (18%). The company has a growing international presence, and often seeks to penetrate new markets through joint ventures and equity interests in local operators, including a 50% stake in Aeroleo (Brazil). Era Group became an independent entity following the completion of a spin-off from SEACOR in 2013.
Fleet
Era owns or operates a total fleet of approximately 170 helicopters, the majority of which are either are medium or light helicopters. Medium helicopters typically fit between 11 and 12 passengers, and can be used for a variety of offshore transportation purposes as well as search & rescue. Light helicopters typically fit between five and nine passengers and usually service the shallow water. Despite more than half of the fleet consisting of light helicopters, the medium and heavy helicopters represent 80% of fleet value on a dollar weighted basis. Though the average age of the owned fleet is 12 years, roughly a quarter of the fleet is less than five years old. The company has been upgrading its fleet in recent years, investing mainly in new heavy helicopters to diversify and expand its fleet capabilities.
October 14, 2014
376
Exterran Holdings
Company Description Exterran is a leading natural gas compression company, providing products and
services critical to the production, processing, transportation and storage of natural gas. Exterran controls the largest contract operations service in the U.S. with over 3.5MM HHP in operations. The company significantly increased its geographic presence and total horsepower with the purchase of assets from MidCon Compression earlier this year. Exterran operates throughout North America, both onshore and offshore, and maintains a strong international presence with operations in approximately 30 countries. Approximately 40% of revenues are derived from operations outside of North America, 23% in the Eastern Hemisphere and 18% in Latin America.
Fleet
Exterran has four primary operating segments: 1) North American Contract Operations; 2) International Contract Operations; 3) Aftermarket Services; and 4) Fabrication. The North American contract operations unit is the most lucrative segment, contributing roughly 35-40% of gross profits. The segment primarily provides natural gas compression services to customers in the U.S. Exterran operates in most of the country’s major shale plays and basins, including a particularly strong presence in the Gulf Coast and West Texas. International Contract Operations account for about 30% of gross profits. Unlike the U.S. segment, the international segment is involved in the construction of large natural gas compression stations and processing facilities. The Aftermarket segment provides ongoing maintenance and parts to existing customers. The business is characterized by relatively stable margins, but contributes less than 10% of overall profits. The fabrication business involves design, installation and sale of natural gas compression units. It is the company’s biggest revenue driver, accounting for roughly half of all revenues, but has a relatively high expense ratio and contributes less than a quarter of total gross profits.
October 14, 2014
377
FMC Technologies
Company Description FTI Technologies designs and manufactures highly engineered systems and products
for the energy industry. Core products include subsea production and processing systems, surface wellhead production systems, high pressure fluid control equipment and marine loading systems. The company has made several recent acquisitions that have strengthened their core business units and geographic footprint. FTI derives roughly two thirds of revenue from deepwater and subsea applications. The company currently has processing projects in every major deepwater basin.
Segments
FTI has three primary operating units: Subsea Technologies, Surface Technologies and Energy Infrastructure. Subsea Technologies – Designs and manufactures several specialized products and services used for deepwater E&P applications, specifically focused on controlling the flow of oil and gas from producing wells. They are the market leader in subsea tree units with approximately 40% market share. The acquisition of Schilling Robotics significantly enhanced FTI’s subsea ROV capabilities. Statoil is the largest customer, accounting for approximately 12% of consolidated revenue. Surface Technologies designs and manufactures products and services involved in land and offshore exploration and production. Surface wellheads account for roughly 13-14% of annual revenues. Additional revenue sources include completion services; flowline products; completion services; high pressure valves; and pumps and fittings used in stimulation activities. Energy Infrastructure – Principal products and services include; measurement systems used in the transfer of oil and gas; land and marine-based fluid loading and transfer systems; material handling systems; systems that separate production flows from wells into oil, gas, sand and water; and automation and control systems.
October 14, 2014
378
Forum Energy Technologies
Company Description Forum Technologies is a global oilfield products company serving the drilling,
completion, production, infrastructure and subsea sectors of the oil and gas industry. The company designs and manufactures proprietary products and aftermarket products that serve the downstream, midstream, and upstream markets. The diverse product offering is comprised of nearly 50 legacy brands that are highly specialized and geared towards the increasing complexities of well construction. Forum generates approximates 40% of revenues from aftermarket goods and services, providing for a more stable revenue source than specialized products that are highly levered to E&P spending. Operations are mainly conducted in the U.S., though the company has a mounting presence in Europe, Africa, Canada and the Asia Pacific, and incremental exposure to Latin America and the Middle East. Onshore operations have historically accounted for the lion’s share of revenues, though this stands to change as the company continues to invest in the development of subsea technologies.
Fleet
The company primarily operates in two segments, 1) Drilling and Subsea; and 2) Production and Infrastructure. Drilling and Subsea Segment includes an array of products and services relating to drilling, well construction, completion, intervention and subsea construction and services markets. Focal areas include designing and manufacturing subsea ROVs, downhole products that serve well construction and production enhancement markets. The company also provides drilling consumables and capital equipment, with a core focus on tubular handling products. Production and Infrastructure Designs and manufactures products and services for the well stimulation, completion, production and infrastructure markets, including flow equipment, production and process equipment and a range of industrial and process valves.
October 14, 2014
379
Frank’s International
Company Description Frank’s International is a global provider of highly engineered tubular services and
casing services to the E&P companies. Casing is set inside the drilled well to isolate the wellbore from surrounding geological formations and support structural integrity; tubular services involves the installation of pipe joints and a smaller pipe inside a cased wellbore, allowing hydrocarbons to flow freely to the surface. The company has a vast geographic footprint that spans over 60 countries in both offshore and onshore markets, and a concurrently diverse customer base. Frank’s tends to bolster its global presence via strategic acquisitions in foreign markets, executing more than 50 transactions since 1982. Frank’s designs proprietary equipment for complex drilling operations. With a focus on technically demanding, complex well structures, continual innovation is essential to maintaining market share. The company has been issued more than 250 patents, including roughly 20 thus far in 2014. Many of the patents are specifically oriented to deepwater projects, which are increasingly complex and have little room for error.
Fleet
Frank’s operates in three primary business segments: 1) International Services; 2) U.S. Services; and 3) Tubular Sales. The International Services segment operates in approximately 60 countries and serves primarily NOCs and Supermajors, typically on high-profile, complex projects. Historically the company’s most lucrative segment, producing more than double the adjusted EBITDA output of the U.S. services segment in 2011; the gap has been narrowing considerably however, and the U.S. now contributes on a nearly par basis. The U.S. services segment operates offshore in the GoM and in most of the country’s active onshore drilling regions. The Tubular Sales segment contributes roughly 10% of EBITDA. It offers an array of products and services, including OD pipe connectors; third part OD pipe distribution; and specialized fabrication and welding service that support deepwater projects in the US GoM, including production risers, flowlines, and pipeline end terminations, and long length tubulars for use as caissons or pilings. Additionally, the segment designs and manufactures equipment used by both the International and U.S. Services segments.
October 14, 2014
380
Gulfmark Offshore
Company Description Gulfmark Offshore is a leading provider of marine transportation services to the
offshore oil and gas industry. The company owns, operates and manages a fleet of new generation supply vessels that carry out a full range of services and are able to work in most environments around the world. Through a combination of newbuilds, acquisitions and divestures, the company has produced one of the youngest, most technologically advanced fleets in the industry. The fleet operates in three core regions – the North Sea, Southeast Asia and the Americas, and has a small yet growing presence in Brazil and Australia. The company operates the largest fleet of PSVs in the North Sea, and continues to reinforce their North Sea supremacy through newbuild PSVs designed specifically for harsh environments. Gulfmark established its presence in the Americas with its acquisition of Rigdon Marine in 2008.
Fleet
Gulfmark’s owned fleet includes nearly 80 vessels, consisting of roughly 65% PSVs, 20% AHTS, and the balance FSVs and SPVs. The vessels transport materials, supplies and personnel to offshore facilities, as well as move and position drilling structures. Gulfmark has a history of upgrading its fleet through newbuilds and acquisitions, while divesting older assets to optimize fleet composition. In 2008, the average fleet age was 12 years, which has since dropped to four years- one of the youngest in the industry. The company is midst of a $500M newbuild program, constructing twelve new generation vessels, eight of which have been delivered since 2013 and the remainder expected for delivery by YE 2015.
October 14, 2014
381
Halliburton
Company Description Halliburton is the largest diversified oilfield services company in North America, and
the second-largest in the world behind only Schlumberger. The company aims to serve the upstream oil and gas industry throughout the entire lifecycle of the well, including locating hydrocarbons and managing geological data, drilling and formation evaluation, well construction and completions, and optimizing production of mature assets. HAL has a leading market share in many of its businesses, including pressure pumping and completion services, in addition to several others. The company’s growth strategy remains focused on deepwater, unconventional and mature assets. HAL’s operations are categorized by four regional segments: North America; Middle East/ Asia; Europe/ Africa/ CIS; and Latin America. Halliburton has traditionally derived approximately half of total revenues from operations in North America. This percentage has been decreasing in recent years however, falling over 500 bps since 201- a trend that is likely to persist as HAL continues to direct capital towards international expansion.
Segments
Halliburton’s oilfield products and services are separated into two categories: Completion & Production and Drilling & Evaluation. The Completion & Production segment revenue tends to be skewed towards North America, accounting for 65% of segment revenues in 2013 (and 70% in 2012). C&P consists of pressure pumping (cementing and stimulation), intervention, pressure control, specialty chemicals, artificial lift, and completion services. The segment consists of six business lines: Production Enhancement, Cementing, Completion Tools, Halliburton Boots & Coots, Multi-Chem, and Halliburton Artificial Lift. C&P contributes about 60% of overall revenues. C&P has historically been the better margin business, averaging 20% since 2010 versus 15% for D&E. The Drilling & Evaluation segment achieves a more balanced revenue mix than C&P, deriving roughly one third of revenues from North America. D&E provides field and reservoir modeling, drilling, evaluation, and precise wellbore placement solutions that enable customers to model, measure, drill, and optimize their well construction activities. Seven business lines make up HAL’s D&E business: Aroid, Sperry Drilling, Wireline and Perforating, Drill Bits and Services, Landmark Software and Services, Testing and Subsea, and Consulting and Project Management.
