67 WALL STREET, New York - March 8, 2012 - The Wall Street Transcript has just published its Oil & Gas: Drilling Equipment and Services Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Strong Demand for Higher-Specification Rigs - Drilling Shift From Gas to Liquids - Offshore Deepwater Oil Discoveries - Shale Drilling Dynamics
Companies include: Aker Kvaerner (AKSO.OL); Cameron International (CAM); Anadarko (APC); BP (BP); and many more.
In the following brief excerpt from the Oil & Gas: Drilling Equipment and Services Report, expert analysts discuss the outlook for the sector and for investors.
JAMES WEST is the Lead Oil Service and Drilling Analyst for Barclays Capital. Mr. West joined Barclays Capital in September 2008, and prior to that he was at Lehman Brothers beginning in October 2000. His broad coverage universe includes large-capitalization, diversified oil service companies, niche technology providers, offshore and onshore contract drillers, supply vessel providers and energy capital equipment companies. Prior to joining Lehman Brothers, Mr. West worked at Donaldson, Lukfin & Jenrette. He earned a B.A. from the University of North Carolina at Chapel Hill.
TWST: And what's going on on the construction side of it? Is it keeping pace?
Mr. West: Construction has picked up fairly significantly as well. We've seen over 100 new offshore rigs have been ordered since late 2010, and we expect this cycle to see well over 200 new offshore rigs ordered, perhaps well in advance the 200, but 200 is a number we at least comfortable with now as the industry tries to keep pace with the increasing demand in the market. If you think about it from an offshore rig company perspective, if you're able to achieve day rates at $600,000 a day, day cost of $125,000 per day and a new offshore rig might cost you $625 million or so - then you're getting a payback in four to five years on a 40-year asset, so these are pretty attractive economics for the offshore drillers.
And so we think that will spur continued investment in new offshore rigs. And so it's equally good for companies like National Oilwell Varco, which sells the majority of the equipment used in deepwater rigs, also good for Cameron (CAM), who is a major provider of blowout preventers on deepwater rigs, and then of course good for other companies that service the rigs or supply the rigs, and as these rigs come to market, we'll of course need things like helicopters and supply boats to support the rig operation.
TWST: So it's a virtuous cycle at this point.
Mr. West: It is now, $115 international oil prices always help.
TWST: It seems like a fairly bright picture here.
Mr. West: We're pretty bullish on the oil service space in general, and certainly bullish on the offshore rig companies and the rig equipment companies - the manufacturers as well as a result of this.
TWST: What do investors think of the space at this point? Are stock prices reflecting this positive outlook?
Mr. West: The oil service group has had a nice move up this year. Since we published our outlook report, which was put out on December 19, the OSX, or the Oil Services Index, is up about 27% versus the S&P, which I believe is up about 13% over the same time period, so investors are gravitating towards the oil service group. I would say though the valuations on a historical basis for many stocks remain below their historical averages, for the rig companies themselves, the offshore drillers are trading at an average on our numbers of about 7.5 times 2012 EBITDA, which is kind of in the middle of their normalized range.
The capital equipment companies - so Cameron, National Oilwell - are trading on an earnings basis at anywhere from 14 times to 17 times forward year earnings, which is actually right in the fairway of their kind of midpoint of their range. So it's not - I can't argue that the capital equipment of the offshore drillers are very cheap in here, but why I think given that we have a three to five-year kind of fairway of earnings growth here, that there's definitely room for multiples to move up.
TWST: Where would you be focusing your attention?
Mr. West: We actually like the big capital of service companies more so than the capital equipment in the offshore drillers, and that's really because the valuations are more attractive. So you have Baker Hughes (BHI), Halliburton (HAL) and Weatherford (WFT), all trading at nine times to 11 times 2012 earnings, which is below their historical range of 13 times to 15 times. And these companies also I think benefit from two things.
One is the resilience of the North American land market, which I think is certainly a controversial area for investors right now, but it's a market that we think is going to hold up reasonably well given the strength in oil prices and the shift towards oil activity. And number two, these are the companies that benefit significantly from what we think will be a very strong international upcycle, an international upcycle that this year will gain positive momentum. We'll likely see very strong volume growth and significant margin growth as international upcycle starts to accelerate, and part of that's driven by the new offshore rigs that are coming to market. They're just increasing volumes overall.
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