Thursday, September 13, 2007

I Found Goldman's Other Deep Sea Driller Pick: Atwood Oceanics (ATW)

It is always exciting to find a new company that plays on themes you are interested in. Through the transitive theorem, I was able to triangulate on Goldman's other deep sea driller pick (mentioned in the post before this one): Starting at GlobalSantaFe (GSF), go through Yahoo News, find an article mentioning Pride International (PDE), and notice this hidden gem from 2 days ago (via AP):

"In a note to investors, Goldman Sachs analyst Daniel Boyd cut his third-quarter, full-year 2007 and 2008 forecasts for most drillers, sparing only Atwood Oceanics (ATW) and Pride International (PDE). He said he expects drilling rates to rise gradually domestically and to weaken internationally. While the international jackup market remains undersupplied at the moment, increasing supply is likely to put pressure on day rates as we move into 2008. We expect the deepwater market to remain undersupplied through 2009 and for demand to be more than enough to absorb new builds at leading edge day rates."

Also mentioned positively was Diamond Offshore Drilling (DO) which is one of the fund's holdings.

Also per a CBSMarketwatch article today, Mike Breard, an analyst at Hodges Capital Management says "Demand is slowing for some of the shallow water rigs. But there continues to be a shortage of deep offshore rigs in the world and day rates are going up," Breard said. "We see that trend continuing for at least the next five years. People have already signed leases for these deep offshore rigs going out to 2010."

Now that's secular.

More on Atwood Oceanics (ATW) in a later post, but let's look at the relative valuations in the group on a simple PE estimate for 07 and 08, from largest to smallest
  • GlobalSantaFe ($16B soon to be merged): EPS est 07: $7.10, 08: $9.11 - generating PE's of 10.1 and 7.9 respectively.
  • Diamond Offshore ($15B): EPS est 07: $7.13, 08: $12.36 - generating PE's of 15.3 and 8.8 respectively.
  • Pride International ($6B): EPS est 07: $2.95, 08: $4.13 - generating PE's of 12.3 and 8.8 respectively.
  • Atwood Oceanics ($2.5B): EPS est 07: $4.06, 08: $7.23 - generating PE's of 19.4 and 10.9 respectively.
So we can see these stocks all generally are trading in the high upper digit PEs base do 2008 estimates. With that said, the estimates have been gyrating quite extensively the past 60 days per Yahoo estimates - how accurate these are within a dime or a quarter in 2008 can be called in question but directionally year over year 2007 vs 2008, the trend is the same.

Obviously the wild card is dayrates in this sector but again, most of these rigs are rented out many years in advance on long term contracts. As one comes off contract, it gets rebid at much higher rates than the old expiring contract. As crude rises and producers are flush with cash they can continue to bid extravagant rates for this limited supply of rigs worldwide; especially in the Far and Middle East.

As an aside GlobalSantaFe hit an air pocket when it announced plans to build a new rig without a pre-arranged drilling contract. This rig won't be ready until 2010 - "Our decision to move forward without an executed drilling contract is clearly a departure from our much more conservative past approach," said Jon Marshall, president and chief executive officer of GlobalSantaFe. "However we would not have taken such a capital risk without a very high degree of confidence in the ongoing strength of the ultra-deepwater market." This bad boy will be able to drill down to depths of 10k feet!

Per Reuters:
  • Investors, skittish about the drillship's price and the fact that it is not yet under contract, pushed shares ofGlobalSanteFe down 2 percent.
  • "I think people are disappointed that it's going to cost so much and they didn't announce a contract with it," said Mark Urness, an analyst with Calyon Securities, adding that demand for other newly built drillships has been strong.
  • On average, recently ordered drillships have cost about $645 million, according to Urness.
  • In a note to clients, energy investment bank Simmons & Co. said the drillship, the most expensive ordered to date, "provides a strong signal about future demand for ultra-deepwater."
2 analysts - 2 wildly different assessments - shocker!

So a new stock to add to the watch list, and after doing some homework tonight I will put up a more full analysis on Atwood Oceanics.

Long GlobalSantaFe, Diamond Offshore, Pride International in fund; no personal positions

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