October 14, 2014
382
Helmerich & Payne
Company Description Helmerich & Payne is a contract drilling company with land and offshore operations in
the United States, South America, Africa and the Middle East. H&P is the leading U.S. unconventional land driller in the U.S., and maintains one of the, newest and the sophisticated fleets in the industry, including more than 300 domestic rigs, 36 international rigs and nine offshore platforms. Over 300 of the rigs are AC Drive FlexRigs and the balance SCR Fleet. AC Drive FlexRigs are electronically operated rigs well-suited for multi-pad development of unconventional shale resources. Given the trend towards more complex drilling methods, HP has established itself as the market leader with the buildup of its AC rig count.
Fleet
H&P has over 285 active rigs in the United States, with operations in all the largest shale plays. The company is exceptionally well represented in the Permian Basin and Eagle Ford Shale, with over 90 rigs in each region. More than 85% of their active rigs drilling horizontal or directional well paths. The International segment includes 30 rigs, with operations in Ecuador, Colombia, Argentina, Tunisia, Bahrain and United Arab Emirates. Argentina remains the company’s largest international exposure, currently with seven active rigs and six additional FlexRigs in transit. The company’s offshore fleet consists of nine offshore platform rigs primarily operated in the Gulf of Mexico, with operations offshore California and Equatorial Guinea as well.
October 14, 2014
383
Hercules Offshore
Company Description Hercules is a leading provider of shallow-water drilling and marine services that
primarily serves the Gulf of Mexico region. The company owns a diverse fleet comprised of jackup rigs, liftboats, barge rigs, submersibles, and one platform rig. The company’s fleet of jackup rigs operates in shallow water and tends to service the lower-specification end of the jackup market. Hercules also operates two Keppel FELs Super A high specification harsh environment jackup rigs via an equity investment in Discovery Offshore. The company’s fleet is relatively old, with an average age of 32 years, with 10 jackups that are currently cold stacked. Hercules is making progress towards high-grading its fleet however, taking delivery of three jackups in the past two years.
Offshore Drilling
Hercules operates a fleet of 39 jackup rigs, including one in construction. 27 of the company’s 39 jackup rigs located in the Gulf of Mexico, with the balance located internationally. The average age of the domestic fleet it 35 years and nearly 90% of the domestic jackup rigs are mat-supported, a type of jackup characterized by mats that sink into the ocean seabed that are deployed primarily in the Gulf of Mexico. 20 of these mat-supported jackups were acquired from Seahawk Drilling in 2011. The company also has 10 jackup rigs internationally, including two under construction, located in West Africa, Southeast Asia and the Middle East. The average age of the international fleet is 24 years.
Liftboats
Liftboats, viewed as an alternative to derrick vessels, are self-propelling and self-elevating vessels that provide a work platform for a variety of services. Hercules operates 41 liftboats in the Gulf of Mexico, where the company maintains over 40% of the total market share, nearly twice as much as the nearest competitor. The company also operates the largest international fleet of liftboats with 23 marketable units primarily located in West Africa and the Middle East.
October 14, 2014
384
Hornbeck Offshore
Company Description Hornbeck is a global provider of marine transportation services and vessels to the oil
and gas industry. The company operates a young, technologically advanced fleet of Offshore Supply Vessels (OSVs) and Multi-Purpose Support Vehicles (MPSVs) which operate mostly in deepwater and ultra-deepwater markets. Hornbeck divested its downstream segment (consisting of nine tank barges and nine tugs) in 2013 and redirected the proceeds towards the company’s fifth OSV newbuild program, expected to cost approximately $1.25B. The U.S. GoM continues to serve as Hornbeck’s core operating market, though the company has been expanding its international presence in Brazil, Mexico, Latin America and the Middle East. Major customers include major oil companies, NOCs and the U.S. government. Drilling rigs typically require 2-4 OSVs in the U.S. GoM, and even more are needed in international locations where there are greater logistical challenges.
Fleet
With an average age of eight years, Hornbeck’s OSV fleet is one of the youngest in the industry, where the OSV average fleet age is closer to 12 years. The current fleet, comprised of 58 new gen OSVs and 4 MPSVs, will tick up to 77 units (68 OSVs and nine MPSVs) by 2016, following the completion of their latest OSV newbuild program. Hornbeck’s OSVs are all equipped with dynamical positioning systems and feature larger cargo capacity to support deepwater projects located increasingly farther offshore. OSVs are used to transport drill pipe, drummed material and equipment, liquid mud, potable and drilling water, fuel, dry bulk cement and personnel to offshore locations. MPSVs are more versatile vessels, designed to support a range of deepwater oilfield applications, including subsea-to-surface construction, inspection, repair and maintenance; well intervention, decommissioning projects and flotel services; and pipeline and subsea wellhead installations with saturation diving systems and flexible umbilical and pipe laying capabilities.
October 14, 2014
385
Independence Contract Drilling
Company Description Independence Contract Drilling is an up and coming provider of land-based contract
drilling services for oil and natural gas producers in the United States. The company owns and operates a newly constructed fleet rigs specifically designed to target unconventional resource plays. The company went public in August 2014 following the success of the ShaleDriller series rig, which first began drilling in May 2012. Independence has expanded rapidly, with 10 rigs now in operation and an additional eight expected by the end of 2015. The ShaleDriller is designed to be fast moving between drill sites and is equipped with a multi-directional walking system, enabling it to walk between wellbores and over existing wellheads. The rigs are also AC programmable to allow precise control over certain drilling parameters, allowing for significantly faster drill time than its mechanical counterparts, which are becoming increasingly technologically and economically obsolete.
Fleet
Independence constructs, owns, and operates its own fleet of custom ShaleDriller rigs, contracting them out to customers on a dayrate basis. Their fleet consists of 11 ShaleDriller 1500’s, nine of which are equipped with a multi-directional walking system. One of the eleven rigs is under construction, scheduled for deployment in December 2014. In addition, the company intends to use proceeds from the IPO to fund the construction of eight additional rigs for completion in 2015. All of the rigs currently in operation are under contract and are currently drilling in the Permian Basin. Though some rigs have previously operated in the Eagle Ford Shale and Mid-Continent region, the company is currently operating only in the Permian Basin with intermediate plans to expand to adjacent basins.
October 14, 2014
386
ION Geophysical
Company Description ION Geophysical is a provider of integrated geophysical solutions to the E&P industry.
The company serves customers in all of the major oil and gas producing regions of the world from offices in 21 cities located across six continents. ION’s products and services are used by E&P operators and seismic contractors to generate high-resolution images of the subsurface during exploration. These images are used to identify sources of hydrocarbons and target drilling locations for wells. Key offerings include acquisition equipment, software, planning and seismic processing services and seismic data libraries. ION also conducts land seismic operations through a 49% interest in INOVA Geophysical, a joint venture with BGP Inc.
Segments
ION operates in four primary business segments: Solutions, Ocean Bottom Services, Software, and Systems. The solutions segment is the highest grossing segment, accounting for roughly half of total revenues. The solutions segment focuses on provides products and services for challenging and complex environments including the Arctic frontier, deepwater subsurface salt formations in the Gulf of Mexico and offshore West Africa and Brazil. The segment offers two primary services: GeoVentures services and GXT Imaging Solutions. GeoVentures manages the entire seismic process, from survey planning and data acquisition to final subsurface imaging and reservoir characterization. GXT Imaging Solutions group maintains more than 14 petabytes of seismic data information that is designed to help E&P customers reduce exploration and production risk. The data library covers significant portions of many of the frontier basins in the world. The software business provides marine imaging, seabed imaging, survey design, planning, optimization, and command & control software. The systems segment is primarily a repair and refurbishment business for the company’s other segments, providing a more predictable revenue stream. ION’s Ocean Bottom Services unit offers seabed seismic acquisition services to E&P customers. The business took off following the acquisition of OceanGeo and has been the company’s fastest growing segment since 2006.
October 14, 2014
387
Key Energy Services
Company Description Key Energy Services is one of the largest onshore, rig-based well servicers in the
world. The company has four key business lines: Rig-Based Services; Fluid Management Services; Coiled Tubing Services; and Fishing and Rental Services. By rig count, Key is the largest U.S. onshore, rig-based well services company with approximately 20% market share. Not surprisingly, rig-based services account for nearly half of total revenues. Key primarily operates domestically, but has exposure to Mexico, Columbia, Ecuador, the Middle East and Russia. The Permian Basin represents the largest domestic exposure, contributing nearly a third of revenues, though the company maintains diverse operations spread across most of the major resource plays in the continental U.S.
Service Lines
The company operates in 4 primary business segments: 1) Rig-Based Services; 2) Fluid Management Services 3) Coiled Tubing Services; and 4) Fishing and Rental Services. Rig-Based Services The rig-based services segment has a total fleet of approximately 800 rigs worldwide, 700 located domestically. Services include completion of newly-drilled horizontal and vertical wellbores, recompletion of existing wellbores, maintenance of well bores, workover work, and plugging and abandonment of wellbores. Fluid Management Services Involves the transportation and disposal of fluids used in the drilling and completion process. The company owns a fleet of more than 1,000 fluid trucks, 4,000 frac trucks and 75 saltwater disposal wells. Business is characterized by relatively low barriers to entry and downward pressure on pricing during periods of decelerating growth. Coiled Tubing Services Coiled tubing services include wellbore clean-outs, nitrogen jet lifts, through-tubing fishing, and formation stimulations utilizing acid and chemical treatments. Approximately 40% of segment revenues are derived from the Eagle Ford Shale. Fishing and Rental Services. Fishing services involve recovering equipment that is lost or stuck in a wellbore utilizing certain tools, which include drill pipe, pumps, rods and blowout preventers. Key has nearly 800 blowout preventers, and 135 HydraWalk pipe-handling units.
