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Offshore Drilling May Not Be as Strong as Expected (ESV, PDE, RIG, BP, WOPEY, DO, PBR)

Administrator — Mon, 07 Feb 2011 18:07:42 +0000

Today’s announcement of a definitive merger agreement between Ensco plc (NYSE: ESV) and Pride International Inc. (NYSE: PDE) is the first major deal among offshore drillers since the Macondo well explosion last April. The combined company will be the second-larges offshore driller in the world, behind only Transocean Ltd. (NYSE: RIG). The deal has been talked about for some time, and is largely grounded on the ideas that scale will work to the combined companies’ favor and that offshore drilling is about to boom. But is that really true?

The disaster in the Gulf of Mexico at the Macondo well owned by BP plc (NYSE: BP) has led to stricter proposed regulation in the US portion of the gulf. And Reuters noted in January that “the oil industry worldwide is preparing for a crackdown on risky and expensive offshore drilling” as a result of the Gulf disaster. Australia tightened its permitting regime before issuing permits to BP and Woodside Petroleum Ltd. (OTC: WOPEY), and Brazil is also considering tightening its regulations.

The Financial Times recently reported that the five largest oil companies in the world are set to spend $128 billion on capital investment in 2011. A lot of that spending will occur onshore in North America, where drilling for shale gas is much easier, surer, and less risky financially. It’s a rare hole in a shale gas play that comes up dry.

Shale gas development has also begun in Europe, particularly in Eastern Europe and, interestingly, in France, as well as projects ramping up in China. The catch is that shale gas does not fill the world’s demand for transportation fuel. Currently, only oil does that.

MarketResearch.com has estimated that $64.2 billion will be spent on offshore drilling in 2011, about half the total $128 billion investment predicted by the FT. The bulk of the investments are expected to be made in the Asia-Pacific region, although MarketResearch.com also notes expected growth in the US Gulf of Mexico, Brazil, and West Africa.

Another hitch is the availability of offshore drilling rigs. According to PennEnergy’s weekly offshore rig count, there are a total of 790 offshore rigs in the world’s supply, of which 571 are currently in use. The global utilization rate is 72.3%.

With that much spare capacity, day rates could come under pressure, hurting revenue and profits at drillers like Ensco, Transocean, and Diamond Offshore Drilling Inc. (NYSE: DO). Rig utilization in western Africa, arguably the least regulated offshore drilling area in the world, is still just under 72%.

Drilling in the Arctic will also not begin in earnest this year, although drilling activity is expected to increase in the North Sea. Utilization of offshore rigs in Europe is at nearly 80%, so this could be a bright spot for drillers in 2011.

Transocean shares are trading at around $80, with a mean price target for the next 12 months of $82.57. The company’s 52-week range is $41.88-$92.67. Ensco’s target price (before the merger announcement) was $57.19 and its 52-week range was $33.33-$55.88. Ensco’s shares closed last Friday at $54.41. Diamond’s 52-week range is $54.70-$93.42, its mean price target is $69.67, and it is currently trading around $72.55.

The offshore drillers will feel the effects of the slowdown in the US Gulf of Mexico, and are vulnerable to tighter regulations in Australia and, perhaps, even the North Sea. As long as there is regulatory uncertainty surrounding offshore drilling, it is best to be cautious about the cheery outlook for these drillers.

And let’s not omit Petrobras (NYSE: PBR). It now sits on billions of barrels of oil that were purchased from the Brazilian government.

Paul Ausick

Filed under: Mergers and Buy Outs, Oil & Gas Tagged: BP, DO, ESV, PBR, PDE, RIG, WOPEY

Mergers As Far As The Eyes Can See (AOL, BEC, DHR, BRK-A, BRK-B, WSC, ESV, PDE, SNY, GENZ, GGOX, ENWV)

Administrator — Mon, 07 Feb 2011 13:49:17 +0000

They call it “Merger Monday” for a reason. Today’s news is not dominated by football hangovers. It is dominated by a slew of headlines over mergers, mergers, and more mergers. We compiled a brief summary of each deal this morning.

