| To: Dennis Roth who wrote (185) | 10/24/2005 9:35:53 AM | | From: Dennis Roth | | | | Schlumberger (OP/A): 35% upside to $108 fair value - Goldman Sachs - October 23, 2005
We are raising our 2006-07 EPS estimates for SLB to $4.40/ $5.00 from $4.30/ $4.90 as we've raised 2006 E&P spending growth to 20% from 15% (still 8% in 2007), which boosts revenue growth for SLB. Our offshore driller estimates already reflect this change + we will be making similar changes for other service stocks. We rate SLB OP/A w/ 35% upside to our $108 fair value estimate + see SLB among the most attractive service stocks for the following reasons:
(1) premier franchise outside N. America, where pricing improvement still appears under-appreciated by consensus,
(1a) upside to incremental margins as revenue growth will be more price than volume in 2006+,
(2) highest exposure to exploration activity among peers,
(3) among best positioned to counter wage inflation given global labor access/ development + raw material inflation given higher service vs mfg orientation.
3Q2005 EPS AHEAD OF EXPECTATIONS EX-HURRICANE IMPACT
SLB recurring 3Q2005 EPS ex-hurricane impact of $0.92 was ahead of our estimate + consensus of $0.86, which included minimal or no adjustment for hurricane impact. Seismic was the star performer with revenue/ pretax income 17%/ 45% ahead of our estimates. This has positive implications for BHI, which owns 30% of SLB's seismic company. SLB oilfield revenue/ pretax income were 4%/ 5% above our estimate, w/ stronger results in all regions, most notably N. America + Europe/ Africa/ CIS. Incremental margins ex-hurricane of 47% y-y and 35% sequentially were strong, though we believe even stronger incrementals are likely in coming quarters as pricing continues to rise. Cash flow and balance sheet items were in line.
IMPLICATIONS FOR THE INDUSTRY HURRICANE HEADLINE RISK.
Despite a larger than expected impact from hurricane ($0.06 vs $0.01-0.02), SLB reported EPS of $0.86 was in line. We believe investors inclined to add to positions on recent weakness have been waiting for indications that hurricane impact would not drive bad 3Q earnings headlines for service/ equipment stocks before wading back into the sector, which is down 10-15% since late September. SLB result confirm that headline risk is probably not going to be a major broad-based issue.
SEISMIC.
Stronger than expected 3Q performance in seismic is also positive for BHI + also VTS, PGS, TGS and CGG, though we believe it is clear that SLB's Q-seismic technology is differentiating performance relative to the competition. SLB also indicated that the normal seasonal jump in US Gulf data library sales may be somewhat muted this year given oil company focus on spending to repair damaged production facilities.
RAW MATERIAL COST INFLATION.
SLB indicated that it has been able to build price escalators into new contracts for raw material cost inflation since May. We suspect other companies are doing the same, and at the margin, this reduces risk that margin expansion in the service/ equipment sector will disappoint for these pressures. Still, we believe this remains a critical issue to watch and point out that investors can avoid this risk by focusing more on the offshore drillers. Labor inflation is a common theme across the entire industry (+10-15% in 2006), but already assumed in estimates, in our view. Among service/ equipment companies, we believe SLB's greater mix of service revenue gives it a lower risk profile.
SLB'S OTHER INCOME WAS ABOVE EXPECTATIONS - POSITIVE FOR SII.
SLB reported $35 mln of other income vs our estimate of $30 mln. This item is primarily (but not solely) SLB's 40% equity interest in its fluids joint venture with Smith Int'l. All else equal, this suggests SII may have stronger than expected 3Q EPS.
REGIONAL MARKET OUTLOOK.
At the margin, SLB commentary suggests potential upside to our assumptions for the 2006 market outlook for L. America (Venezuela) and Russia.
WHAT TO WATCH FOR 4Q EPS OUTLOOK.
In 4Q, SLB expects to recover $0.03-0.04 from activity in the US Gulf returning to normal following hurricane impact. We also estimate that underlying improvement in N. American drilling will add $0.02-0.03, with the same in Middle East/ Asia and L. America geomarkets adding $0.01-0.03. However, seasonal weakness in the N. Sea and Russia should cost $0.02-0.03.
SEISMIC J.V.
On December 1st, SLB/BHI's seismic joint venture agreement allows either party to propose a sale of its interest to the other for the first time. The receiving party has the option to sell its interest back to the instigating party at the same price. While neither party is obligated to do anything - and can propose anything outside the existing agreement as well - BHI has indicated it does not view its 30% interest as core long-term. However, we estimate a sale at this point in the cycle would be dilutive to 2006 EPS for BHI without a large simultaneous share repurchase. SLB indicates the business is core, but we do not think BHI is interested in earnings dilution at this point in the cycle. Bottom line, there is potential nothing happens, but the issue bears watching.