October 14, 2014
388
MRC Global
Company Description MRC global is the largest global industrial distributor of pipe, valves and fittings (PVF)
to the energy industry. The company offers a multitude of PVF products and services specifically designed for a range of downstream, midstream and downstream applications. Key products include piping systems, fittings, tubing, flanges, line pipe, tubular goods and a variety of valves. These products are used in the construction, maintenance, and repair of equipment that is used in extreme operating conditions such as high pressure, extreme temperatures, and/or highly corrosive environments. Additional services include zone store management, valve tagging, and information systems that assist customers with supply chain services. Over 70% of revenues are attributable to multi-year maintenance, repair and operations (MRO), for which they have a contract retention rate of approximately 95%. MRC has a vast geographic footprint, with a presence in over 45 countries and more than 400 locations throughout North America, Europe, Asia and Australia. The company has been increasingly levering their international exposure through strategic acquisitions, including the purchase of Stream AS in Norway– bolstering their offshore capabilities and presence in one of the biggest offshore E&P markets in the world.
Products
MRC operates in there segments distinguished by geography, U.S., Canada and International. The U.S. segment accounted for approximately 76% of revenues in 2013, with a network comprised of over 130 branch locations, eight distribution centers, 13 valve automation service centers and over 95 third-party pipe-yards. U.S. operations have a strong presence in most major basins across the country, with a particularly strong presence in the Eastern U.S. and Gulf Coast. The Canada segment accounted for 14% of revenue, earned by over 40 branch locations, one distribution center, one valve automation service center and 24 third-party pipe yards. MRC has been expanding its international segment, which now has over 55 branch locations, six distribution centers, 13 valve automation centers and ten pipe yards.
October 14, 2014
389
Nabors Industries
Company Description Nabors Industries is a global provider of land-based drilling and rig services, as well as
completion and production services. The company provides services for every phase of an oil or gas well, from construction through abandonment. Nabors also provides a number of ancillary well-site services, including engineering; transportation and disposal; well logging; directional drilling and rig instrumentation. Their customer base is quite diverse, consisting of major, national and independent oil and gas companies, with no customer accounting for more than 10% of revenues. Nabors entered into an agreement in August to combine its completion & production services business with C&J Energy Services. Nabors will retain approximately 53% of the combined entity, to be called C&J Energy Services Ltd and managed by the C&J management team. The company’s scale was largely achieved through a series of strategic acquisitions- an average of one per year for the past five years- aimed to increase the scope and reach of the company’s operations. Nabors has also shed certain noncore assets in recent years through a series of divestitures, recycling older assets in an effort to high grade the expansive fleet. Nabors became one of the ten largest pressure pumpers in North America following its acquisition of Superior Well Services in 2008.
Fleet
The company operates in two segments; 1) Drilling & Rig Services; and 2) Completion & Production Services. The Drilling & Rig Services segment is comprised of the company’s drilling rig operations and drilling-related services, which includes equipment manufacturing, instrumentation optimization and directional drilling services. Nabors operates the largest land based drilling fleet in the world, with approximately 500 land drilling rigs operating worldwide (375 of which are North America-based and 125 located internationally). The Completion & Production includes 550 rigs for land well-servicing and workover, with roughly 450 in the United States and 100 in Canada. The segment is comprised of all operations involved in the completion, maintenance, and abandonment of a well, which encompasses stimulation, coiled-tubing, cementing, wireline, workover, well-servicing and fluids management. The company also has 36 platforms, seven jackups, one barge rig, and a large number of fluid hauling vehicles operating throughout the United States and internationally.
October 14, 2014
390
National Oilwell Varco
Company Description National Oilwell Varco, Inc. is a leading provider of capital equipment and
components to the upstream oil and gas industries. The company is a worldwide leader in providing mechanical components for land and offshore drilling rigs, well servicing rigs ,tubular inspection and internal tubular coatings, drill string equipment, extensive lifting and handling equipment, and a wide variety of drilling motors, bits and tools. NOV has a worldwide presence, with over 800 manufacturing, sales and services centers around the world. Consolidation has been a common theme in the industry, and the company largely achieved its current scale though acquisitions of smaller competitors, coupled with organic growth. However, in light of recent industry trends, NOV completed the spin-off of its distribution business, NOW Inc., in 2014, shifting focus back towards its core competencies and higher margin businesses. NOV subsequently recast their reporting segments into four distinct units: Rig Systems, Rig Aftermarket, Wellbore Technologies and Completion & Production Solutions.
Products
The rig systems segment primarily supports land and offshore drillers. The company designs and manufactures equipment for drilling oil and gas wells, including substructures, derricks, masts, cranes, mud pumps, blowout preventers, and power transmission systems. The segment tends to be highly leveraged towards capital spending on rig construction and refurbishment. The business is also NOV’s biggest earnings driver, generating more than half of total operating profit. The Rig Aftermarket segment performs maintenance work and replacement parts and services for components manufactured by the rig systems segment. The segment primarily supports land and offshore drillers. Demand is driven mostly by the overall level of oilfield drilling activity, which drives the need for replacement parts and maintenance work. The rig aftermarket segment generates roughly three times less revenue than rig systems, but the margins are considerably higher and tend to be more stable. The Wellbore Technologies segment designs, manufactures, rents, and sells a variety of equipment and technologies used to perform drilling operations, Primary functions include solids control, waste management equipment and services, tubular inspection and coating services, instrumentation, drilling fluids, premium drill pipe, wired pipe, downhole tools, and drill bits. Wellbore Technologies is the second highest revenue generating unit behind rig systems. Completion & Production Solutions integrates technologies for well completions and gas production. The segment designs and manufactures equipment used for hydraulic fracture stimulation, well intervention, onshore production and offshore production. The broad range of equipment includes pressure pumping trucks and pumps, wellheads, coiled tubing units, wireline units, artificial lift systems and subsea production technologies. This is the company’s lowest margin segment, with operating margins typically less than 14%.
October 14, 2014
391
Noble Corp
Company Description Noble Corp is a leading offshore drilling company with a fleet that primarily operates
in international markets, including Brazil, West Africa, Mexico, India and the Middle East. The company has a high quality fleet of 35 offshore drilling units that largely focus on ultra-deepwater and high-specification drilling projects. In August 2014, the company completed a spin-off of its standard specification drilling business to Paragon Offshore. The company’s resultant 35-vessel fleet has an average age of 13 years and consists of 20 floaters and 15 jackups, including 2 currently under construction. Modernizing and high-grading the fleet has been prioritized in recent years, and nine units have been acquired or rebuilt since 2013, with an additional two jackups expected by year-end.
Floaters
Noble Corp’s floating fleet includes eleven semisubmersibles and nine drillships. Eight of the drillships are rated to work in the ultra-deepwater (>7,500’), while the ninth, the Noble Discover, has a maximum water depth of 1,000 ft. Around half the semisubmersible fleet is rated to work in the ultra-deepwater (>7,500).
October 14, 2014
392
North Atlantic Drilling
Company Description North Atlantic Drilling Limited, a majority owned subsidiary of Seadrill Limited, is an
offshore drilling company that specializes in harsh environment drilling. The company is the leading driller in the North Atlantic basin, with a mixed fleet of eight harsh environment units in operation and one newbuild under construction. In August 2014, North Atlantic entered into agreement with Russia’s largest oil producer, Rosneft to sell a 30% ownership stake in exchange for approximately 150 land drilling rigs and accompanying five-year contracts with Rosneft for these units. The transaction is expected to close in 4Q14. Prior to the deal, NADL had a very concentrated customer base, deriving over half its revenues from Statoil and the balance from just five additional customers. Seadrill will continue to own more than 50% of NADL and will continue to provide its support and managerial services.
Fleet
Prior to the Rosneft agreement, the company’s fleet consisted of five dynamically positioned, harsh environment semi-submersibles (including one under construction), five harsh environment jackups (including two under construction), and one harsh environment deepwater drillship. Three of the semisubs are rated to work in the ultra-deepwater (>7,500’) and two are rated to work in midwater and deepwater (1,500’ to 7,500’). As part of the Rosneft deal, NADL will acquire approximately 150 rigs, a significant portion of Rosneft’s land drilling operation.
October 14, 2014
393
NOW Inc.
Company Description NOW is a leading distributor of oilfield equipment and supply chain management
services to the upstream, midstream, downstream and industrial markets. The company offers a diverse range of products including MRO supplies, pipes, valves, fittings, mill and industrial supplies, tools, safety products, and artificial lift systems. DNOW also provides supply chain services including inventory and warehouse management, logistics, business processing and business process and performance metrics reporting. DNOW previously existed as National Oilwell Varco’s distribution business, and became an independent company following the completion of a spin-off earlier this year. DNOW leverages the scale of its customers’ collective demand for supplies through a network of more than 300 branches worldwide, serving customers in over 90 countries around the world and in turn providing a highly diversified revenue stream.
Products
DNOW operates through a comprehensive network that consists of more than 270 Energy Branch locations and 60 supply chain locations, servicing most of the major oil and gas producing regions around the world. Energy branches primarily serve the upstream and midstream sectors and account for the lion’s share of revenues. Supply chains offer more customer specific solutions, serving the downstream, industrial and manufacturing end-markets. The company has three reportable segments: U.S., Canada and International. The U.S. segment consists of more than 200 locations, approximately 75% energy branches. Roughly two thirds of revenue is generated within the U.S. The segment’s geographic reach was significantly expanded by the acquisition of Wilson Distribution in 2012. DNOW has one the largest oilfield distribution networks in Canada, with over 70 locations that are predominately located in the Canadian Oil Sands region. International operations are conducted through a network of more than 30 branches that serve over 20 countries around the world. The company has a key presence in many markets that are traditionally underserved by competitors. International locations include Australia, Azerbaijan, Brazil, China, Colombia, Egypt, England, India, Indonesia, Kazakhstan, Mexico, Netherlands, Norway, Russia, Saudi Arabia, Scotland, Singapore and United Arab Emirates.