AOL Inc. (NYSE: AOL) is paying $315 million to acquire privately-held Huffington Post to revamp its online content.

Beckman Coulter Inc. (NYSE: BEC) is being acquired by Danaher Corp. (NYSE: DHR) for $5.87 billion. The deal comes to $83.50 per share and the $5.87 billion compares to a market cap of roughly $31.5 billion for Danaher. Danaher investors better hope that synergies and cost efficiencies can be had in a serious way because this was about $10.00 above what we thought was a fair market value in December when the rumors first broke.

Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) is finally making good on an event that first surfaced last August. Warren Buffett and friends are acquiring the rest of Wesco Financial Corporation (NYSE Amex: WSC), the remaining 19.9% not owned, for cash or shares of Berkshire Hathaway Class B common stock at the election of each shareholder for almost $550 million with a starting value before gains and items of $386.55 per share.

Ensco Plc (NYSE: ESV) is acquiring Pride International (NYSE: PDE) in a cash and stock deal valued at $41.60 prior to any dilution or share value change. The deal is for 0.4778 shares and $15.60 in cash.

Sanofi-Aventis (NYSE: SNY) is reportedly close to striking a deal to acquire Genzyme Corporation (NASDAQ: GENZ) for some $74 to $77 per share plus what will be up to a $5 to $6 earn-out right per share based upon certain milestones.

In a much smaller deal, GigOptix, Inc. (OTCBB: GGOX) is acquiring Endwave Corporation (NASDAQ: ENWV) in a stock for stock deal that appears to be close to a merger of equals. Endwave shareholders will own some 42.5% of the combined company.

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JON C. OGG

Filed under: Mergers and Buy Outs Tagged: AOL, BEC, BRK-A, BRK-B, DHR, ENWV, ESV, GENZ, GGOX, PDE, SNY, WSC

Analysts Downgrading Oil Patch (NOV, PDE, REP, SII, STO, SU, RIG)

247wallst — Wed, 14 Jan 2009 07:56:20 +0000

It is probably no huge shock that downgrades are coming more than upgrades now that oil has come down so much. Too bad these were not the calls several months ago. Here are some of the downgrades this Wednesday in the oil patch:

National Oilwell Varco (NYSE: NOV) Cut to Underweight at JPMorgan.
Pride International (NYSE: PDE) Cut to Underweight at JPMorgan.
Repsol SA (NYSE: REP) Cut to Neutral at UBS.
Smith International (NYSE: SII) Cut to Neutral at JPMorgan.
Statoil (NYSE: STO) Cut to Neutral at UBS.
Suncor Energy (NYSE: SU) Cut to Sector Perform at RBC.
Transocean (NYSE: RIG) Cut to Neutral at JPMorgan.

Jon C. Ogg
January 14, 2009

Posted in Analyst Calls, Oil & Gas Tagged: NOV, PDE, REP, RIG, SII, STO, SU

Oil Patch Offers No Great Earnings Assurances (NBR, NE, ESV, PDE)

247wallst — Thu, 02 Oct 2008 10:14:24 +0000

Oilfield services company Nabors Industrial (NYSE:NBR) revised its guidance downward after the market closed yesterday and its share price is approaching a new 52-week low. And its bringing its competitors down with it. Noble Corporation (NYSE:NE) is off more than 7%, Ensco International (NYSE:ESV) is off more than 5%, and Pride International (NYSE:PDE) is off nearly 7% in early trading today. Both Pride and Noble have touched new 52-week lows.

Nabors now expects third quarter EPS of $0.65-$0.68, below analysts’ expectations of $0.80. The biggest component of thedownturn is an expected mark-to-market loss of $22 million on Nabors’s450 million-share investment in Honghua Group Ltd. Nabors alsoestimates $13 million in property losses due to Hurricanes Gustav andIke. The company also plans to record a tax adjustment of $0.06/share.On more than 280 million shares outstanding, that amounts to about $17million.

