EQUITY RESEARCH 7 April 2011 U.S. OIL SERVICES & DRILLING Offshore Rigs: Is the Next Wave of Consolidation on the Horizon? Ordering Continues Unabated: The new rig construction cycle that began during the fourth quarter of 2010 continues unabated. Since our January update, an additional 19 jackups and 16 floaters have been ordered, bringing the total number of units ordered since the beginning of the cycle to 37 jackups and 28 floaters. Companies have also secured options to build an incremental 26 jackups and 15 floaters, the majority of which we expect to be exercised. Most of the options must be exercised in the next nine to 12 months. For those companies that have mostly shunned the newbuild cycle thus far, consolidation may be the only near-term option for growth or to replace lost earnings power as shipyard slots at established yards have quickly filled. We believe another round of rig company consolidation is highly likely. In addition, some of the major rig operators are likely to divest older assets in the near-term. Newbuild Prices Moving Higher; Shipyard Slots Filling Up: The flurry of recent newbuild rig orders and concerns around shipyard availability have resulted in a tightening of capacity for many traditional shipyards. We believe the majority of slots for deliveries through 2013 are now full. We also believe floater capacity for 2014 at the established yards is now mostly sold out due to recent orders and options. Rig construction costs are also trending higher which is making priced options more valuable. We believe cost increases are primarily due to rising steel prices and price increases for rig equipment. Additional Rig Company Consolidation Likely As Newbuilds Become Less of an Option: Limited near-term shipyard availability and rising construction costs could result in additional rig company consolidation. We believe the traditional drillers are continuing to have difficulty buying one-off assets, which most had expected to become distressed during the downturn, particularly newbuild floaters, and we expect that several new offshore rig companies have likely emerged as attractive acquisition candidates. Some smaller traditional drillers may also be candidates. In our view, a remaking of the offshore rig industry is underway. NOV Remains Our Favorite: We continue to believe that the best way to be positioned for the ongoing new rig construction cycle is through the major equipment providers National Oilwell Varco, Cameron International, Aker Solutions and, to a lesser extent, Rowan Companies (through LTI). For the offshore drillers, we prefer those companies which have premium fleets and are adding to earnings power with newbuilds. Our two favorite offshore drillers are Ensco Plc and Rowan Companies. Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 8. INDUSTRY UPDATE U.S. Oil Services & Drilling 1-POSITIVE Unchanged U.S. Oil Services & Drilling James C. West 1.212.526.8796 [email protected]BCI, New York Anthony Walker 1.312.609.8183 [email protected]BCI, New York European Oil Services & Drilling Mick Pickup +44 (0)20 3134 6695 [email protected]Barclays Capital, London Tom Ackermans +44 (0)20 7773 4457 [email protected]Barclays Capital, London
Transcript
EQUITY RESEARCH 7 April 2011
U.S. OIL SERVICES & DRILLING Offshore Rigs: Is the Next Wave of Consolidation on the Horizon?
Ordering Continues Unabated: The new rig construction cycle that began during the fourth quarter of 2010 continues unabated. Since our January update, an additional 19 jackups and 16 floaters have been ordered, bringing the total number of units ordered since the beginning of the cycle to 37 jackups and 28 floaters. Companies have also secured options to build an incremental 26 jackups and 15 floaters, the majority of which we expect to be exercised. Most of the options must be exercised in the next nine to 12 months. For those companies that have mostly shunned the newbuild cycle thus far, consolidation may be the only near-term option for growth or to replace lost earnings power as shipyard slots at established yards have quickly filled. We believe another round of rig company consolidation is highly likely. In addition, some of the major rig operators are likely to divest older assets in the near-term.
Newbuild Prices Moving Higher; Shipyard Slots Filling Up: The flurry of recent newbuild rig orders and concerns around shipyard availability have resulted in a tightening of capacity for many traditional shipyards. We believe the majority of slots for deliveries through 2013 are now full. We also believe floater capacity for 2014 at the established yards is now mostly sold out due to recent orders and options. Rig construction costs are also trending higher which is making priced options more valuable. We believe cost increases are primarily due to rising steel prices and price increases for rig equipment.
Additional Rig Company Consolidation Likely As Newbuilds Become Less of an Option: Limited near-term shipyard availability and rising construction costs could result in additional rig company consolidation. We believe the traditional drillers are continuing to have difficulty buying one-off assets, which most had expected to become distressed during the downturn, particularly newbuild floaters, and we expect that several new offshore rig companies have likely emerged as attractive acquisition candidates. Some smaller traditional drillers may also be candidates. In our view, a remaking of the offshore rig industry is underway.