October 14, 2014
394
Ocean Rig
Company Description Ocean Rig is an offshore drilling company specializing in ultra-deepwater and harsh
environment drilling. ORIG has a diverse customer base and a strong international presence, with units currently located in West Africa, Angola, Brazil and the North Sea. The company maintains one of the highest specification ultra-deepwater fleets in the industry, consisting of eleven ultra-deepwater drillships and two ultra-deepwater semisubmersibles, including four that are currently under construction. Of the 7 units currently in the fleet, two are harsh environment semisubmersibles and five are dual-derrick drillships equipped with blow-out preventers (BOPs). The four drillships under construction (one to be delivered by the end of 2014 and the rest expected in 2015 and beyond) will further enhance what is already one of the highest specification ultra-deepwater fleets in the industry.
Fleet
The company has a relatively young fleet, with an average age of four compared to an average fleet age of 14 for established offshore drillers, a boon to Ocean Rig as new, high-spec rigs typically command higher day rates. The entire fleet is rated to work in the ultra-deepwater (>7,500’), and all but two were built after 2010. The two semisubmersibles, the Eirik Raude and the Leif Eiriksson, are harsh, environment, ultra-deepwater fifth generation units that have winterized steel allowing for performance in extreme weather conditions.
October 14, 2014
395
Oil States
Company Description Oil States International is a diversified oilfield services company that provides
offshore products and well site services to the upstream oil and gas industry. OIS has two primary operating segments: Offshore Products and Well Site Services. Offshore products accounts for more than half of total revenue but garners lower margins than well site services, which contributes approximately 55% of total EBITDA. The company previously had a significant accommodations unit that was spun off in 2013, transforming OIS into a pure-play oil services company. OIS has a robust presence in North America with operations in most of the region’s major shale plays. On the international front, OIS operates in over 25 countries worldwide, with planned capacity additions in Brazil and the U.K. in 2015.
Segments
The offshore products segment manufactures and develops advanced products used for offshore drilling and production. The products and services primarily used in deepwater producing regions and include flex-element technology, connector systems, high-pressure risers, compact valves, deepwater mooring systems, cranes, subsea pipeline products, blow-out preventer stack integration, specialty welding services and offshore installation services. Well Site Services provides drilling services in addition to a comprehensive array of completion products and services. Offerings include wireline and coiled tubing support, pressure pumping support, isolation tools, completion fluids, flowback and well testing. Completion services are offered in more than 50 locations in North America. Drilling efforts are carried out by a fleet of 34 owned and operated land drilling rigs located in the Permian Basin and Rockies.
October 14, 2014
396
Pacific Drilling
Company Description Pacific Drilling S.A. is a growing offshore drilling company with one of the youngest
and most technologically advanced fleets in the world. The company contracts its high-spec units, equipment and work crews on a dayrate basis to drill oil and natural gas wells, primarily in deepwater and ultra-deepwater plays. Including two currently in construction, Pacific operates a fleet of eight high-spec, ultra-deepwater drillships, four that are equipped with dual gradient drilling packages; technology with the potential to access previously unreachable reservoirs. The fleet is contracted to only three customers, Chevron, Total and Petrobas, and sustaining these relationships is essential to ongoing operations.
Fleet
In 2010, the company took delivery of its first rig, the Pacific Bora, and subsequently took delivery of three rigs in 2011, two in 2013, and one in 2014. The company has an additional two additional rigs under construction that are not yet under contract, the Pacific Meltem and the Pacific Zonda, expected for delivery in late 2014 and early 2015, respectively. With an average age of two years, Pacific boasts one of the youngest and most technologically advanced fleets in the industry. The drillships are deployed in Nigeria (3), the Gulf of Mexico (2) and Brazil (1).
October 14, 2014
397
Paragon Offshore
Company Description Paragon Offshore is global provider of standard specification drilling rigs, related
equipment, and work crews to the oil and gas industry on a dayrate basis. Formerly a unit of Noble Drilling, the company became independent in August of 2014 upon the completion of a spinoff of Noble’s standard-spec business. Paragon’s fleet consists of 33 jackups, 6 floaters and one floating production, storage and offtake (FPSO) vessel. The company operates in 12 countries across five continents, with a strong presence in the North Sea, Brazil, Mexico, and the Middle East. The North Sea accounts for roughly one third of total EBITDA. Important relationships exist with Pemex and Petrobas, the latter of which accounts for approximately 42% of Paragon’s contract backlog.
Fleet
Paragon’s fleet of standard spec drilling units has an average fleet age close to 35 years and includes 33 jackups, four drillships and two semisubmersibles. Standard specification units are classified by a number of factors, but are generally over 15 years old, with mechanically operated drilling equipment (rather than electronic) and have a hook load of less than two million pounds. Ten of the drilling units are without contracts, with three units listed as cold stacked and seven ready stacked. The floating fleet of drillships and semisubs are primarily rated to work in midwater and deepwater (1,500’ to 7,500’)
October 14, 2014
398
Parker Drilling
Company Description Parker Drilling is a global provider of contract drilling and drilling-related services to
the energy industry. The company also provides rental equipment to onshore and offshore drillers, and project management services for the design, construction and operation of customer-owned rigs. Parker offers a wide range of services to a diverse customer base across more than 20 countries, generating roughly 50% of revenues outside of the U.S. The company maintains an important relationship with Exxon Neftegas Limited (ENL), who accounted for approximately 15% of revenues in 2013.
Fleet
The company’s business is separated into five operating segments: Rental Tools, U.S. Barge Drilling, U.S. Drilling, International Drilling and Technical Services. The rental tools segment is operated by subsidiaries Quail Tools and ITS, the latter acquired in 2013. The ITS acquisition expanded Parker’s international reach and service lines; Quail Tools primarily serves domestic customers. The business provides a range of equipment to drillers, including drill pipe, tubing, high-torque connections, blowout preventers and drill collars. Parker’s international land rig fleet is comprised of 24 units designed to drill in rugged environments. The rigs are located in Latin America, Europe, the Middle East, and Asia. Four of the units are not currently contracted. The U.S. drilling business primarily consists of two Artic Alaska Drilling Unit (AADU) land rigs designed to withstand the harsh drilling environments of the Alaskan North. The U.S. barge fleet consists of 13 barge drilling rigs that drill for oil and natural gas in the shallow waters off the coast of the U.S. Gulf of Mexico. Also included in the fleet is the 3,000 horsepower Parker Barge 257, designed to drill year-round in extreme temperatures and reservoir conditions.
October 14, 2014
399
Patterson-UTI Energy
Company Description Patterson-UTI provides onshore contract drilling and pressure pumping services
throughout the United States and Canada. Patterson, founded in 1978, merged with UTI in 2001 establishing one of the largest land drillers in the country. The company currently operates one of the largest land-based drilling fleets with over 275 marketable rigs. PTEN has been expanding the scale and quality of its business lines through a series of acquisitions and a sizeable newbuild program which has delivered roughly five new APEX rigs per year over the past five years.
Contract Drilling Services
Patterson-UTI contracts the majority of its drilling services to major and independent oil and natural gas companies in Texas and surrounding states. More than 90% of the fleet has a depth capacity between the range of 12,500 and 25,000 feet. Approximately two thirds of the rigs are high-spec APEX rigs or other electronically operated AC rigs, with the balance operated mechanically. The company plans to complete 25 additional APEX rigs by 2Q 2015. The contract drilling segment also includes nearly 300 trucks used to transport drilling rigs and related equipment.
Pressure pumping services
Patterson-UTI provides pressure pumping services through two subsidiaries, Universal Pressure Pumping and Universal Well Services. The pressure pumping fleet has consists of 800,000 active hydraulic horsepower, but will likely approach 1.25MM HHP following a recent acquisition of pressure pumping assets in Texas and the deployment of additional units. Universal Pressure Pumping is located throughout Texas, and Universal Well Services operates mainly in the Permian, Barnett, and Eagle Ford basins. Services offered include well stimulation and cementing for the completion of new wells, maintenance of existing wells, hydraulic and nitrogen fracturing, cementing, and acid pumping services. The company also has a small E&P segment operating in Texas and New Mexico, which accounts for less than 3% of revenues.
October 14, 2014
400
Precision Drilling
Company Description Precision Drilling is the largest oilfield services company in Canada. The provides
drilling, completion and production services to E&P companies in North America and the Middle East. Precision is the second largest land drilling company in North America, servicing nearly a quarter of the active onshore wells in Canada and approximately 5% of the wells located in the U.S. Less than 10% of revenues are generated outside of North America. The company recently entered into a service and marketing agreement with Schlumberger which should expand the scope of Precision’s directional drilling business. The company has been taking measures to update its fleet in recent years, constructing new rigs while decommissioning older models, in light of the industry shift towards more complex and unconventional drilling programs. !8 newbuilds were announced in 18 with an additional 16 set for 2015. Precision operates in two segments: Contract Drilling Services and Completion & Production Services.
Contract Drilling Services
Precision has one of the largest land drilling fleets in the industry, with approximately 325 marketable rigs. About 200 of the fleet are high performance Super Series rigs, high specification units that are highly mobile and well suited for horizontal or directional drilling. The fleet is primarily deployed in North America, with approximately 185 rigs in Canada and 125 in the U.S., with the balance located in Mexico, Saudi Arabia and Iraq. The contract drilling segment drives the company’s bottom line, providing over 90% of EBITDA in 2013.
Completion & Production Services
Precision provides completion and workover services, equipment rentals, coiled tubing services, camps, water treatment units, and several other ancillary services. Precision’s completion and production services segment operates primarily in Canada, maintaining a smaller presence in the U.S. The well servicing fleet consists of approximately 190 well completion and workover service rigs, 20 snubbing units and 12 coil tubing units. The company also has around 300 wellsite accommodation units, 50 drilling camps, 24 pump houses, 10 wastewater treatment units, seven potable water production units and an extensive collection of oilfield rental equipment.
October 14, 2014
401
Rowan Companies
Company Description Rowan is a global provider of offshore drilling services to the oil and gas industry.
