67 WALL STREET, New York - February 8, 2012 - The Wall Street Transcript has just published its Oil & Gas: Exploration & Production 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: International Increase in Capital Expenditures - Rising Costs of Equipment and Services - Shale, Offshore and Deepwater Drilling - Consolidation to Achieve Economies of Scale
Companies include: Anadarko (APC); BP (BP); Baker (BHI); Cameron (CAM); Cenovus Energy Inc. (CVE); Chevron (CVX); and many more.
In the following brief excerpt from the Oil And Gas Special Report, expert analysts discuss the outlook for the sector and for investors.
Scott Gruber, CFA, is Senior Research Analyst for U.S. oil services at Sanford C. Bernstein & Co., LLC. He joined Bernstein in 2004 as a Research Associate on the energy team before taking on the primary coverage of oil services in 2009. Mr. Gruber was voted the Best Up & Comer Analyst within his sector in Institutional Investor's All-America Research poll in 2010. In 2003, he graduated with honors from the economics department at Princeton University, where he also received a minor in environmental studies.
TWST: You expect deepwater rig supply to fall short of demand by 10% in 2013. Please tell us more about that hypothesis and what the ramifications would be for the sector.
Mr. Gruber: I should mention first that we reduced the forecast shortfall a bit based upon changes in our crude price expectations relative to one when the report was published. We still expect a shortfall, but we foresee about 6% shortage in 2013 versus 8% previously. I think the growth in deepwater drilling activity is one of the more attractive investment themes within the oil services space. Our report, which you referenced, highlights that we believe rig capacity will fall short of demand in 2013. As a result, the momentum behind deepwater rig rate inflation should continue.
We expect very healthy rates and continued inflation in deepwater rates in 2012. A number of offshore drillers are well leveraged to rising offshore rates, such as Ensco (ESV) and Noble (NE). Now, beyond the offshore drillers who, obviously, own and operate the rigs, one of the very few segments within oil services which has yet to secure pricing power is offshore drilling and well-completion services. And I think there is a very high probability that the international service companies like Schlumberger (SLB), Halliburton (HAL) and Baker Hughes (BHI) secure pricing power for their offshore services in 2012. The company most leveraged to this theme is Schlumberger, and that's why it's our top pick in the space. There is great controversy around whether or not the industry secures pricing power, but if you look at customer spending plans and you look at the contracts, which have already been signed to execute the growth embedded in the plans, it provides great confidence to us that the demand growth for the deepwater drilling and completion services will outpace supply and allow the industry to resecure pricing power.
TWST: In addition to Schlumberger, which you mentioned, which names do you believe are the best way to get exposure to the sector?
Mr. Gruber: Schlumberger is our top pick for really three reasons. For the near-term investor, there is controversy around a key catalyst, and that catalyst is offshore well drilling and well-completion pricing. We're confident that Schlumberger secures pricing power this year and margins will rise, and as a result the earnings growth that we foresee into 2013 is achievable, and therefore, the stock is cheap at the current valuation. For longer-term investors, it's one of the highest-quality companies in the space, and it has a healthy balance sheet. The company should generate $5 billion in free cash flow over the next two years, which will be used to facilitate continued buybacks. They are also very well positioned for secular growth in deepwater drilling as well as unconventional resource development globally. The other name I would highlight is Ensco.
They are our top offshore driller pick. As I mentioned, we believe offshore rig rates continue to inflate, and Ensco is capturing that opportunity both in the deepwater and the shallow water. The company, in our view, is the highest-quality offshore driller. They combine a high-quality fleet, well-maintained legacy assets, and they should also generate free cash flow over the next two years allowing the company to pay down debt that was placed on their balance sheet for a previous acquisition while also maintaining an above-S And P dividend yield.
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts.This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
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