http://www.fundamentalasset.com/ en Fundamental Research and Trading Copyright 2011 2011-10-05T16:38:45+00:00 http://www.fundamentalasset.com/research-and-trading/entry/transocean-acquisition-of-aker-complete #When:16:38:45Z{/if} Transocean announced yesterday that it completed the acquisition of 100 percent of the shares of Aker Drilling ASA for NOK 26.50 per share. Fearnley Fonds comments that at yesterday’s close of USD45/s, RIG’s share is close to low price levels from the financial meltdown in 2008 (low of USD42.24) and the Macondo blow-out in 2010 (low of USD42.58). Given the current financial and economic climate (falling oil prices and constrained capital markets) we see activity and dayrate recovery within the drilling space (which basically have been ongoing since mid 2010 – give or take (Macondo etc.)), to start running out of steam. “Early indication” trend changes have already been observed in the jackup market (increasing number again of idle jackups in the international market) as commented in our “Drillers Weekly” (20 September). The current uncertain climate will, as we see it, thus basically limit further dayrate increases. The haste is gone, for now. They do not see moderation in the activity levels, though (particularly for UDW floaters) and rather believe dayrates to hold/hover in current ranges. As such e.g. our UDW free date dayrate projection of USD550k appears too high. Lowering our free date dayrate projection to USD500k (~in-line with current market) and align lower rig segments dayrate projections accordingly, reduces our target on RIG to ~USD70 (USD80). This still provides for upside potential of ~60%. 2011-10-05T16:38:45+00:00 http://www.fundamentalasset.com/research-and-trading/entry/technip-news-of-decent-contract-win #When:07:43:41Z{/if} Has according to Bloomberg, signed an USD1bn contract with PDVSA. Venezuelas Oil Minister Rafael Ramirez told reporters today that PDVSA has signed a USD1bn contract with TECH to develop natural gas infrastructure works in Venezuela. TECH has so far in 3q announced 6 contracts, excluding the above mentioned contract, whereof 2 are priced (total value USD230m). Of these 4 have been announced in September. TECH’s pre-annonuced order intake (value) is traditionally low.  2011-09-28T07:43:41+00:00 http://www.fundamentalasset.com/research-and-trading/entry/dover-dov-good-company-but-jpm-considers-high-expectations-and-earnings-ris #When:09:52:56Z{/if} Following a nice run JPM considers that the bar seems to have been raised for Dover, we are inclined to agree. JPM believes that relative upside to EPS is at best limited from here, with downside risks, mostly at Tech. As an early cycle stock, with markets having worked well off of the bottom, they see the potential for relative multiple contraction on lower earnings, and are moving to UW. Management/strategy is sound, but the bar seems significantly higher. 2012 consensus estimate for DOV’s EPS is now ~$5.12 versus $4.34 at the beginning of ‘10. 2010/2011 came in an average ~40% higher than initial estimates. Historically peak eps for DOV was $3.70 and the 3 year average earnings multiple 18.5x. 70% of analysts now have a “Buy” rating on the stock versus 56% in early 20110. In other words, momentum has been strong and the stock has outperformed, down 8% this year compared to the group down 16% (or up 143% off the 2009 low vs group +114%). - Tech the biggest risk. Tech is not “all about Knowles,” (advanced micro-acoustics products) and JPM sees organic headwind/risk of $0.30-$0.40 for 2012 EPS. First, Electronic A/T (41% of segment sales), which represented 76% of the segment profit gain from 2009-2011E, or a $0.66 swing in DOV EPS, is set to decline, while CMP/other (25% segment sales) has 50% military exposure. Knowles (33% segment sales) should continue to grow, but likely not as much as some investors think, and not enough to offset, with pricing/increased competition risks to watch. Sound Solutions (1) fills the A/T hole and (2) diversifies Knowles, but also seems more risky now, as it sees revenues at its biggest customer -50% in 2012. Longer term, JPM thinks pricing will be more of a challenge for what is still a smallish supplier to an aggressive customer in Apple. 