Historically focused on high-specification jackups, the company has been diverting resources to ultra-deepwater units and divesting noncore assets in recent years, aiming to achieve a more balanced revenue mix. Rowan leads the industry with 19 high-spec jackups, roughly twice as much as the nearest competitor. The company’s operations are focused in the North Sea, the Gulf of Mexico, and the Persian Gulf. Their presence in the Middle East is supported by a strong relationship with Saudi Aramco, who operates nearly a third of Rowan’s jackup fleet.
Fleet
Rowan owns a fleet of 30 jack-up rigs and four high-spec, ultra-deepwater drillships, two of which are currently under construction. All of the company’s jackups are independent leg cantilever rigs that can operate in at least 300 feet of water. The majority of the jackups are high-spec units (indicating a hook-load capacity of at least two million pounds), that are well suited to service high-pressure/high-temperature wells. Diversifying the fleet has been a priority for the company, taking delivery of three heavy-duty, harsh environment (HDHE) ultra-deepwater drillships (12,000’ water depth) in 2014, with an additional unit, the Rowan Relentless, expected by early 2015. These rigs are already contracted until at least 2017 and will be deployed in Southeast Asia and West Africa, enhancing the company’s international presence. In November, the Rowan Resolute will be deployed in the Gulf of Mexico on a three year contract with Anadarko through 2017.
October 14, 2014
402
Schlumberger
Company Description Schlumberger is the world’s largest diversified provider of services and products to
the oilfield. Industry trends have long been driven by Schlumberger innovations, starting with the invention of wireline logging and sustained by the largest R&D budget in the industry which funds a network of over 125 research and engineering facilities worldwide. Schlumberger’s value proposition lies in its ability to integrate and leverage the breadth of its products and services. SLB has a leading market share in a number of product lines and services, including wireline logging, production testing, drill bits, directional drilling services, drill & completion services, surface data logging, solids control and coiled tubing services. Schlumberger operates in over 85 countries worldwide. Global operations are reported through four geographic segments: North America, Latin America, Europe/CIS/Africa and Middle East & Asia. Each segment contributes significantly to both the top and bottom lines, and no region typically accounts for more than 40% of revenues or operating income.
Segments
Schlumberger’s portfolio of products and services, covering virtually every aspect of the exploration, drilling and production cycle, is delivered through three primary operating units: Reservoir Characterization Group; Drilling Group; and Production Group. Reservoir Characterization is the smallest business by revenues but the largest in terms of operating income (39% in 2013). The business seeks to optimize the drilling workflow, a process that begins with locating and defining hydrocarbons. Principal services include WesternGeco, Wireline, Testing Services, SLB Information Solutions and PetroChemical Services. The Drilling Group, the largest in terms of revenues with 38%, integrates precise well placement and formation data to maximize production and drilling efficiency, while providing wellbore assurance throughout the life of the reservoir. This mission is carried out via integrated drilling systems comprised of drill bits, drilling fluids, directional drilling systems, MLWD tools and surface data logging. The Production Group (35% of revenues in 2013) provides products and services that are used throughout the entire lifecycle of the well, including well services, completions, artificial lift, well intervention, water services, carbon services and SLB Production Management field production services. Additionally, Schlumberger owns a 40% interest in OneSubsea, a joint venture with Cameron International that serves the subsea oil and gas market.
October 14, 2014
403
SEACOR Holdings
Company Description SEACOR Holdings primarily operates as a provider of marine services and equipment
to the international energy and agricultural industries. SEACOR’s diverse suite of operations includes offshore and inland river services, storage and shipping of petroleum, and the manufacturing of alcohol. Era Group, a helicopter leasing company, was spun out of SEACOR in 2013. SEACOR’s subsequent aviation operations were reduced to an approximate $36M commitment to several joint ventures in Asia.
Fleet
The diversified holdings company has four reporting segments; 1) Offshore Marine Services, 2) Inland River Services, 3) Shipping Services, and 4) Illinois Corn Processing. Offshore Marine Services Offshore Marine Services is the SEACOR’s main earnings driver, accounting for approximately 45% of revenues in 2013. The segment offers various marine services to the offshore oil and gas industry, including the transportation of personnel, intervention maintenance and repair support, construction support, wind farm support, and lift boat services. The company employs a diverse fleet of vessels to accommodate the wide range of services offered. The fleet includes AHTS, FSVs, PSVs, and crew boats. Inland Services Group The Inland Rivers Services group owns and operates a fleet of barges, towboats and smaller harbor boats, mainly along the Mississippi river. Core operations include chemical transportation, ethanol and petroleum storage, and barge repair. Shipping Services The Shipping Services is primarily involved with the transportation of crude oil and petroleum products from offshore facilities to the U.S. coast. Illinois Corn Processing Located in the U.S. Corn Belt in Pekin Illinois, Illinois Corn Processing manufactures and distributes a variety of alcohol used in food, industrial, and petrochemical end markets, as well as fuel grade ethanol.
October 14, 2014
404
Seadrill Limited
Company Description Seadrill, together with its subsidiaries, is an offshore drilling contractor that operates
a fleet of 69 rigs including 24 under construction, comprising drillships, jackups, semi-submersibles and tender rigs. The company also provides platform drilling, well intervention and engineering services through its listed subsidiary Seawell Limited. Seadrill has been pursuing an aggressive newbuild program in recent years, in addition to upgrading its fleet via strategic M&A. The company’s fleet has an average age of seven years, one of the youngest fleets in the industry. Seadrill has 10 contracts expiring in both 2015 and 2016, making the ability to renew these contracts or obtain new ones critical to the company’s sustained success. The company aims to consistently high-grade its fleet through newbuild orders and acquisitions of modern assets, while divesting older, non-core assets, including the sale of ten tender rigs to SapuraKencana in 2013. Petrobas, Statoil, Total and Exxon Mobile combine to account for roughly 60% of total revenues. Seadrill also owns 70.4% of the outstanding shares of NADL, 63% of Seadrill Partners, 66.2% of AOD, 50.1% of Sevan and 50% of SeaMex.
Floaters
Including 10 units under construction, Seadrill's floater fleet totals 31 units, comprised of 14 semisubmersibles and 17 drillships. The average age of the floating fleet is four years, with 32 of the ultra-deepwater units built in 2000 or after. Nearly the entire fleet is rated to work in the ultra-deepwater (>7,000’ depth), with the exception of two mid-water semisubs graded to work in harsh environments. Eight of the units under construction are slated for use in South Korea, and six of those units are not yet under contract.
Jackups
Seadrill has a fleet of 29 high specification jackups, including eight jackups under construction, with an average age of ten years. All units were built after 2005, including three harsh environments jackups. The eight jackups under construction will be deployed in China, with five expected in 2015 and the balance in 2016. Contracts have not yet been secured for these units.
Tenders
Seadrill disposed of its tender rig business in 2013, selling its stake in certain entities that owned and operated 18 tender rigs to SapuraKencana for a mix of cash and new shares of SapuraKencana, an approximate 12% ownership stake. As part of the agreement, Seadrill will continue to provide operational support to three tender rigs, the West Jaya, West Setia and West Esperanza, and retain ownership of two tender rigs, the T-15 and T-16.
October 14, 2014
405
Seventy Seven Energy
Company Description Seventy Seven Energy provides oilfield services to E&P companies targeting
unconventional resource plays in the United States. The company offers a wide range of upstream services including drilling, hydraulic fracturing, oilfield rentals, rig relocation, and fluid handling and disposal. Operations are spread throughout most of the major shale plays within the U.S., with the highest concentration in the Anadarko Basin and the Eagle Ford Shale. Chesapeake Energy spun off SSE in 2014, and SSE subsequently derives roughly 90% of drilling revenues from contracts with Chesapeake. SSE plans to diversify their revenue stream however, with the long-term goal of deriving only half of their revenues from Chesapeake.
Fleet
SSE operates in four primary business units: 1) Drilling 2) Hydraulic Fracturing; 3) Oilfield Rentals; and 4) Oilfield Trucking. Drilling and hydraulic fractures combine for roughly three quarters of total revenue. Drilling SSE operates a modern fleet of approximately 100 land-drilling rigs, including 16 PeakeRig newbuilds expected by YE 2015. The majority of the rigs are multi-well pad capable and equipped with AC electric drives. Hydraulic Fracturing Provides high-pressure hydraulic fracturing services and other well stimulation services. Owns and operates nine fracturing units, including eight that are currently under contract with Chesapeake. Oilfield Rentals Offers premium rental tools and services for land-based drilling, completion and workover activities. Rental tools include drill-pipes, drill collars and tubing, blowout preventers, frac tanks, mud tanks, and environmental containment equipment. Oilfield Trucking Provides drilling rig relocation and logistics services, and fluid transport and disposal services. SSE has approximately 200 transportation trucks, 150 water hauling trucks, 65 crane & forklifts, and 65 rig ups.
October 14, 2014
406
Superior Energy Services
Company Description Superior is a diversified oilfield services company that serves the drilling, completion
and production-related needs of oil and gas companies worldwide. Superior offers a diverse collection of specialized products and services that are used throughout the economic lifecycle of a well. Superior derives more than 80% of revenues from the U.S. (20% from the U.S. GoM), and the balance internationally. Superior has four reportable segments: Drilling Products and Services; Onshore Completion and Workover Services; Production Services; and Subsea and Technical Solutions. Completion and Workover Services contributed 35% of revenues in 2013, more than any other segment, while Subsea and Technical Solutions contributed the least with 16%. The Drilling Products segment overwhelmingly the most profitable, contributing more than half of total operating income.
Segments
The Drilling Products and Services segment is comprised of downhole drilling tools, which includes tubular rentals and manufacturing and rentals of bottom hole tools; and surface rentals, which includes temporary onshore and offshore accommodation modules and accessories. In the Onshore Completion and Workover Services segment, Superior provides pressure pumping services, well service rigs and fluids management. Complete Energy Services, acquired by Superior in 2011, provides the company’s fluid management services. Production Services businesses include a variety of intervention services and specialized pressure-control tools used for pressure control and intervention operations. Subsea and Technical Solutions include products and services that are generally customer-specific and require specialized engineering and manufacturing. Services rendered include pressure control, completion tools, subsea construction, end-of-life services, marine technical services, and the production and sale of oil and gas.