E&P BUDGET ANNOUNCEMENT SEASON IS AROUND THE CORNER.
Many E&P companies will announce 2006 capex plans over the balance of 2005, with December a particularly active month historically. All signals point to growth of 20-25% in 2006, but E&Ps are also sensitive to investor perception of capital discipline and often under-state plans at this time of year. Though most investors heave learned to take these announcements with a grain of salt, low-balling of budgets nonetheless can create concerns that oil service estimates are too high.
ARRIVAL OF WINTER WEATHER OFTEN STIMULATES A TRADING RALLY.
Oil service stocks have often rallied in October as investors anticipate the start of winter and improved commodity price psychology. Given that the group has sold off 10-15% over the last 3-4 weeks on fears of oil demand destruction, the onset of cold weather (or the anticipation of it) in the US could again be a catalyst.
NOVEMBER IS HISTORICALLY A BAD MONTH FOR OIL SERVICE STOCKS
November has historically been a bad month for oil service stocks as
(1) the stocks often rally in October in anticipation of winter,
(2) US + N. Sea rig counts often begin to weaken seasonally, causing investors to become nervous about 4Q-1Q estimates, and
(3) investors anticipate headline risk from E&P budget low-balling.
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: Jason Gilbert, Terry Darling. |
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| To: Dennis Roth who wrote (186) | 4/23/2006 8:12:25 AM | | From: Dennis Roth | | | | SLB (OP/A): First Take - Strong 1Q results; Reiterate OP/A - Goldman Sachs - April 21, 2006
Schlumberger (SLB, OP/A) posted better than expected 1Q driven by strong North America (NAM) performance. EPS of $0.59 was $0.04 above our est and consensus. NAM Rev/EBIT were 13%/24% above our est, being the key driver for the outperformance with strength in Wireline, Drilling&Measurements and Pressure Pumping. As expected, extreme cold weather in Russia hurt results in the Europe/CIS/Africa, but it was not enough to offset NAM strength. WesternGeco results were also strong with revenues in line and EBIT 38% above our est at $158 mn. SLB management reinforced its optimism towards the seismic market with 3 announcements: (1) SLB agreed to buy BHI's 30% stake in WesternGeco for $2.4 bn; (2) SLB will commission a 7th Q marine vessel (2Q07); and (3) SLB raised WesternGeco Capex to $350 mn, from $315 (ex-multi client surveys). SLB's bullish comments on seismic should be a positive for sentiment on VTS (IL/A).
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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| To: Dennis Roth who wrote (188) | 4/24/2006 6:29:04 PM | | From: Dennis Roth | | | | 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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| To: Dennis Roth who wrote (189) | 5/8/2006 12:09:11 PM | | From: Dennis Roth | | | | SLB (OP/A), BHI (IL/A): Reinstating ratings - Goldman Sachs - May 08, 2006
After a period of NR, we are reinstating our investment view on Schlumberger (SLB) with an OP/A rating and on Baker Hughes (BHI) with IL/A rating. Prior to going NR our ratings were the same. We are also updating our fair values following 1Q results. Our fair value for SLB increased to $81 (=13% upside), from $77, based on an '07 EV/DACF multiple of 17.5x (17% premium over BHI). The key drivers for the change in our SLB fair value were higher estimates and higher multiple of 17.5x (versus 16.5x previously). Our fair value for BHI is $98 (=12% upside), up from $83, based on an '07 EV/DACF multiple of 15.0x. The two key drivers for the change in our BHI fair value were higher estimates and lower share count (due to the large share buyback announcement).
RECOMMENDATION UPDATE:
SLB REINSTATED WITH OP/A - We see 13% upside to our $81 fair value. Despite being by far the largest company in our coverage universe, Schlumberger should deliver above average revenue/EPS growth in 2006/2007, which highlights strong management execution and favorable revenue mix (Exploration) at this point of the cycle. Schlumberger also has the strongest ties to the national oil companies (NOCs), which puts the company in an excellent strategic position to capitalize on Eastern Hemisphere growth.
As previously mentioned, we raised our '07 EV/DACF fair multiple to 17.5x, from 16.5x. Our new fair value multiple implies a 17% premium for SLB versus BHI, versus the historic premium of around 10%. There are 3 key reasons why we think SLB should trade at a larger premium now than historically: (1) Solid outlook for the seismic industry following strong 1Q results for all seismic companies and significant re-rating of seismic stocks. (2) Shift in spending towards exploration should benefit SLB disproportionately given its #1 market position in seismic, wireline and drilling systems. (3) Strongest ties to NOCs and higher leverage to international growth (2/3rds or revenues).