2011-09-08T09:52:56+00:00 http://www.fundamentalasset.com/research-and-trading/entry/oil-services-and-equipment-jpm-considers-that-this-time-its-different #When:09:12:00Z{/if} The direction of oil prices is of particular concern for the Oil Services sector in North America. As long as WTI oil prices stay in the $80s/bbl or above, JPM expects the US land rig count to steadily increase, driven by oil and liquids production in the emerging resource plays. However, if prices fall below $75/bbl, E&Ps likely will be squeezed with shrinking cash flows and higher well costs as service prices are up roughly 10-15% over the past 12 months. With many E&Ps already outspending cash flow (partly insulated from hedging about 35% of production), the rig count would likely flatten at $75/bbl, and subsequently decline if prices fell to the $60s/bbl. To service companies, the biggest impact would be to the pressure pumping market, which we estimate is about 10% undersupplied, despite the capacity additions over the past 18 months. Assuming our base case holds of another 100 rigs added to the market over the next 12 months, we believe pressure pumping capacity will align with demand towards the end of 2012, at which time prices will stabilize and potentially fade. However, if the rig count flattens in a $75/bbl environment, this inflection point likely moves up several quarters putting our earnings estimates at risk. This time it’s different! To ward off the 2007 flashbacks, JPM points out that this is a very different pressure pumping market than last cycle: 1) As an oil market, demand drivers are global now, not domestic – when the US rig count peaked 3 years ago, 83% of rigs drilled for gas, while 56% drill for oil now; 2) The complexity of operations has never been higher – programs are hard to cut quickly; 3) Major oil companies now underpin activity levels – more consistent spending across the US; and 4) Service companies appear more disciplined with additions and pricing increases. 2011-09-08T09:12:00+00:00 http://www.fundamentalasset.com/research-and-trading/entry/subsea-7-solid-results #When:13:39:34Z{/if} Good results all round and helped by good contribution from associatesRevenues of $1,335m slightly ahead of consensus of $1,290 (UBS e$1,300m). Adjusted EBITDA was $307m, 24% ahead of both consensus and UBS estimates of $244m. Adjusted EBITDA margin increased sequentially from 14.7% in 1Q11 to 23% in 2Q11. The big beat in results was largely driven by strong contribution from joint ventures, Sapura Acergy and NKT flexibles. Diluted EPS $0.32 was only 14% ahead of consensus because the convertible debt was dilutive during the quarter. Strengthening backlog and reasonable revenue coverage The backlog at the end of 2Q stood at $7.9bn, up 57% y/y and 18% q/q with an impressive order intake of $2.5bn. $2.9bn of the backlog is scheduled for execution in 2012, covering 49% of revenue estimates. This is broadly in line with historical average of 47%. UBS raised their revenue estimated revenue by c2% for 2011 to 2013 and EBITDA by margin by c100bps, in order to reflect strong operational execution, solid order intake and improved visibility. Their 2011-2013 estimates increase on average by 6%. On UBS new estimates, Subsea 7 is trading at 12.8x 2012E PE, a 26% premium to the sector. This compares to an average premium of 18% over the past 5 years. 2011-08-11T13:39:34+00:00 http://www.fundamentalasset.com/research-and-trading/entry/us-crude-oil-inventories-fall #When:07:39:09Z{/if} The US official EIA inventory data was very bullish for crude oil:Crude oil inventories were down 5.2 Mb, Gasoline inventories were down 1.6 Mb and Distillate inventories were down 0.7 Mb, for a combined decrease of 7.5 Mb. US crude oil demand for the last four weeks was reported to average 19.3 Mb/d (down 0.6% from last year) which is far stronger than expected. As American markets fell substantially yesterday (S&P 500 fell 4.42%) crude oil resisted (both WTI and Brent) and actually made gains on the day (Brent up $4.11/b). At least one leading analyst suggests that the significance of this trading session should not be brushed off and they are reversing their bearish call on crude oil, as support builds. 2011-08-11T07:39:09+00:00 http://www.fundamentalasset.com/research-and-trading/entry/barclays-on-u.s.-oil-services-drilling #When:13:37:28Z{/if} Does Mid-$80s WTI Take Some Heat Off North America? Barclays analyst, James C. West, said, "Current NAM Oil Prices ($83) Below Average 2011 Budgeted Levels:Barclays recently revisited the oil price assumptions embedded in North American oil and gas company capital spending plans for 2011 compiled in June. The average oil price assumption for those companies as of our June report was $87 per barrel, with about half of North American companies using prices above $87. For those budgeting above $87 the average price used for spending budgets was actually $94 per barrel.” “51% of U.S. Oil Production WTI-linked: We believe WTI prices have fallen enough that if sustained could result in budget adjustments in North America. Roughly 51% of U.S. Oil production is based on WTI prices and, on average, every $10 change in oil prices impacts cash flows of the large-cap E&Ps by 8%.” “Buy Quality: Barclays thinks the recent downward move in the overall group is an opportunity and recommend buying high quality companies. They continue to de-emphasize North American land players and remain bullish on those companies with exposure to the international and the capital equipment cycles which are under way. Schlumberger (NYSE: SLB), Baker Hughes (NYSE: BHI), and Cameron (NYSE: CAM) are their favourites.” 