NOV Remains Our Favorite: We continue to believe that the best way to be positioned for the ongoing new rig construction cycle is through the major equipment providers National Oilwell Varco, Cameron International, Aker Solutions and, to a lesser extent, Rowan Companies (through LTI). For the offshore drillers, we prefer those companies which have premium fleets and are adding to earnings power with newbuilds. Our two favorite offshore drillers are Ensco Plc and Rowan Companies.
Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
This research report has been prepared in whole or in part by research analysts based outside the USwho are not registered/qualified as research analysts with FINRA.
PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 8.
INDUSTRY UPDATE U.S. Oil Services & Drilling 1-POSITIVE Unchanged
U.S. Oil Services & Drilling James C. West 1.212.526.8796 [email protected] BCI, New York Anthony Walker 1.312.609.8183 [email protected] BCI, New York European Oil Services & Drilling Mick Pickup +44 (0)20 3134 6695 [email protected] Barclays Capital, London Tom Ackermans +44 (0)20 7773 4457 [email protected] Barclays Capital, London
Barclays Capital | U.S. Oil Services & Drilling
7 April 2011 2
CONTENTS
Rig Ordering Cycle Continues Unabated............................................................................................... 3 Newbuild Prices Ticking Higher; Shipyard Availability Declining .................................................... 5 Further Rig Company Consolidation Likely .......................................................................................... 5 Rig Market Bifurcation Continues........................................................................................................... 6 NOV Raising Prices; Taking Share in BOPs........................................................................................... 7
FIGURES
Figure 1: Current Cycle Floater Orders .................................................................................................. 3 Figure 2: Current Cycle Jackup Orders................................................................................................... 3 Figure 3: Current Cycle Shipyard Options............................................................................................. 4 Figure 4: Noble Corporation Recent Newbuild Construction Costs................................................ 5 Figure 5: Historical Offshore Rig Orders vs. Oil Prices (WTI) ........................................................... 6 Figure 6: Recent Offshore Rig Company Consolidation Activity ..................................................... 6
Barclays Capital | U.S. Oil Services & Drilling
7 April 2011 3
Rig Ordering Cycle Continues Unabated
The new rig construction cycle that began during the fourth quarter of 2010 continues unabated. Since our January update, an additional 19 jackups and 16 floaters have been ordered, bringing the total number of units ordered since the beginning of the cycle to 37 jackups and 28 floaters. We believe the cycle is being driven by a continued bifurcation towards higher quality assets, an aging of offshore equipment (a significant portion of the existing fleet is at or near retirement age) and increased focus on safety in a post-Macondo world. Concerns over shipyard capacity have also accelerated the ordering process.
Figure 1: Current Cycle Floater Orders