RECOMMENDATION UPDATE:
BHI REINSTATED WITH IL/A - We see 12% upside to our $98 fair value. BHI shares outperformed significantly over the past couple of weeks on the back of very strong 1Q results and a large share buyback announcement. Even though the strong near term momentum for BHI shares is likely to continue, we still prefer HAL and SLB among the large caps. We continue to think that Exploration and Pressure Pumping should show the best pricing power/incrementals over the next 12-18 months. 1Q06 results seem to support our view that pricing power is strong for Exploration (e.g. Strong seismic, wireline and directional results across the board) and Pressure Pumping (both HAL and BJS reported strong results and announced price increases that should benefit upcoming quarters). Therefore, subject to normal quarterly lumpiness, we believe SLB (Exploration) and HAL (Pressure Pumping) have more room to beat estimates over the next 12-18 months than BHI.
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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| To: Dennis Roth who wrote (190) | 5/8/2006 2:48:50 PM | | From: buckbldr | | | | Hi Dennis, pardon my ignorance...no excuses... but could you please divulge definitions of those GS stock Ratings...i.e. (OP/A), (IL/A), etc? I presume they can be utilized to glean at a glance GS's contemporary opinions w/o having to go in depth into the articles you so generously post for us, realizing of course that it should not replace thorough Due Diligence.
Thanks
Buck |
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| From: Dennis Roth | 7/23/2007 8:17:07 AM | | | | | | Another solid quarter from Schlumberger Goldman Sachs July 23, 2007
What's changed
Schlumberger posted strong 2Q results. EPS of $1.02 exceeded our $0.96 estimate and consensus of $0.95. Variance to our estimate of $0.06 was driven by:
(1) North America (+$0.01),
(2) Latin America (+$0.01),
(3) Middle East/Asia Pacific (+$0.02),
(4) WesternGeco (-$0.02),
(5) a lower tax rate (+$0.02), and
(6) other items (+$0.02).
We raised our 2007/2008 EPS estimates by $0.21/$0.47 to $4.15/$4.96.
Implications
(1) SLB's consistent solid execution remains unparalleled in the industry, although we think this is already reflected in the stock's premium valuation relative to the group.
(2) SLB's ability to weather a significant slowdown in Canada was impressive. This is partially attributed to management's foresight to lower the cost structure in 4Q2006/1Q2007.
3) The outlook for North America (NAM) remains uncertain, with capacity additions in pressure pumping serving to accelerate price erosion. Strong contract coverage in pressure pumping helped keep 2Q NAM margins stable; however, margins are likely to come under pressure when contracts are renegotiated in late 3Q2007.
(4) Strong 2Q performance was led by Middle East/Asia Pac, where margins reached a record-high 35.3% (+103 bp qoq). Management cautioned that strong margins may be difficult to sustain due to the favorable mix toward exploration in 1H2007. International exposure remains one of our favorite themes for the oil service group.
Valuation
SLB is trading at a 2008 EV-DACF/P-E of 14.9X/19.5X, versus 10.3X/14.1X for BHI and 11.1X/13.9X for HAL. We have raised our 12-month price target to $95 (14.5X 2008 EV/DACF), from $87 due to higher estimates.
Key risks
Key risks to our thesis include:
(1) A US/Global recession could result in weaker commodity prices and further E&P capex cuts; and
(2) weakness in natural gas prices could lead to further E&P capex cuts in North America. |
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| From: Dennis Roth | 10/22/2007 2:33:12 PM | | | | | | Valuation premium seems excessive even after sell-off - Goldman Sachs - October 22, 2007
What's changed
Schlumberger reported 3Q07 EPS of $1.09 - above our estimate and consensus of $1.07. Variance to our estimate was driven by (1) a lower tax rate (+$0.03); weakness in North America (-$0.04), strength in Latin America (+$0.01) and WesternGeco (+$0.02). We raised our 2007/08/09 EPS estimates by $0.05/$0.00/$0.08 to $4.20/$5.18/$6.15, due to a lower tax rate.
Implications
(1) We believe the inline 3Q results could remove some of the premium embedded in Schlumberger’s valuation relative to peers; especially following Halliburton’s 3% beat. We recognize that Schlumberger is one of the best positioned companies in the group but see some downside to the relative multiple as investors begin to question SLB’s invincibility.
