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Gold/Mining/Energy : Schlumberger - The biggest/baddest oil service company -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (189)5/8/2006 12:09:11 PM
From: Dennis Roth  Read Replies (1) | Respond to of 215
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).

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).

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.