Order Date Rig Name Contractor Rig Type Rig Water Depth Construction Status Delivery Date Rig Design Build Yard Build Cost First Operator11-Nov-2010 Queiroz Delba Drsh Tbn1 Queiroz Galvao/Delba Drillship 10,000 Under Construction 1-Jul-2012 Samsung 10000 Samsung Heavy Industries Petrobras11-Nov-2010 Queiroz Delba Drsh Tbn2 Queiroz Galvao/Delba Drillship 10,000 On Order 1-Sep-2012 Samsung 10000 Samsung Heavy Industries Petrobras11-Nov-2010 West Auriga Seadrill Drillship 12,000 On Order 1-Mar-2013 Samsung 10000 Samsung Heavy Industries 595,000,00011-Nov-2010 West Vela Seadrill Drillship 12,000 On Order 1-Jun-2013 Samsung 10000 Samsung Heavy Industries 595,000,0009-Dec-2010 Odebrecht Drsh Tbn5 Odebrecht Drillship 10,000 Planned 31-Aug-2013 Daewoo9-Dec-2010 Odebrecht Semi Tbn1 Odebrecht Semisubmersible 10,000 Planned 31-Aug-2013 Daewoo
14-Dec-2010 Pride Drsh Tbn5 Pride Drillship 10,000 On Order 1-Jul-2013 Samsung 12000 Samsung Heavy Industries 600,000,0004-Jan-2011 Diamond Drsh Tbn1 Diamond Offshore Drillship 12,000 On Order 30-Jun-2013 GustoMSC P10000 Hyundai Heavy Industries 590,000,000
19-Jan-2011 Noble Drsh Tbn5 Noble Drillship 12,000 On Order 1-Jun-2013 GustoMSC P10000 Hyundai Heavy Industries 605,000,000 Shell19-Jan-2011 Noble Drsh Tbn6 Noble Drillship 12,000 On Order 1-Dec-2013 GustoMSC P10000 Hyundai Heavy Industries 605,000,00020-Jan-2011 Aker Drsh Tbn1 Aker Drilling Drillship 12,000 Planned 1-Dec-2013 Daewoo 600,000,00020-Jan-2011 Aker Drsh Tbn2 Aker Drilling Drillship 12,000 Planned 1-Dec-2013 Daewoo 600,000,00031-Jan-2011 Atwood Advantage Atwood Drillship 12,000 On Order 30-Sep-2013 Daewoo 600,000,0002-Feb-2011 Ocean BlackHornet Diamond Offshore Drillship 12,000 On Order 1-Dec-2013 GustoMSC P10000 Hyundai Heavy Industries 590,000,000
11-Feb-2011 Sete Brasil Drsh Tbn1 Petrobras Drillship 10,000 On Order 1-Jan-2015 Samsung Estaleiro Atlantico Sul 662,400,000 Petrobras11-Feb-2011 Sete Brasil Drsh Tbn2 Petrobras Drillship 10,000 On Order 1-Jan-2015 Samsung Estaleiro Atlantico Sul 662,400,000 Petrobras11-Feb-2011 Sete Brasil Drsh Tbn3 Petrobras Drillship 10,000 On Order 1-Jan-2016 Samsung Estaleiro Atlantico Sul 662,400,000 Petrobras11-Feb-2011 Sete Brasil Drsh Tbn4 Petrobras Drillship 10,000 On Order 1-Jan-2016 Samsung Estaleiro Atlantico Sul 662,400,000 Petrobras11-Feb-2011 Sete Brasil Drsh Tbn5 Petrobras Drillship 10,000 On Order 1-Jan-2017 Samsung Estaleiro Atlantico Sul 662,400,000 Petrobras11-Feb-2011 Sete Brasil Drsh Tbn6 Petrobras Drillship 10,000 On Order 1-Jan-2017 Samsung Estaleiro Atlantico Sul 662,400,000 Petrobras11-Feb-2011 Sete Brasil Drsh Tbn7 Petrobras Drillship 10,000 On Order 1-Jan-2018 Samsung Estaleiro Atlantico Sul 662,400,000 Petrobras4-Mar-2011 Noble Drsh Tbn6 Noble Drillship 12,000 On Order 30-Jun-2014 GustoMSC P10000 Hyundai Heavy Industries 615,000,000
17-Mar-2011 Pacific Drilling Tbn1 (Unconfirmed) Pacific Drilling Drillship 12,000 On Order 1-Oct-2013 Samsung 12000 Samsung Heavy Industries 550,000,00017-Mar-2011 Pacific Drilling Tbn2 (Unconfirmed) Pacific Drilling Drillship 12,000 On Order 31-Dec-2013 Samsung 12000 Samsung Heavy Industries 550,000,00025-Mar-2011 Sevan Marine Tbn1 Sevan Marine Semisubmersible 10,000 On Order 1-Dec-2013 Sevan Drilling Sevan 650 COSCO Nantong 525,000,00025-Mar-2011 Sevan Marine Tbn2 Sevan Marine Semisubmersible 10,000 On Order 1-May-2014 Sevan Drilling Sevan 650 COSCO Nantong 525,000,0006-Apr-2011 Maersk Drsh Tbn1 Maersk Drilling Drillship 12,000 On Order 15-Aug-2013 Samsung 12000 Samsung Heavy Industries 650,000,0006-Apr-2011 Maersk Drsh Tbn2 Maersk Drilling Drillship 12,000 On Order 15-Nov-2013 Samsung 12000 Samsung Heavy Industries 650,000,000
28 Total Source: ODS-Petrodata, Company reports
Figure 2: Current Cycle Jackup Orders
Order Date Rig Name Contractor Rig Type Rig Water Depth Construction Status Delivery Date Rig Design Build Yard Build Cost First Operator5-Oct-2010 Atwood Mako Atwood Jackup 400 On Order 30-Sep-2012 PPL Shipyard Pacific Class 400 PPL Shipyard 190,000,000 5-Oct-2010 Atwood Manta Atwood Jackup 400 On Order 31-Dec-2012 PPL Shipyard Pacific Class 400 PPL Shipyard 190,000,000