October 14, 2014
407
Tenaris
Company Description Tenaris is a leading manufacturer and supplier of steel pipe products and related
services for the energy industry and other industrial applications. Primary customers include major oil and gas companies and engineering companies involved in gas gathering, transportation, processing and power generation facilities. Core products include casing, tubing, line pipe, and mechanical and structural pipes. The company operates in virtually every major oil and gas basin worldwide and maintains service facilities with industrial operations in the Americas, Europe, Asia and Africa. Tenaris achieved this scope both primarily through a series of strategic acquisitions - entering new markets by acquiring interests in foreign competitors. North America is the highest grossing region, though the Middle East & Africa has been the fastest growing segment over the last several years.
Segments
Tenaris has two reportable segments: Tubes and Others. Tubes accounts for more than 90% of annual revenues. The Tubes segment involves the production and sale of both seamless and welded steel tubular products, with seamless tubes accounting for the majority of revenues. Seamless tubulars are often used for more complex operations, including high pressure and high temperature applications. Drilling applications are the primary end-use for these products. Corporate G &A expenses are allocated to the tubes segment, lowering the reported segment margins. The Others segment includes all other businesses, namely the production and selling of sucker rods; welded steel pipes for electrical conduits; industrial equipment; coiled tubing; and raw materials.
October 14, 2014
408
TETRA Technologies
Company Description Tetra is a pure play oil and gas services company that provides several distinct
products and services including fluid services, production testing, full service compression and offshore services. Tetra is the market leader in a variety of niche markets that span the entire well life cycle, from drilling and completion through to the abandonment stage. The company has a strong global presence and derives roughly 30% of revenues from international operations. Approximately 65% of revenues are derived from onshore applications, with the balance earned offshore. TETRA is divided into three operating divisions: Fluids, Production Enhancement and Offshore. TETRA’s compression services offerings were significantly improved with the recent acquisition of Compressor Systems, Inc.
Segments The fluids division manufactures and markets clear brine fluids, additives, and
associated products for the use in well drilling, completion and workover operations. Operations are primarily located in the U.S., with additional business in Latin America, Europe, Asia, the Middle East and Africa. The fluids business the biggest source of revenue, contributing 40% in 2013. Production Enhancement consist of two sub-segments: Production testing and Compressco. The production testing segment provides after-frac flow back, well testing, offshore rig cooling and other associated services. Compressco provides compression-based services used in both conventional and unconventional applications. Compressco services were significantly enhanced with the acquisition of CSI in August. The Offshore division provides downhole and subsea services such as well plugging and abandonment; decommissioning and construction services utilizing heavy barge lifts; and conventional and saturated diving services. Tetra is the largest provider of heavy lift platform removals with two full derrick barges. The company is currently phasing out the Maritech segment, an oil and gas production operation which is decommissioning its remaining offshore wells and production platforms.
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Thermon Group
Company Description Thermon is a global provider of highly engineered infrastructure equipment for
various end markets, including downstream and upstream oil and gas applications, chemical processing, and power generation. Thermon provides a comprehensive array of heat tracing solutions, including electric and steam heat tracing, tubing bundles, control systems, design optimization, engineering services and installation services. Heat tracing involve the application of external heat onto pipes and other instruments to prevent freezing, protect vessels, and maintain temperature and flow operations. Thermon is the second largest thermal solutions provider with approximately 20% market share. The oil and gas industry is the company’s largest end-market, representing nearly 45% of revenues. The company expects to have to make a significant investment in upstream infrastructure to keep pace with industry dynamics, particularly to service reservoirs that are deeper, more complex and located in harsh environments. Thermon has a strong international presence, with network of distributors in more than 30 countries. Roughly two thirds of all revenue is generated outside of the U.S. Thermon has a diverse customer base consisting of many include multi-national corporations, with no customer accounting for more than 10% of revenue.
Fleet
Thermon’s business involves the engineering and installation of highly-specific thermal solutions, and providing repair and maintenance services throughout the useful life of the project. Services relating to reoccurring maintenance and repair account for approximately 60% of annual revenues, and provide a relatively stable revenue source due to the necessity of upkeep and high switching costs.
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Tidewater
Company Description Tidewater is the largest owner and operator of OSVs with an active fleet of roughly
275 vessels. The fleet supports virtually every phase of the offshore E&P cycle, including transporting equipment and personnel to offshore locations; towing and anchor handling for offshore drilling units; workover and production activities; and a variety of specialized services, including seismic and subsea support. Tidewater’s geographic footprint spans over 50 countries, with over 90% of revenues derived outside the U.S. from a variety of customers, including IOCs, NOCs and independent E&P companies. Chevron is the single largest customer, accounting for approximately 18% of revenues, followed by Petrobas at roughly 9%. The company has continued to high-grade its fleet by constructing new vessels and via acquisitions, notably the acquisition of Troms Offshore Supply in 2013, which expanded Tidewater’s presence in the North Sea and the harsh environment capabilities of the fleet.
Fleet
The deepwater class of vessels contributed 55% of the company’s revenues from vessel operations in FY2014, up from 49% in FY2013, and 44% in FY2012. The deepwater class includes about 75 large PSVs; 12 large, high-horsepower Anchor Handling Towing Supply (AHTS) vessels; and one large MPSV. Tidewater continues to invest heavily in deepwater, with plans to deliver nearly 25 new deepwater PSVs within the next three years. Tidewater has a fleet of roughly 110 towing supply vessels contributes around 44% of revenues. The class includes non-deepwater towing-supply vessels (with less than 10,000 BHP) and on-deepwater PSVs that are less than 230 feet long, primarily used to transport cargo and supplies to offshore drilling locations. Additional vessels include crew boats and utility vessels used to transport personnel, and offshore tugs that are used tow floating drilling rigs and barges; dock tankers, and assist pipe laying, cable laying and construction barges.
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Transocean
Company Description Transocean is one of the largest offshore drilling companies in the world with a total
fleet of over 90 offshore drilling units. The company specializes in technically demanding drilling, with a focus on deepwater and harsh environment markets. With operations in every major market, the company has one of the most diverse customer bases in the industry. This stands to change, however, as Transocean moves to exit various non-core markets as it continues to position itself as a specialist in ultra-deepwater and harsh environment markets.
High-Spec Floaters
Transocean has a fleet of 55 high-spec floaters, including seven ultra-deepwater drillships under construction. The average age of the fleet is 17 years and four of the vessels are cold stacked. 36 are rated to work in the ultra-deepwater (>7,500’), including seven that are rated for harsh-environments, primarily deployed in the North Sea. The company also has 12 deepwater drillships, three of which are not currently under contract (4,500’ to 7,500’). Transocean has a fleet of 21 midwater semisubmersibles (1,000’ to 4,499’) with average age of approximately 30 years. The fleet is primarily deployed in the U.K. North Sea, and four are rated to work in harsh environments. Transocean plans to divest midwater operations in the future. Including five under construction, the company has a fleet of 15 high specification jackups with an average age of 11 years. The jackups under construction, all high-specification KFELS jackups, all expected for delivery in 2016 or later and are not yet under contract.
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Trican Well Services
Company Description
Trican Well Service is an international full service pressure pumping company. The company provides a suite of specialized products, equipment and services for use in the drilling, completion, stimulation, and reworking of oil and gas wells. Trican has substantial operations in Canada and the U.S., and a mounting international presence. Trican invested heavily in fracturing from 2009-2012, nearly tripling their fracturing capacity (in terms of HHP). Recent spending has been mostly for maintenance purposes, focusing instead on increasing current utilization and improving existing cost structures. Approximately three fourths of revenue is generated from fracturing, with the balance coming from cementing; coiled tubing; nitrogen; acidizing and specialty chemicals; and industrial and pipeline services.
Fleet
As one of the largest pressure pumpers in Canada, Trican is quite levered towards Canadian LNG export activity. The Canadian market makes up roughly 55% of consolidated revenues, with fracturing accounting for approximately 60% of Canadian revenues. On the whole, fracturing comprises 67% of revenues. Trican’s biggest exposure is in the Permian and Marcellus regions, but has a presence in most other major formations. U.S. operations contribute roughly a third of revenues. Internationally, TCW has a large geographic footprint that spans the Russia, Kazakhstan, Algeria, Australia, Norway, Saudi Arabia and Columba. Russia represents their greatest international exposure, and operations have been growing rapidly since their entrance to the market in 2000.
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Vantage Drilling
Company Description
Vantage Drilling Company, together with its subsidiaries, is an international offshore drilling company that contracts its drilling units, equipment, and work crews on a dayrate basis for the drilling of oil and natural gas wells. The company also provides construction supervision services and operational and managerial support services for the construction of two ultra-deepwater drilling units at DSME shipyard in Korea. Vantage manages and operates a modern, high specification fleet of eight units, including one currently under construction. Modern, high-spec rigs often command premium day rates as operators preferences have increasingly shifted towards more high-spec, modern units for their perceived safety and efficiency gains relative to their older counterparts. The fleet primarily operates in West Africa and South East Asia, with additional operations in India and the Gulf of Mexico. Given their modest fleet size, Vantage depends on a small number of customers for the majority of their revenues. OGNC and Petrobas accounted for more than 50% in 2013.
Fleet
The company’s fleet consists of four BMC ultra-premium 375 jackups, three DSME ultra-deepwater drillships and one DSME ultra-deepwater dual derrick drillship (the Cobalt Explorer) which is currently under construction. With an average age of just four years, Vantage has one of the youngest fleets in the industry. The Cobalt Explorer is expected to be available in June, 2015 and is not yet under contract. The drillships are all rated to work in the ultra-deepwater up to 12,000 feet.
