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Gold/Mining/Energy : Schlumberger - The biggest/baddest oil service company
SLB 48.90+0.4%4:00 PM EDT

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To: Dennis Roth who wrote (188)4/24/2006 6:29:04 PM
From: Dennis Roth  Read Replies (1) of 215
 
SLB (NR), HAL (OP/A): A good start for Oil Services; Reiterate Attractive coverage view - Goldman Sachs - April 24, 2006

Earnings season started on a positive note with both Halliburton (HAL, OP/A) and Schlumberger (SLB, NR) posting results above GS estimates and consensus. We raised our above-consensus forecasts for both HAL and SLB. Strength in North America was the key driver for better than expected operating performance for both companies, which reinforces our view that E&Ps will 'drill through' the near term seasonal weakness in US natural gas prices. We expect other Oil Services companies reporting this week to post 1Q results generally either in line or slightly above consensus. And even though the 1Q06 earnings seasons should not be as spectacular as the 4Q05, we should continue to see strong fundamentals and operating performance that support our Attractive sector view. We continue to believe that the risk-return for investors with a 12-18 month time horizon is very compelling.

(Goldman Sachs & Co., and or one of its affiliates is acting as advisor to Baker Hughes Incorporated in the proposed sale of its interest in WesternGeco to Schlumberger Limited. Goldman Sachs & Co., and or one of its affiliates will receive a fee for this advisory role).

RECOMMENDATION UPDATE: HAL IS STILL OUR TOP PICK - We reiterate HAL as our Top Pick and we expect the IPO of KBR to act as a catalyst to bridge the valuation gap between HAL and SLB/BHI as it will highlight the attractiveness of HAL's core Oilfield business. Continued solid execution as demonstrated in 1Q06 should also help relative multiple expansion. HAL currently trades at an '07 EV/DACF of 12.3x, versus 15.1x for SLB and 14.6x for BHI. Our fair value for HAL of $97 implies 16% upside.

IMPLICATIONS FOR THE INDUSTRY #1: STRENGTH IN NORTH AMERICA INTO 2Q - The fact both HAL and SLB posted strong North America results is encouraging. Seasonal weakness in US natural gas prices was one of investors' key concerns going into the quarter not only due to potential impact on 1Q but especially because it could affect momentum into the 2Q06. HAL and SLB management comments suggest that they expect North America strength to continue through the shoulder months, which is in line with our view that E&Ps will not change capex plans due to near term volatility. The fact that Halliburton announced a price book increase on April 15th is another indication that pricing power continues strong into the 2Q.

IMPLICATIONS FOR THE INDUSTRY #2: BULLISH COMMENTS ON SEISMIC - SLB management reinforced its optimism and commitment to the seismic market with 3 announcements:
(1) Acquisition of BHI's 30% stake in WesternGeco for $2.4 bn (implies total equity value of $8 billion);
(2) SLB will commission a 7th Q vessel (2Q07); and
(3) SLB raised WesternGeco's capex to $350 mn, from $315 mn (ex-multi client surveys). SLB's comments/actions are positive for sentiment of other seismic companies like Veritas (VTS). The near term momentum is likely to remain strong for seismic companies and fundamentals look solid over the next 12-18 months. However, we are still concerned about newbuilds (more of a late '07/'08 concern) and the fact that valuations are not inexpensive for historic standards at the same time that returns are well above normal. We reiterate our IL/A rating for VTS as we believe there is better risk/return elsewhere in the sector.

WHAT TO WATCH FOR: Here are some of the key areas to monitor this week:
(1) BJS capex will be an important data point for Pressure Pumping capacity additions. In the calendar 4Q05 BJS reported capex below expectations, suggesting some potential difficulties to add capacity. It will be also interesting to compare BJS comments on Pressure Pumping pricing and job turndowns with HAL's bullish comments.
(2) CAM's subsea orders;
(3) LSS comments on alloy pricing power and potential share buyback; and
(4) BHI's performance relative to HAL/SLB.

RAISING ESTIMATES FOR HAL AND SLB: We raised our '06/'07 EPS estimates for HAL by $0.07/$0.05 to $4.13/$5.26. Higher estimates for ESG (the core Oilfield Energy Services Group) were partly offset by lower assumptions for KBR (lower Iraq revenues and reflecting divestitures). We raised our '06/'07 EPS estimates for SLB by $0.13/$0.12 to $2.65/$3.43. The key drivers for our increase were North America and WesternGeco. We also incorporated in our SLB model the acquisition of 30% of WesternGeco owned by BHI (we assumed the transaction closes at the end of April, as indicated by management). The increases in our '06 oilfield estimates for both SLB and HAL were very similar. The reason why our EPS increase is lower for HAL than for SLB is only because, as previously mentioned, we lowered our KBR estimates.

Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Daniel Henriques, CFA, and Daniel Boyd, CFA.
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