18-Oct-2010 Eurasia Drilling JU Tbn1 Eurasia Drilling Jackup 250 On Order 1-Apr-2013 LeTourneau Super 116E Class Lamprell 210,000,000 18-Oct-2010 West Castor Seadrill Jackup 400 On Order 1-Dec-2012 Friede & Goldman JU-2000E Jurong Shipyard Pte Ltd 200,000,000 18-Oct-2010 West Tucana Seadrill Jackup 400 On Order 1-Mar-2013 Friede & Goldman JU-2000E Jurong Shipyard Pte Ltd 200,000,000 2-Nov-2010 Drilling & Offshore JU Tbn1 Drilling & Offshore Jackup 350 On Order 2-Nov-2012 Friede & Goldman JU-2000A ABG Shipyard 220,000,000 2-Nov-2010 Drilling & Offshore JU Tbn2 Drilling & Offshore Jackup 350 On Order 2-Nov-2012 Friede & Goldman JU-2000A ABG Shipyard 220,000,000
15-Nov-2010 West Oberon Seadrill Jackup 400 On Order 1-Mar-2013 Friede & Goldman JU-2000E Dalian Shipbuilding Industry Co. 190,000,000 15-Nov-2010 West Telesto Seadrill Jackup 400 On Order 1-Dec-2012 Friede & Goldman JU-2000E Dalian Shipbuilding Industry Co. 190,000,000 24-Nov-2010 Standard JU Tbn5 Standard Drilling Jackup 400 On Order 1-Jul-2012 Keppel FELS KFELS B Class Keppel FELS 180,000,000 2-Dec-2010 Mermaid JU Tbn1 Mermaid Drilling Jackup 350 Under Construction 1-Dec-2012 Keppel FELS KFELS B Class Keppel FELS2-Dec-2010 Mermaid JU Tbn2 Mermaid Drilling Jackup 350 On Order 1-Mar-2013 Keppel FELS KFELS B Class Keppel FELS
14-Dec-2010 Prospector JU Tbn1 Prospector Offshore Drilling Jackup 350 Under Construction 16-Aug-2012 Friede & Goldman JU-2000E Dalian Shipbuilding Industry Co.14-Dec-2010 Prospector JU Tbn2 Prospector Offshore Drilling Jackup 350 Under Construction 16-Aug-2012 Friede & Goldman JU-2000E Dalian Shipbuilding Industry Co.21-Dec-2010 Noble JU Tbn1 Noble Jackup 400 On Order 20-Dec-2012 Friede & Goldman JU-3000N Jurong Shipyard Pte Ltd 220,000,000 21-Dec-2010 Noble JU Tbn2 Noble Jackup 400 On Order 20-Jun-2013 Friede & Goldman JU-3000N Jurong Shipyard Pte Ltd 220,000,000 22-Dec-2010 Jasper JU Tbn1 Jasper Offshore Jackup 400 Under Construction 15-Nov-2012 Keppel FELS KFELS B Class Keppel FELS 180,000,000 19-Jan-2011 Atwood Orca Atwood Jackup 400 On Order 30-Jun-2013 PPL Shipyard Pacific Class 400 PPL Shipyard 190,000,000 23-Jan-2011 Clearwater JU Tbn1 Contractor TBC Jackup 400 On Order 1-Mar-2013 Keppel FELS KFELS B Class Keppel FELS 180,000,000 23-Jan-2011 Clearwater JU Tbn2 Contractor TBC Jackup 400 On Order 1-Jun-2013 Keppel FELS KFELS B Class Keppel FELS 180,000,000 24-Jan-2011 Discovery Offshore Tbn 1 Discovery Offshore Jackup 400 On Order 1-Jun-2013 Keppel FELS KFELS Super A Class Keppel FELS 231,000,000 24-Jan-2011 Discovery Offshore Tbn 2 Discovery Offshore Jackup 400 On Order 1-Sep-2013 Keppel FELS KFELS Super A Class Keppel FELS 231,000,000 9-Feb-2011 ENSCO JU Tbn1 Ensco Jackup 400 On Order 1-Apr-2013 Keppel FELS KFELS Super A Class Keppel FELS 230,000,000 9-Feb-2011 ENSCO JU Tbn2 Ensco Jackup 400 On Order 1-Oct-2013 Keppel FELS KFELS Super A Class Keppel FELS 230,000,000
15-Feb-2011 Maersk JU Tbn1 Maersk Drilling Jackup 492 On Order 1-Dec-2013 GustoMSC CJ70-X150A Keppel FELS 500,000,000 15-Feb-2011 Maersk JU Tbn2 Maersk Drilling Jackup 492 On Order 1-Jun-2014 GustoMSC CJ70-X150A 500,000,000 16-Feb-2011 Transocean JU Tbn2 Transocean Jackup 350 On Order 1-Dec-2012 Keppel FELS KFELS Super B Class Bigfoot Keppel FELS 200,000,000 16-Feb-2011 Transocean JU Tbn3 Transocean Jackup 350 On Order 1-Jun-2013 Keppel FELS KFELS Super B Class Bigfoot Keppel FELS 200,000,000 22-Feb-2011 Greatship JU Tbn1 Greatship Global Energy Services Jackup 350 On Order 1-Dec-2012 LeTourneau Super 116E Class Lamprell 160,000,000 7-Mar-2011 Perforada Central JU Tbn1 Perforadora Certral Jackup 375 On Order 1-Mar-2013 LeTourneau Super 116E Class Keppel FELS 195,000,000
