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Energy Strategist: New from Gue
05/06/2005 12:00 am EST
Elliott Gue has just launched The Energy Strategist . Not simply a look at "big oil," this very exciting new service will provide an ongoing analysis of all aspects of the sector from production and delivery to refining and alternative energy. Here, he looks at a "drilling" opportunity.
"Contrary to what many believe, the big
integrated oil companies generally don't drill their own wells or own their own
drilling rigs. Drilling is the province of a specialized group of companies
known as the contract drillers, who own mobile drilling rigs and keep crews
of personnel to run these rigs. Operating companies pay a day-rate for the use
of rig and crew. As you might expect, operating companies worldwide have
responded to strong demand for oil and gas by increasing exploration activity
and new drilling operations, which spells more contracts for the drillers. And
with drilling rigs in such high demand, day-rates have been rising, whether it's
for the simplest land rigs or the most complex deepwater operations.
"We caution that the drillers can be a volatile group and selectivity is key. The best growth for the next few quarters will be from offshore drillers specializing in international markets. Day-rates for advanced mobile offshore rigs are currently running at record highs. And spending overseas should be less cyclical, given that most of the big international projects now underway will take years to develop and are planned many months in advance. Such long-term projects will likely go ahead even if oil and gas prices moderate from current levels.
"I’m adding driller GlobalSantaFe (GSF NYSE) to our ‘Wildcatters portfolio.’ Both companies are well placed with a concentration on international and offshore operations. The company has 45 advanced jackup rigs capable of drilling in up to 45 feet of water. In addition, it has nine semis and three drillships. One of the semis is an advanced semi capable of ultra-deepwater work while two of the company's drillships are rated for depths of 12,000 feet. The deepwater semi looks like a particularly valuable asset. It is contracted for the next year in the low $80,000 range with a follow-up six-month contract for next year at over $170,000 a day. Based on recent contract awards, this semi could ultimately see day-rates well above $200,000.
"While GlobalSantaFe's portfolio of drilling assets is solid and there's upside to day-rates for the company's fleet it trades at a notable valuation discount to other offshore-levered contract drillers. GlobalSantaFe trades at a 28% discount based on price-to-sales basis and 37% based on price-to-book. This is highly unusual for the stock, as it has historically traded in line with its peer group. The reason for the discount is temporary due to a 23 million share offering in mid-April, in which the proceeds were used to buy back and retire stock held by Kuwait Petroleum. It's likely that this valuation discount will close over the next few quarters. It's therefore a great time to buy GlobalSantaFe as a cheap play on the offshore drilling business."
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