The nearly 19% drop in EPS is the headline number here. The componentsof that drop are probably unique to Nabors and don’t really have anyrelevance to other oilfield services companies. Operationally, evenNabors appears to be doing okay, although its international segment hasexperienced "excessive" downtime in Mexico and Saudi Arabia and otherdelays elsewhere.

The problem looks like cash flow. With the exception of Noble, theseoutfits had negative cash flows in the June quarter. It’s no secretthat credit is hard to get. Crude pricesare falling because of recession fears, and that means less drilling.Even if the US Congress approves the bailout/rescue plan, globaleconomic growth is likely to continue to be slow. E&P companieswon’t spend as much on capex or new exploration, and the drillers arelikely to contract even more. Growth looks to be out of the picture.

Paul Ausick
October 2, 2008

Posted in Earnings, Earnings Warning, Oil & Gas Tagged: ESV, NBR, NE, PDE

UBS Hikes Oil (CVX, DO, HERO, NE, PDE, RDC, RIG)

247wallst — Thu, 15 May 2008 07:01:05 +0000

UBS has raised its raw oil price targets for 2008 to 2010 and has lifted its coverage in the oil sector. UBS also initiated coverage on some of the oil and drilling companies this morning. Here are a few of the stocks they initiated coverage on:

Chevron (NYSE: CVX) raised to Buy from Neutral.
Diamond Offshore (NYSE: DO) started as Buy with a $160 target.
Hercules Offshore (NASDAQ: HERO) started as Neutral with a $35.00 price target.
Noble Corp. (NYSE: NE) started as Buy with $81.00 target.
Pride (NYSE: PDE) started as Neutral.
Rowan (NYSE: RDC) started as Buy with $53.00 target.
Transocean (NYSE: RIG) started as Buy with a $200 target.

As far as average oil price, UBS raised those as well:

$115.00 average per barrel for 2008.
$120.00 average per barrel for 2009.
$116.50 average per barrel for 2010.

Jon C. Ogg
May 15, 2008

Goldman Sachs Sees Gold in Offshore Drillers (DO, PDE, RIG)

247wallst — Tue, 19 Feb 2008 09:37:01 +0000

Goldman Sachs has said enough is enough in oil drillers. The firm is suggesting that investors take advantage of recent weakness seen in the offshore oil drillers.

Its two Buy-rated picks in the call were Diamond Offshore (NYSE: DO) with some 23% upside to its price targets and Pride International (NYSE: PDE) with about 20% upside to its price targets.

Goldman Sachs even noted Transocean (NYSE: RIG) with 22% upside to its target, although Goldman Sachs only has a neutral rating on that name.

This huge discovery in Brazil is noted as part of the reason for day rates rising, although this now notes a record $639,000/day rate.

Jon C. Ogg
February 19, 2008

Top Oil & Gas Analyst Calls (December 18, 2007)

247wallst — Tue, 18 Dec 2007 08:05:39 +0000

These are the top analyst research noted that 247WallSt.com has seen in the oil, gas, and energy sector early this morning:

Approach Resources (AREX) started as Overweight at J.P.Morgan.
Atwood Oceanics (ATW) raised to Buy at Banc of America.
Cal Drive (DVR) started as Buy at Banc of America.
Diamond Offshore (DO) started as Buy at Banc of America.
Ensco (ESV) started as Neutral at Banc of America.
Grant Prideco (GRP) downgraded to Hold at Citigroup.
Gulfmark Offshore (GLF) raised to Buy at Banc of America.
Hornbeck Offshore (HOS) started as Buy at Banc of America.
Noble Energy (NE) started as Buy at Banc of America.
Occidental Petroleum (OXY) raised to Market Perform at FBR.
Pride International (PDE) started as neutral at Banc of America.
Transocean (RIG) started as Buy at Banc of America; Jim Cramer also noted this one as being one of his top 5-year stocks with earnings visibility.

Jon C. Ogg
December 18, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he produces the SPECIAL SITUATION newsletter and he does not own securities in the companies he covers.