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Weatherford
Company Description Weatherford International is the fourth largest diversified oilfield services company in
the world. Weatherford is a relatively young company that has grown rapidly since its inception in 1987. Its rapid ascent can be attributed to both innovation and a prolific series of acquisitions – more than 250 over the past 13 years alone. Weatherford’s core businesses include well construction, completion, artificial lift, formation evaluation and stimulation. The company is market leader in artificial lift, production optimization, casing and tubing services, cementation products, drilling with casing, line hangers, solid expendables, and managed pressure drilling. Weatherford is in the process of divesting a number of non-core businesses and recommitting focus to core competencies; aging reservoirs, unconventional resources, and well integrity. Testing &Production services and drilling fluids businesses are in the process of being divested, and the company has plans to do the same with the wellheads business and their remaining land rigs, starting with the fleets in Russia and Kurdistan. With operations in more than 100 countries, Weatherford has a global presence that few others can rival within the industry. Weatherford breaks down its operations geographically into four segments: North America; Latin America; Europe/SSA/Russia; and MENA/Asia Pacific. North America contributed roughly 42% of revenues in 2013. While the other three segments have historically been on even footing, MENA/Asia Pacific outpaced the other segments on the heels of strong demand in China, and accounted for roughly 20% of revenues in 2013.
Segments Weatherford divides its business into two primary operating segments: Formation
Evaluation and Well Construction; and Completion and Production. Formation Evaluation and Well Construction historically generates roughly 60-65% of the company’s total revenue stream. Formation Evaluation and Well Construction assist clients determine the most efficient drilling methods with an emphasis on well integrity throughout the entire well life-cycle. Key service lines include tubular running services, controlled-pressure drilling and testing, drilling services, drilling tools, integrating drilling, wireline services, re-entry and fishing, cementing, liner systems, integrated laboratory services and surface logging. Operating margins for well construction tend to around 25%; companywide margins have been closer to 10% over the past five years. Formation Evaluation service margins have hovered around or below the companywide levels in recent years, but the segment remains ripe for margin expansion. Completion and Production businesses are designed to unlock reserves in deepwater, aging and unconventional reservoirs, and boost overall field productivity and profitability. Principal service lines include artificial lift systems; stimulation and chemicals including a full fleet of pressure pumping services; completion systems; and pipeline and specialty services. Artificial lift is the company’s bread and butter, generating approximately 20% of total revenues while occupying a fortified position as the market leader.
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ISI RATING SYSTEM: Based on stock’s 12-month risk adjusted total return.
BUY Forecasted Return > 10% HOLD Forecasted Return from 0% to 10% SELL Forecasted Return < 0%
ISI has assigned a rating of BUY to 51% of the securities rated as of 9/30/14.* ISI has assigned a rating of HOLD to 47% of the securities rated as of 9/30/14.* ISI has assigned a rating of SELL to 3% of the securities rated as of 9/30/14.*
(Due to rounding, the above number may add up to more/less than 100%). *Please note as of October 2014 ISI Group LLC has changed our ratings system to the categories described above.
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For the distribution of ratings for the quarter ending 9/30/14, what was previously rated as a Strong Buy/Buy is now reflected in the BUY category, what was previously rated as a Neutral is now reflected in the HOLD category, and what was previously rated as a Cautious/Sell is now reflected in the SELL category. PRICE CHART: Disclosure Charts for all research reports containing a rating or a price target for a subject company whose securities have been assigned a rating or price target for at least one year, must include a line graph of the daily closing prices of the security for the period that a rating or price target has been assigned, up to three years.
VALUATION METHOD/RISK: North America Oil Services & Drilling Aspen Aerogels (ASPN) Valuation Methodology: Our 12-month price target of $17 is based on 50.0x our 2015 EV/EBITDA estimate (EV of $0.2 billion and 2015E EBITDA of $7 million). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. Atwood Oceanics Inc. (ATW) Valuation Methodology: Our 12-month price target of $48 is based on 6.0x our 2015 EV/EBITDA estimate (EV of $3.9 billion and 2015E EBITDA of $740 million). Risks to our Price Target: A significant decline in commodity prices would likely lead to a slowdown in drilling activity, and consequently demand for offshore drilling rigs. A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. Dayrates are historically volatile and A material shift in dayrates to lower levels would alter our earnings outlook for offshore drillers. A decrease in offshore rig demand due to a change in commodity prices or a shift in exploration and development activity towards onshore basins could cause dayrates to fall. Also, an oversupply of new rigs driven by increased newbuild orders from rig contractors could alter the market fundamentals in the offshore market and could adversley impact dayrates as well. Baker Hughes (BHI) Valuation Methodology: Our 12-month price target of $95 is based on 17.3x our 2015 earnings estimate of $5.5. Risks to our Price Target: A significant change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production and international political and economic risks. Basic Energy Services (BAS) Valuation Methodology: Our price target of $25 is based on 4.5x our 2015 EV/EBITDA estimate (Enterprise Value of $1.4 billion and 2015 EBITDA of $405 million). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks.
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Bristow Group Inc. (BRS) Valuation Methodology: Our price target of $80 is based on 7.2x our 2015 EV/EBITDAR estimate (Enterprise Value of $3.2 billion and 2015 EBITDAR of $398 million). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitcal and economic factors. C&J Energy Services (CJES) Valuation Methodology: Our price target of $34 is based on 6.9x our 2015E EV/EBITDA estimate (EV of $1.4 billion and 2015E EBITDA of $851 million). Risks to our Price Target: Sustained overcapacity of stimulation equipment in the U.S. oilfields could weigh on C&J’s earnigs and possibly modify our view on the company's earnings potential. Additionally, an unexpected drop in commodity prices or the decreasing E&P spending could also impact the company’s earnings outlook. Calfrac Well Services (CFW CN / CFW.TO) Valuation Methodology: Our price target of $22 is based on 6.9x 2015 EV/EBITDA multiple (Enterprise value of $2.0 billion and $405 million EBITDA). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. Cameron International (CAM) Valuation Methodology: Our 12-month price target of $87 is based on 16.5x our 2015 earnings estimate of $5.30. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. CARBO Ceramics (CRR) Valuation Methodology: Our price target of $62 is based on 16.5x our 2015 EPS estimate of $3.75 Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitcal and economic factors. Chart Industries Inc. (GTLS) Valuation Methodology: Our price target of $72 is based on 19.0x our 2015 EPS estimate of $3.80. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. CHC Helicopter (HELI) Valuation Methodology: Our price target of $5.8 is based 5.1x our 2015 EV/EBITDA multiple (Enterprise value of $1.8 billion and $340 million EBITDA). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitcal and economic factors.
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Core Laboratories (CLB) Valuation Methodology: Our price target of $151 is based on 21.5x our 2015 EPS estimate of 7.03. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production and international political and economic risks. Core Laboratories (CLB) Valuation Methodology: Our price target of $151 is based on 21.5x our 2015 EPS estimate of 7.03. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production and international political and economic risks. Diamond Offshore Drilling (DO) Valuation Methodology: Our 12-month price target of $32 is based on 4.8x our 2015 EBITDA estimate (Enterprise Value of $6.2 billion and 2015 EBITDA of $1.23 billion). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitcal and economic factors. Dresser-Rand Group Inc. (DRC) Valuation Methodology: Our price target of $83 is based on 13.4x our 2015 EBITDA estimate (Enterprise Value of $7.3 billion and 2015 EBITDA of $554 billion). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international politcal and economy related risks. Dril-Quip Inc. (DRQ) Valuation Methodology: Our price target of $81 is based on 19.8x our 2015 EPS estimate of $6.10 plus $5 per share in excess cash. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, OPEC behavior, increasing non-OPEC oil production, and other international political and economic risks. Ensco plc (ESV) Valuation Methodology: Our price target of $45 is based on 6.6x our 2015 EBITDA estimate (Enterprise Value of $13.3 billion and 2015 EBITDA of $2.27 billion). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. Ensign Energy Services (ESI CN / ESI.TO) Valuation Methodology: Our price target of $17 is based on 5.1x our EV/EBITDA multiple (Enterprise value of $2.7 billion and $618 million EBITDA). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks.
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Era Group Valuation Methodology: Our price target of $19 is based on 6.6x our EV/EBITDA multiple (Enterprise value of $0.7 billion and $108 million EBITDA). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitcal and economic factors. Exterran Holdings Inc. (EXH) Valuation Methodology: Our price target of $40 is based on 6.0x our EV/EBITDA multiple (Enterprise value of $4.4 billion and $742 million EBITDA). Risks to our Price Target: Drilling declines in North America and excess capacity in the market have led to reduced demand for compression equipment. Prolonged weakness in the domestic natural gas market, sustained production declines and storage builds could result in reductions in contracted horsepower. FMC Technologies (FTI) Valuation Methodology: Our 12-month price target of $67 is based on 19.0x our 2015 earnings estimate of $3.50. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. A protracted downturn in the airline industry could have a adverse impact on the company's earnings. Forum Technologies (FET) Valuation Methodology: Our 12-month price target of $40 is based on 16.5x our 2015 earnings estimate of $2.40. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. Frank's International (FI) Valuation Methodology: Our 12-month price target of $26 is based on 19.8x our 2015 earnings estimate of $1.30. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitcal and economic factors. NOW Inc. (DNOW) Valuation Methodology: Our 12-month price target of $29 is based on 16.5x our 2015 earnings estimate of $1.76. Risks to our Price Target: A material change in commodity prices would our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. GulfMark Offshore, Inc. (GLF) Valuation Methodology: Our price target of $35 is based on 6.0x our 2015 EV/EBITDA estimate (Enterprise Value of $1.3 billion and 2015 EBITDA of $242 million). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitcal and economic factors.
