Seadrill Fear and Loathing – Barron’s

Shares of Seadrill (SDRL) have dropped despite the Europe-listed shares getting an upgrade atSociété Générale today, as the investment bank still sees better opportunities in Noble (NE),Ensco (ESV) and Rowan (RDC).


Société Générale Guillaume Delaby andEdward Muztafago explain why they raised their rating on Seadrill and why they’re still not fans of the offshore driller:

Our previous Sell rating (report link, 28 October), was partly based on the risk of floaters oversupply post 2013, which has now materialized. Assuming a “normal” and “gentle” scenario, we believe that: 1) 2014, 2015 and 2016 consensus might now be a bit too low and, 2) the current $3.92 annual dividend (11% dividend yield) might also be secure. In that context, and even assuming a slightly more grim 2014 (before a pick-up in 2015), our Sell rating is no longer warranted in our view. But in the event of an unexpected harsher scenario of declining oil prices and/or higher interest rates, we find little reassurance at Seadrill whose net debt, according to our forecasts, could rise to $17.5bn by the end of 2015 (237% gearing), a high level even by Seadrill’s own standards.

Delaby and Muztafago explain why Noble, Rowan and Ensco are better bets:

All in all, and while Seadrill is no longer a “Sell” or our “least preferred stock” (now SBM Offshore), we believe that US competitors like Noble, Rowan and Ensco (covered by SG analyst Edward Muztafago out of the US) are much more attractive given: 1) 6-8% expected dividend yields (2015-2016e), 2) above 15% FCF yields and 3) reasonable 35-50% gearing levels. Put another way, they offer only slightly less expected financial rewards for a much lower degree of financial risk in our opinion.

Still, not everyone’s a fan of even those drillers–yesterday Barclays cut its price targets on Rowan and Ensco, among others.

Shares of Seadrill have fallen 0.7% to $34.74 at 10:20 a.m. today, while Noble has dropped 0.8% to $31.03, Rowan has declined 0.9% to $31.30 and Ensco is off 0.5% at $50.39.

Deep Sea Drilling Sector : Sector declines along with growing competition

Morgan Stanley has looked at the sector and sites the likely decline of rates as a reason to be more conservative about the sector. $ 100 oil is not a sufficient offset to the new rigs competing in the same markets.

The future looks OK, the present not so much, Morgan Stanley says

  • Bearish talk about offshore drillers has abounded recently (IIIIIIIV), and Atwood Oceanics (ATWlatest quarterly results won’t ease those concerns, Morgan Stanley says.
  • The firm is now modeling a rollover at $400K/day on ATW’s next rig to rollover in Equatorial Guinea in Aug. 2014, down substantially from the rig’s current dayrate of $516K/day (fixed in July 2013), as it sees increased competition in securing new work.
  • ATW does remain positioned to deliver steady earnings growth, the firm says, and beyond well-documented near-term floater market choppiness it still forecasts marketed utilization to pick up in 2015.
  • ATW (-2.1%) results pulled down other offshore players: HERO -7.9%DO-3.2%NE -2%RIG -1.9%SDRL -1.8%ESV -1.6%RDC -0.9%.

Niko Resources : Death Spiral ?

Niko Resources

(NKO : TSX : $1.34), Net Change: -1.28, % Change: -48.85%, Volume: 7,510,858
Ability to continue as a going concern?

Following Niko‟s Q2/F14 results, and its announcement of a potential $340 million high-yield debt facility, Canaccord Genuity Oil & Gas Analyst Christopher Brown has downgraded his rating on NKO shares.
In Brown‟s view, if the company secures the proposed debt facility, the majority of its operating cash will be directed toward high interest debt payments. Moreover, the debt would be on a first priority basis, secured by substantially all of NKO‟s assets.
As such, if the company is unable to secure additional funds through asset sales, Brown believes it is likely that NKO‟s assets will revert to the new debt holder. His sentiment is echoed by NKO‟s financial auditor, which states it has significant doubts about the company‟s ability to continue as a going concern.

Also announced, NKO has signed a letter of intent with Diamond Offshore (DO) relating to a settlement of the company‟s payment commitments and obligations relating to the Ocean Lexington and Ocean Monarch rigs.

Trinidad Drilling Ltd.

A petroleum drilling rig capable of drilling t...

A petroleum drilling rig capable of drilling thousands of feet (Photo credit: Wikipedia)

TDG : TSX : C$7.06
Target: C$8.50

Trinidad Drilling Ltd. is a Canadian based drilling contractor with operations in western Canada, southern US and Mexico. Trinidad’s rig portfolio is largely comprised of deeper rigs. The company also operates coring rigs, surface hole rigs and barge rigs.
All amounts in C$ unless otherwise noted.

Investment recommendation
EPS (ex-FX gain) of 29c came in ahead of consensus of 26c. EBITDA of $85 million beat consensus of $80 million but was just shy of our $88 million forecast. The consensus beat is attributed to better than expected results from the company’s Canadian drilling division. TDG’s Canadian fleet realized 73% utilization vs the industry average of 58%, due to both high demand for the company’s relatively high performance fleet and management’s ability to crew virtually all of its rigs in a seasonally busy period. The division’s result drove overall company outperformance, as TDG’s -3% y-y decline in total company revenues and -8% y-y decline in total company EBITDA represented outperformance vs peers (other drillers active in both Canada and the US reported flat to -21% y-y declines in revenues and -10% to -27% y-y declines in EBITDA over the quarter).