2011-08-10T13:37:28+00:00 http://www.fundamentalasset.com/research-and-trading/entry/jpm-oil-services-and-equipment-thoughts #When:10:30:13Z{/if} Trade away in May, but don’t go too far, stocks trough quicker than you think - How much seasonality is there in oilfield service stocks and should investors really sell in May and wait out the summer? JP Morgan give their viewsWe’ve heard that line of thinking more than once, so we dug into the numbers to see if that trade makes sense. On the one hand the numbers do show OSX stocks historically outperforming from December to May—peaking in May or June in 11 of the past 14 years. However, this is a pretty quick trade considering the stocks typically trough in July/August. OSX underperformed S&P by 400bp in May … buy the stocks in July unless oil prices weaken. From 1997-2010, the OSX was up for the month of May seven times and down seven times. When it’s up, it always outperforms the S&P (+720bp); when it’s down, it underperforms (-457bp). With the OSX down 5.3% in May (underperforming the S&P by 400bp), history suggests buying the stocks in July assuming oil prices stay flat or move higher. But if oil prices weaken, the bottom isn’t likely until possibly September. Narrow window for the trade, play it through capital equipment. OSX stocks have peaked in May/June in 11 of the past 14 years, bottoming in July/August about 50% of the time, with the opportunity for this trade increasing materially over the past 8 years. The best way to play the trade is through capital equipment stocks, working 67% of the time in part from typically higher 2H inbound orders. 2011-06-15T10:30:13+00:00 http://www.fundamentalasset.com/research-and-trading/entry/kentz-corp-decent-agm-statement #When:14:08:25Z{/if} Kentz’s AGM statement has confirmed that growth for 2011 is in line with expectations underpinned by a sustained backlog. Backlog at end April of $1629m is in line with the reported number at end January ($1630.3m) with $412m order intake between January and April ($82m of this from natural growth in existing contracts). In the divisions, Specialist EPC backlog has dropped to $717m ($780m at end Dec). Construction backlog has edged higher to $670m ($658m at end Dec) and Technical Support Services backlog has grown significantly to $242m ($164m at end Dec) - generated mainly from opex opportunities from core clients. The bidding pipeline is maintained at $3.7bn with the potential for game-changing contracts in 2H11. In the meantime the valuation relative to peers at c12x 2012 ex cash estimates looks attarctive. 2011-05-27T14:08:25+00:00 http://www.fundamentalasset.com/research-and-trading/entry/transocean-rig-jp-morgan-upgrades-to-neutral #When:16:03:57Z{/if} With RIG’s stock price having fallen 22% over the past two months, JP Morgan believes the risk/reward profile for the stock has balanced out to result in upgrading their recommendation to Neutral from Underweight, keeping our price target at $70 per share. Although they continue to believe the stock has additional downside stemming from Macondo liability, a potential rebound in the deepwater market and improving conditions in the Gulf of Mexico help to offset some of those risks. Longer term, they question the company’s newbuild strategy and are concerned Transocean will be in a weaker competitive position as the cycle evolves and others are aggressively building to improve asset quality. JPM’s $70 price target is in line with their NAV, based upon their assumptions on dayrates, operating costs, and capital spending requirements. Three potential upside catalysts: 1. RIG is a proxy for the deepwater market―dayrates have bottomed, waiting on multiyear contracts before calling the inflection point; 2. Gulf of Mexico moving forward―RIG has among the highest exposure to the GoM; 3. Potential jackup spin-off or divestitures―they aren’t convinced a spin-off creates much value, but a deepwater pure play should command a premium multiple. Three on the downside: 1. Macondo investigations coming to a head, liability risk still not priced in―three Dept. of Justice investigations have been ongoing almost a year, follows a civil suit filed in December; 2. Newbuild strategy could put RIG at competitive disadvantage―RIG is the only one not building on spec; 3. Dividend payout could be at risk―RIG has been trying to pay out its $1bn dividend but has been blocked several times. 2011-05-12T16:03:57+00:00