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Halliburton Co. (HAL) Valuation Methodology: Our 12-month price target of $97 is based on 18.2x our 2015 earnings estimate of $5.31. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. Helmerich & Payne (HP) Valuation Methodology: Our 12-month price target of $114 is based on 6.3x our 2015 EV/EBITDA estimate (Enterprise Value of $8.3 billion and 2015 EBITDA of $1.9 billion). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitcal and economic factors. Hercules Offshore (HERO) Valuation Methodology: Our price target of $2 is based on 3.6x our 2015 EV/EBITDA estimate (EV of $1.3 billion and 2015 EBITDA of $357 million). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. Hornbeck Offshore Services (HOS) Valuation Methodology: Our price target of $50 is based on 6.3x our 2015 EV/EBITDA estimate (Enterprise Value of $1.7 billion and 2015 EBITDA of $420 million). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic events. A repeal of the Jones Act would be a materially negative event for Hornbeck as it would allow increased vessel migration to the GOM, the company's primary market. Independence Contract Drilling (IOC) Valuation Methodology: Our price target of $18 price target is based on 7.8x our 2015 EV/EBITDA estimate (Enterprise Value of $0.3 billion and 2015 EBITDA of $37 million). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC production, and international and economic events. ION Geophysical Corp. (IO) Valuation Methodology: Our price target of $2.7 price target is based on blended multiple of 4.8x EV/EBITDA (Enterprise Value of $0.4 billion and 2015 EBITDA of $420 million), which takes into account both ION’s legacy business and INOVA joint venture with BGP Inc. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitcal and economic factors.
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Key Energy Services (KEG) Valuation Methodology: Our price target of $5 price target is based on 5.1x our 2015 EV/EBITDA estimate (Enterprise Value of $1.3 billion and 2015 EBITDA of $297 million). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitcal and economic factors. MRC Global (MRC) Valuation Methodology: Our 12-month price target of $29 is based on 16.5x our 2015 earnings estimate of $2.20. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitcal and economic factors. Nabors Industries (NBR) Valuation Methodology: Our 12-month price target of $29 is based on 6.0x our 2015 EV/EBITDA estimate (Enterprise Value of $8.7 billion and 2015 EBITDA of $1.78 billion). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. National Oilwell Varco (NOV) Valuation Methodology: Our 12-month price target of $95 is based on 14.0x our 2015 earnings estimate of $6.80. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitcal and economic factors. Noble Corp. Valuation Methodology: Our 12-month price target of $25 is based on 7.2x of our 2015 EV/EBITDA estimate (EV of $11.5bn and 2015E EBITDA of $1.72 billion). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitcal and economic factors. Ocean Rig UDW Inc. (ORIG) Valuation Methodology: Our 12-month price target of $34 is based on 7.2x of our 2015 EV/EBITDA estimate (EV of $5.6bn and 2015E EBITDA of $1.18 billion). Risks to our Price Target: A significant decline in commodity prices would likely lead to a slowdown in drilling activity, and consequently demand for offshore drilling rigs. A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. Dayrates are historically volatile and A material shift in dayrates to lower levels would alter our earnings outlook for offshore drillers. A decrease in offshore rig demand due to a change in commodity prices or a shift in exploration and development activity towards onshore basins could cause dayrates to fall. Also, an oversupply of new rigs driven by increased newbuild orders from rig contractors could alter the market fundamentals in the offshore market and could adversley impact dayrates as well. The interests of inside owners may not always align with the interests of public equity shareholders including the timing and means of selling additional shares in the secondary market.
October 14, 2014
422
North Atlantic Drilling (NADL) Valuation Methodology: Our 12-month price target of $5.8 is based on 7.2x our 2015 EV/EBITDA estimate (EV of $4.2bn and 2015E EBITDA of $671MM). Risks to our Price Target: A significant decline in commodity prices would likely lead to a slowdown in drilling activity, and consequently demand for offshore drilling rigs. A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. Dayrates are historically volatile and A material shift in dayrates to lower levels would alter our earnings outlook for offshore drillers. A decrease in offshore rig demand due to a change in commodity prices or a shift in exploration and development activity towards onshore basins could cause dayrates to fall. Also, an oversupply of new rigs driven by increased newbuild orders from rig contractors could alter the market fundamentals in the offshore market and could adversely impact dayrates as well. The interests of inside owners may not always align with the interests of public equity shareholders including the timing and means of selling additional shares in the secondary market. Oceaneering International (OII) Valuation Methodology: Our 12-month price target of $93 is based on 19.8x our 2015 earnings estimate of $4.70. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. Pacific Drilling SA (PACD) Valuation Methodology: Our 12-month price target of $12 is based on 7.2x our 2015 EV/EBITDA estimate (EV of $4.2bn and 2015E EBITDA of $716MM). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks. Dayrates are historically volatile and A material shift in dayrates to lower levels would alter our earnings outlook for offshore drillers. A decrease in offshore rig demand due to a change in commodity prices or a shift in exploration and development activity towards onshore basins could cause dayrates to fall. Also, an oversupply of new rigs driven by increased newbuild orders from rig contractors could alter the market fundamentals in the offshore market and could adversely impact dayrates as well. The interests of inside owners may not always align with the interests of public equity shareholders including the timing and means of selling additional shares in the secondary market. Oil States International (OIS) Valuation Methodology: Our 12-month price target of $71 is based on 16.5x our 2015 earnings estimate of $4.31. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitcal and economic factors. Pacific Drilling (PACD) Valuation Methodology: Our 12-month price target of $12 is based on 7.2x our 2015 EV/EBITDA estimate (Enterprise Value of $4.2 billion and 2015 EBITDA of $716 million). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks.
October 14, 2014
423
Paragon Offshore (PGN) Valuation Methodology: Our 12-month price target of $10 is based on 3.6x our 2015 EV/EBITDA estimate (Enterprise Value of $2.7 billion and 2015 EBITDA of $705 million). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be influenced by a change in the economic climate, oil and natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitical and economic risks. The company also has international exposure to potentially politically and economically unstable environments which could impact earnings. Parker Drilling (PKD) Valuation Methodology: Our 12-month price target of $8 is based on 4.2x our 2015 EV/EBITDA estimate (Enterprise Value of $1.0 billion and 2015 EBITDA of $355 million). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be influenced by a change in the economic climate, oil and natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitical and economic risks. The company also has international exposure to potentially politically and economically unstable environments which could impact earnings. Patterson-UTI Energy Valuation Methodology: Our 12-month price target of $43 is based on 5.4x our 2015 EV/EBITDA estimate (Enterprise Value of $3.9 billion and 2015 EBITDA of $1.258 billion). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be influenced by a change in the economic climate, oil and natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitical and economic risks. Precision Drilling (PD CN / PD.TO) Valuation Methodology: Our price target of $14 is based on 5.4x our EV/EBITDA multiple (Enterprise value of $3.9 billion and $957 million EBITDA). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be influenced by a change in the economic climate, oil and natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitical and economic risks Rowan Companies (RDC) Valuation Methodology: Our price target of $41 is based on 6.0x our 2015 EBITDA estimate (Enterprise Value of $4.3 billion and 2015 EBITDA of $1.1 billion). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be influenced by a change in the economic climate, oil and natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitical and economic risks Schlumberger Ltd. (SLB) Valuation Methodology: Our 12-month price target of $129 is based on 19.8x our 2015 earnings estimate of $6.50. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be influenced by a change in the economic climate, oil and natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitical and economic risks
October 14, 2014
424
SEACOR (CKH) Valuation Methodology: Our 12-month price target of $85 is based on 1.25x target forward book value multiple. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be influenced by a change in the economic climate, oil and natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitical and economic risks SeaDrill (SDRL) Valuation Methodology: Our 12-month price target of $40 is based on a 10% target dividend yield on an estimated $4.00 dividend in 2015. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production and international political and economic risks. Seventy-Seven Energy (SSE) Valuation Methodology: Our 12-month price target of $26 is based on 5.0x our estimated 2015 EV/EBITDA (EV of $2.3 billion and 2015 EBITDA of $432 million). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be influenced by a change in the economic climate, oil and natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitical and economic risks Superior Energy Services Inc. (SPN) Valuation Methodology: Our 12-month price target of $39 is based on 14.9x our 2015E EPS estimate of $2.65. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be influenced by a change in the economic climate, oil and natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitical and economic risks.. Tenaris S.A. (TS) Valuation Methodology: Our price target of $41 is based on 14.0x our 2015 EPS estimate of $2.90. Risks to our Price Target: A material decline in drilling activity could result in reduced demand for casing and tubing services which are highly correlated to the oil and gas rig count, particularly in North America. Thermon Group Holdings (THR) Valuation Methodology: Our price target of $25 is based on 18.2x our 2015 EPS estimate of $1.40. Risks to our Price Target: Include the possibility of project delays given the uncertain timing of contracts awarded, as well as the timing and scale of new orders. Significant interuptions in the company’s fabrication and production facilities could also adversely impact the companys earnings outlook. Tidewater Inc. (TDW) Valuation Methodology: Our 12-month price target of $37 is based on 6.0x our estimated 2015 EV/EBITDA (EV of $3.3 billion and 2015 EBITDA of $548 million). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be influenced by a change in the economic climate, oil and natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitical and economic risks. Transocean Ltd. (RIG) Valuation Methodology: Our price target of $27 is based on 6.0x our 2015 EBITDA estimate (Enterprise Value of $10.8 billion and 2015 EBITDA of $2.99 billion).
October 14, 2014
425
Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be influenced by a change in the economic climate, oil and natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitical and economic risks. Trican Well Service (TCW CN / TCW.TO) Valuation Methodology: Our price target of $16 is based on 6.9x EV/EBITDA multiple (Enterprise value of $2.3 billion and $443 million EBITDA). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be influenced by a change in the economic climate, oil and natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitical and economic risks. Vantage Drilling (VTG) Valuation Methodology: Our price target of $1 is based on 6.6x EV/EBITDA multiple (Enterprise value of $3.1 billion and $446 million EBITDA). Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be influenced by a change in the economic climate, oil and natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitical and economic risks. Weatherford International (WFT) Valuation Methodology: Our price target of $29 is based on 16.5x our 2015 earnings estimate of $1.75. Risks to our Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be influenced by a change in the economic climate, oil and natural gas storage levels, OPEC behavior, increasing non-OPEC oil production, and geopolitical and economic risks.