However, we note that in order to satisfy high customer demand, TDG pushed the repairs and maintenance costs it typically incurs in the first quarter into the remainder of the year. Considering this near-term cost reallocation, but also our belief that TDG has a higher performance rig fleet that should continue to outperform longer term, we have revised our 2013/14E EPS from 60c/75c to 57c/80c. Rolling forward the estimates used to derive our target price from 2013 to 2014, our target price increases from C$8.10 to C$8.50. We note our revised target price reflects 4.5x 2014E EV/EBITDA and 10.6x 2014E P/E target multiples.
Divergence between higher vs lower performance fleets continues to surface:

On TDG’s 1Q13 results call, management noted that “older style equipment is being particularly impacted” during softer pockets of demand. We note not only are higher-performance rigs competing for the same work as lower-performance ones, but also that the ownership of NAM oil and gas assets is generally shifting towards larger-cap E&Ps, NOCs and supermajors who place higher value on top-tier equipment vs their small-mid cap E&P peers.

Transocean : Ichan Creeps Up

English: Transocean Wildcat (Aker H-3 design) ...

English: Transocean Wildcat (Aker H-3 design) drilling rig in Cromarty Firth, Scotland. (Photo credit: Wikipedia)


RIG : NYSE : US$58.17
I wonder what Bill Ackman thinks?

Carl Icahn disclosed his stake in Transocean increased to 5.6% late Friday, sending shares of the offshore driller higher. Additionally he has asked management to declare a dividend of at least $4 per share, and has said that if the company doesn‘t, he will propose it at the next shareholder meeting. He said, in a filing, ―Under Swiss law and the Issuer’s Articles of Association, a shareholder has the right to propose a dividend at a company’s annual meeting, and if a majority of shareholders support the proposal, the dividend is declared, whether or not the company’s board supports such  proposal.

Transocean responded in a statement that read, ―We will review Mr. Icahn’s filing carefully and respond in due course. We appreciate the opportunity to hear from our shareholders and look forward to continuing a dialogue with Mr. Icahn.

As always, the Transocean Board of Directors will set dividend policy on the basis of financial prudence and the best interest of
shareholders.‖ Transocean initiated a dividend in 2011, but was forced to abandon the payouts in an effort to maintain its
balance sheet and investment-grade rating on its debt


Halliburton 1

Halliburton 1 (Photo credit: friendofdurutti)


(HAL : NYSE : US$39.76)

Halliburton’s fourth-quarter earnings shrank 26% but beat analysts’ expectations as growth in the oilfield-services company’s international activity helped offset weakness in North America.

Halliburton reported a profit of $669 million, or $0.72 a share, down from $906 million, or $0.98 a share, a year earlier. Earnings from continuing operations were $0.63, down from $0.98 while revenue improved 3.2% to $7.29 billion. Analysts had projected earnings from continuing
operations of $0.60 a share on revenue of $7.06 billion.

Chief Executive Dave Lesar cited an “unusually high post-Thanksgiving decline in activity levels” in North America and remaining stock of high-priced guar gum, a material used in hydraulic fracturing that surged in price last year due to a shortage. Halliburton’s revenue in North America fell 5% from the third quarter and operating income fell 22%.

Helmerich & Payne BUY Target $ 62

Plate-forme pétrolière Oil platform from NASA ...

Plate-forme pétrolière Oil platform from NASA JPL. The Arguello Inc. Harvest Oil Platform is located about 10 km off the coast of central California near Point Conception. catégorie:énergie fossile (Photo credit: Wikipedia)

Nov. 19

Helmerich & Payne 
HP : NYSE : US$48.85
BUY Target: US$62.00

Helmerich & Payne, Inc. is a contract drilling company that owns and operates land rigs in the US and international markets and some offshore platform rigs mostly in the Gulf of Mexico.

Investment recommendation
EPS of $1.39 beat consensus of $1.23 and our $1.24 estimate. On July 30,
we wrote “given that the spread between the dayrates/utilization/margins
commanded by HP’s unrivalled fleet of high-performance rigs relative to
lower-quality rigs typically increases in softer markets, we expect HP to
outperform peers and are upgrading the company to a BUY rating”. As
evidenced by HP’s very strong CY3Q12 as well as by the relatively strong
3Q12s reported by other land drillers with high-performance rig fleets (PD-T,
TDG-T, WRG-T), this growing divergence in demand for high-quality versus
lower-quality rigs has materialized. We expect this trend to continue and
continue to believe that HP offers investors “relative insulation within a
softening rig market.” Despite considering NAM activity levels lower than
previously forecast, we have slightly increased our 2013E EPS from $4.85 to
$4.95. We maintain our $62.00 target price, based on 12.7x CY2013E P/E,
in line with the range (10.2x-17.4x) we assign to peers.
Investment highlights
 We believe the ongoing rig replacement cycle will benefit HP:
Management notes over the past year, the US industry rig count is down 230 rigs while the AC-drive rig count is up 70. Moreover, utilization of AC-drive rigs is over 85% while utilization of SCR and mechanical rigs is below 60%. We expect this rig bifurcation trend to continue as efficiency
drives E&P rig demand. 234 of HP’s 239 NAM rigs are AC-drive rigs.
 No premium for a premium rig fleet? HP trades at 9.9x CY2013E P/E, in line with peers at 9.7x. However, given its historic outperformance,
unrivalled current fleet quality and the ongoing trend of rig bifurcation, we believe HP warrants a premium valuation. Moreover, strong CY3Q12
results and signing of 10 new E&Ps to FlexRig contracts in the past year confirm HP’s strong relative performance should continue near-term.

