Hello all, I bought some NE a few days ago -- can anyone give me some insight as to why this industry trades at about the lowest p/e in the whole market. Even with a disaster 2010 of $4.00 in earnings we're at 7:1. Are the earnings that volitile on oil drilling? Great balance sheet, dividend sucks, but I like a buyback program better than a few pennies more in dividend. RIG looks good too, with DO not as attractive, but still a good buy. Why does HES get the multiple it does??
The thing is, if oil is going to run out in ten years, and that is why drillers are cheap, think about this: For the last 2-3 years that we have before oil supposedly runs out the price of oil would absolutely skyrocket (would it be $300 per barrel, $500?) and that would increase demand and dayrates for drillers as well so even under that scenario drillers would make huge profits for the last few years of oil.
The valuation is based on the uncertainty in the future dayrates. History shows that when dayrates go up as they have the last few years, companies go out and build new rigs. That also happened, and we have many new rigs coming to market in 2009 and 2010. It ain’t that simple though. A rig though is not a rig in every respect. You have floating rigs and jack-up rigs. Floating rigs command a rich premium to jack-up rigs. Floaters are rigs that drill in deep water and they float rather than stand up on the bottom of the ocean. They have not been around long and there are fewer of them. The big new oil finds are primarily in deep water because we have tapped most of the shallow water finds already. Therefore, as you try and forecast future dayrates you must determine the future price of oil, the future price of jack-up dayrates, and the future price of floater dayrates. Once you have all that sorted out, you must value each company based on their floater/jack-up ratio. DO has the best floater to jack-up ratio, but their floaters are not new state of the art floaters. RIG has the next best ratio but has a lot of debt to work through. RIG is also the biggest and the most knowledgeable deepwater company with the most advanced deepwater rigs. NE has a great fleet of deepwater assets but many are jack-ups. Unfortunately, it is not as simple as saying they are undervalued on a P/E ratio. Past earnings have been volatile, and the industry has not policed itself well on overbuilding in boom times that lead to crashes in dayrates. Welcome to our crazy world. You must have an IRON stomach to last more than six months in this sector.
So, based on your hypothesis, NE is traded on the price of oil. It does not trade on earnings. The analysts have a $4.oo spread on next years earnings. That means they don't know. So they give it a 5 p/e. Over the next 2 years, NE could put $2+ bil. in the bank. At that point they could buy 20%+ of the outstanding, assuming the price hangs in the $20's. That may change it to a true value company where the price is based on fundamentals, NOT OIL. Sooner or later, someone will scoop this up if the price stays too low.
You may be right there will most likely be drilling past 20 years from now. But you are wrong if you believe that the doubtful future viability of the oil business due to it running out is not a factor in the p/e's. Why else would XOM (the greatest company in the last 40 years) have a p/e of 8. Don't you think it at least should trade at a p/e worthy of wal-mart (14).
The valuation is nuts. Especially since there is no debt here. Whats goofy, is that this stock was able to trade $20 in 2004 with $30's crude and very little earnings. The retained earnings are a few billion dollars since then and earnings are now huge.
There really is no sustainable downside for this company at this price. Earnings can be very volatile historically. If there is ever a glut of rigs then rigs would go idle and rates would fall and this company would have no earnings. But since crude is trading $60's with terrible demand, seems unlikely it is headed back to $30's. China car sales y/y are up 55%. I think thats why crude is $60's even though America is in depression.
HES gets 10 p/e because of ownership in Tupi field off the coast of Brazil that could be the biggest feild in the world.
These offshore drillers get low p/e's because there may only be 10 to 20 years of drilling left. There may be a 100 years, but you don't know in this industry. Thus, the low multiple. Where as people will most likely be buying cereal from General Mills in 200 years. Also, the valuation is in the 4's because the day rates are going to get cut in half. So they are really in the 8 to 10's.
I have been trying to figure out the prices for all of these water drillers. DO has the greatest percentage of deepwater in its fleet. 31 deepwater and only 14 jack-ups. RIG has it split half and half. Noble has 43 jack-ups and 17 deepwater. Ensco has 43 jack-up and 3 deepwater. That pretty much tells you the story of the p/e's right there. Jack-ups are bad and deepwater is good.