"Slick Profits"

07/08/2005 12:00 am EST

Focus:

Stephen Biggar

Director, Product Strategy, Argus Research Corporation

"We see slick profits from deep water oil drilling" says Stephen Biggar, regarding a recent "Stock of the Week" selection from Standard & Poor's The Outlook. Here, he looks at Hornbeck, a deepwater Gulf driller, and the reasons behind S&P's top 5-star buy rating.

"Hornbeck Offshore Services (HOS NYSE), a provider of vessels for the oil-and-gas-drilling industry, is well positioned to benefit from a secular trend toward deepwater drilling in the US Gulf of Mexico. In our view, Hornbeck possesses a technologically advanced fleet of offshore supply vessels (OSVs) that offers an attractive value proposition to oil and gas operators. Given its highly advanced fleet of vessels, well-suited to work in the deepwater Gulf of Mexico, we anticipate that Hornbeck will outperform its oil-field-services peers.

"Deepwater drilling, despite generally higher costs due to the complex geology of deepwater hydrocarbon reserves, represents an important and substantial source of growth potential for the oil and gas industry. Within the US Gulf of Mexico, a migration toward such deepwater drilling prospects has gone on for years, a trend we expect to continue. Those oil-field-services companies that can best provide the needed ancillary equipment and expertise to handle deepwater applications should, in our view, possess a competitive advantage. 

"We expect revenue growth of about  27% in 2005, rising an additional 16% in 2006. We see earnings per share of $1.29 in 2005, and $1.60 in 2006. Given our view of the competitive advantage of new-generation vessels in deepwater applications, we think that, in this regard, Hornbeck's fleet merits a modest premium to peers. However, at a 9.1 times multiple to estimated 2005 EBITDA, Hornbeck is trading at a 4% discount to the peer group average of 9.5 times. On a price-to-operating cash-flow basis, Hornbeck trades at an 8.2-times multiple, about 10% below the 9.1-times peer group average. With an attractive valuation on intrinsic and relative measures, our recommendation on the stock is 5 STARS, which is our top buy rating."

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