Nucor – Agreement With Encana for Drilling


Encana (Photo credit: Wikipedia)

Nucor (NUE : NYSE : US$41.48)

Nov. 7

nucor and Encana ( ECA) announced a long term agreement for an off-shore natural gas drilling program in the continental United States that the company believes will ensure a reliable, low cost supply of natural gas for its existing and expected future needs for more than 20 years.

Under the terms of the agreement, Nucor will pay its share of costs plus an additional amount of carried interest as each well is drilled, subject to a cap on carry paid for each well and a cap on total carried interest. Either party may suspend drilling if natural gas prices fall below a predetermined threshold.

ECA will be the operator and will provide expertise to drill, complete and operate the wells. The new agreement is in addition to an earlier and smaller onshore natural gas drilling agreement with ECA that was established in 2010. By entering into this new agreement, the company believes it will be better able to manage its exposure to natural gas volatility and overall energy demand for its manufacturing operations

Diamond Offshore Drilling – Rates Rising

Diamond Offshore Drilling

Diamond Offshore Drilling (Photo credit: Wikipedia)

October 19

Diamond Offshore Drilling (DO : NYSE : US$71.41), Net Change: 1.64, % Change: 2.35%, Volume: 4,044,377

Just DO it. 

Shares of deepwater driller Diamond Offshore were higher as recent deals in the sector are painting a picture of a market in which deepwater oil rigs will be in high demand for years. Competitor Noble (NE)  commented that it expects ultradeepwater rates to keep heading higher, even after a strong rise so far this year, while Diamond commented that they saw the same market momentum driven by demand off Australia, both coasts of Africa, as well as closer to home. “

In the U.S. Gulf of Mexico, we have seen resurgence in activity in the deepwater and ultra-deepwater arenas over the past year,” said Michael Acuff, Diamond’s senior vice president of marketing, predicting as many as 40 deepwater rigs could be working there next year, up from 31 now. As for elsewhere, Diamond highlighted the signing of its Ocean Endeavor rig, which had been making $285,000 per day in Egypt, to an 18-month contract starting in December 2013 at $521,665 per day, including half the potential bonus.

The company would only say it will be located outside of the Mediterranean Sea. Also, its Ocean America rig has been signed up by Chevron (CVX)  for 18 months off Australia at a rate of $475,000 per day starting in mid-2013, versus the current dayrate of $405,000.



UBS Top Picks

Yum! Brands logo

Yum! Brands logo (Photo credit: Wikipedia)

September 4, 2012

Comcast Corp.

Ticker: CMCSA


Price: $33.81

Expected 2012 P/E: 14.7x

Comcast provides entertainment, information, and communications products internationally. It was founded in 1969 and is headquartered in Philadelphia, Pennsylvania.


McDonalds Corp.

Ticker: MCD


Price: $89.82

Expected 2012 P/E: 14.8x

McDonalds franchises and operates restaurants primarily in the United States, Europe, Asia, and Africa. It was founded in 1940 and is based in Oak Brook, Illinois.

Source: UBS

Mattel Inc.

Ticker: MAT


Price: $35.27

Expected 2012 P/E: 12.8x

Mattel designs and markets various toy products. It was founded in 1945 and is headquartered in El Segundo, California.

Source: UBS


Yum! Brands

Yum! Brands

AP Images

Ticker: YUM


Price: $63.76

Expected 2012 P/E: 16.6x

Yum operates as a quick service restaurant internationally. It was founded in 1997 and is headquartered in Louisville, Kentucky.

Source: UBS

CVS Caremark Corp.

CVS Caremark Corp.

CVS Caremark

Wikimedia Commons

Ticker: CVS


Price: $45.80

Expected 2012 P/E: 12.1x

CVS provides pharmacy health care services in the United States. It was founded in 1892 and is based in Woonsocket, Rhode Island.

Source: UBS




Ticker: HAL


Price: $33.04

Expected 2012 P/E: 8.8x

Halliburton provides various products and services to the energy industry for exploring and producing oil worldwide. It was founded in 1919 and is based in Houston, Texas.

Source: UBS

Chevron Corp.

Ticker: CVX


Price: $112.88

Expected 2012 P/E: 9.1x

Chevron engages in petroleum and energy operations worldwide. It was founded in 1879 and is headquartered in San Ramon, California.

Source: UBS

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