(2) Despite believe Friday’s 11% sell-off in SLB shares, we do not have a great sense of urgency to add to positions given the more bullish comments from peers and headwinds in the broader market.
(3) Comments made by SLB’s CEO were less optimistic than we were expecting but we believe the underlying fundamentals of the up-cycle are still intact. We lowered our expectations for North America but expect international growth to remain strong, led by Latin America, the Far East, and Russia – all expected to grow >25% in 2008. (4) Seismic results were excellent despite a decline in high margin multi-client sales. We raised our 2008/2009 WesternGeco operating income forecast by 15%/14% due strong demand and continued pricing power.
Valuation
SLB is trading at a 2008 EV-DACF/P-E of 14.8X/19.2X, versus 11.0X/14.8X for BHI and 10.6X/12.7X for HAL. Our $115 12- month price target is unchanged (17x 2008 EV/DACF) and implies 15% upside potential.
Key risks
Key risks include capacity additions, a sustained decline in commodity prices and the broader stock market indices. |
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| From: Dennis Roth | 1/19/2008 9:28:53 AM | | | | | | Schlumberger, Ltd. (SLB): First Take: SLB 4Q EPS falls short on lower than expected margins - Goldman Sachs - Jan 18, 2008
News
This morning, SLB reported 4Q07 EPS of $1.11, which was $0.01 below our estimate and $0.02 below the Street estimate. A lower than expected tax rate contributed $0.02 to the results. Even with the stock down 14% since Monday, we expect this shortfall to put additional pressure on the stock and the services sector this morning given SLB's more tempered outlook on the US Land market and history of repeatedly beating earnings expectations. The severely lower-than expected operating margins (26.7% vs. our 28.3% estimate) will likely draw the most attention on the call, especially in NAM where operating margins fell to 25.4% from 30.8% in 4Q06 and 26.9% in 3Q07 due to lower land stimulation pricing. Revenues of $6.25 billion were actually above our $6.1 billion estimate, and SLB reported better than expected results across all geographies in Oilfield Services - ranging from 1% better in Europe/CIS/Africa to 7% better in Middle East/Asia Pacific. This helped offset 7% lower than expected revenues in WesternGeco partially caused by drydocking and ship transiting. Our estimates and price target are under review.
Analysis
The margin weakness was the most surprising aspect of the quarter and we will look to the conference call to get a better sense as to the impact from temporary factors like IPM startup costs in Mexico, weather delays in North Sea and Mexico, and seismic vessel drydocking and transit versus fundamental challenges like US land pricing.
Implications
SLB's results confirm the growing concern over the past few weeks for 4Q earnings season for the oil services sector. We expect SLB's margin weakness in North America and its commentary on lower pricing in US land will add to the concerns for HAL and BJS. Its long-term outlook on the international land market and seismic market remained quite favorable, though it did comment that high utilization of offshore rigs and limited newbuilds entering the market could limit growth in the near-term. |
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| From: Dennis Roth | 1/22/2008 8:34:06 AM | | | | | | Schlumberger, Ltd. (SLB): Lowering estimates and price target, but maintain Buy rating - Goldman Sachs - 01/21/08
What's changed
We lowered our 2008, 2009, and 2010 EPS estimates for Schlumberger by 8%, 6% and 4% to $4.80, $5.93, and $6.62 following the fourth quarter results. Our new estimates reflect a reduction in our margin assumptions due to weaker than expected pricing pressures in North America and modest adjustments to our international growth forecasts.
Implications
Schlumberger’s 4Q 2007 earnings miss and comments that 2008 would be a “transition year" is disappointing for the entire sector and calls into question revenue growth forecasts and margin assumptions for the oil services companies. With pricing pressures and competition looming in North America, we believe North American-exposed companies (HAL, BJS) may be at risk as they report over the next-few weeks. We do not see many catalysts for the sector in the near-term, even after the severe decline in valuation, and we believe macroeconomic concerns (US & global GDP growth) will most influence the sector’s performance over the next few months. Therefore, we remain Neutral on the group through earnings season. For SLB specifically, we believe its unmatched global presence positions it well to take advantage of the offshore rig cycle beginning in late 2008, the robust international land drilling market, and widening national oil company (NOC) project management opportunities. So, while 2008 may be a "transition year", 2009 and 2010 will not, and investors should use the stock’s weakness to begin building positions.
Valuation
We lowered our 12-month price target for SLB to $92 from $106 (19.2X 2008 EPS) to reflect our estimate revisions. SLB is trading at a 2008 P/E of 16.6X versus 12.7X for BHI and 10.8X for HAL.
Key risks
Weaker-than-expected global economic growth or lower-than-expected oil company spending internationally. |
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