15-Mar-2011 JDC Tbn1 Japan Drilling Company Jackup 425 On Order 1-Mar-2013 Keppel FELS KFELS Super B Class Bigfoot Keppel FELS 210,000,000 21-Mar-2011 Seadrill JU Tbn14 Seadrill Jackup 530 On Order 30-Sep-2013 GustoMSC CJ70-X150A Jurong Shipyard Pte Ltd 530,000,000 28-Mar-2011 Noble JU Tbn3 Noble Jackup 400 On Order 30-Sep-2013 Friede & Goldman JU-3000N Jurong Shipyard Pte Ltd 235,000,000 28-Mar-2011 Noble JU Tbn4 Noble Jackup 400 On Order 31-Dec-2014 Friede & Goldman JU-3000N Jurong Shipyard Pte Ltd 235,000,000 3-Apr-2011 Jasper JU Tbn2 Jasper Offshore Jackup 400 On Order 1-Jun-2013 Keppel FELS KFELS B Class Keppel FELS 180,000,000 4-Apr-2011 Prospector JU Tbn3 Prospector Offshore Drilling Jackup 350 On Order 30-Sep-2013 Friede & Goldman JU-2000E Dalian Shipbuilding Industry Co. 209,000,000 4-Apr-2011 Prospector JU Tbn4 Prospector Offshore Drilling Jackup 350 On Order 30-Sep-2013 Friede & Goldman JU-2000E Dalian Shipbuilding Industry Co. 209,000,000
37 Total Source: ODS-Petrodata, Company reports
Companies have also secured options to build an incremental 26 jackups and 15 floaters, the majority of which we expect to be exercised. Most of the options must be exercised in the next nine to 12 months. Given declining shipyard availability for new rig orders, we believe existing options held by the major offshore rig companies are becoming increasingly valuable and instead of allowing options to expire on their originally agreed upon termination dates, many companies are electing to negotiate extensions. Discussions are also ongoing for another 14 rigs (seven floaters and seven jackups) by several smaller rig
Barclays Capital | U.S. Oil Services & Drilling
7 April 2011 4
companies. For those companies that have mostly shunned the newbuild cycle thus far, consolidation may be the only near-term option for growth or to replace lost earnings power. We believe another round of rig company consolidation is highly likely. In addition, some of the major rig operators are likely to divest older assets in the near-term.
Figure 3: Current Cycle Shipyard Options
Options - Floaters
Operator Rig Class # of Units Exercise DateSeadrill 12,000' DP 2 1Q11
The flurry of recent newbuild rig orders and concerns around shipyard availability have resulted in a tightening of capacity for many traditional shipyards. We believe the majority of slots for deliveries through 2013 are now full and 2014 availability is decreasing. For floaters, 2014 may no longer be an option at established shipyards given recent orders and existing options. Rig construction costs are also trending higher as evidenced by increased prices for several recent rig orders for Noble. We believe this is primarily due to rising steel prices and price increases for rig equipment.
Figure 4: Noble Corporation Recent Newbuild Construction Costs
$220,000
$235,000
$180,000
$190,000
$200,000
$210,000
$220,000
$230,000
$240,000
Noble JU Tbn1 & Tbn2 (ordered Dec 2010) Noble JU Tbn3 & Tbn4 (ordered Mar 2011)
Source: Noble Corp
Further Rig Company Consolidation Likely For those companies that have not participated actively in the unfolding new rig construction cycle, consolidation may be the only near-term option for growth or to replace lost earnings power, as shipyard spots at established drillers have quickly filled. We believe the traditional drillers are continuing to have difficulty buying assets which most had expected to become distressed during the downturn, particularly newbuild floaters, and we expect several new offshore rig companies have likely emerged as attractive acquisition candidates. However, we believe valuations for potential acquisition candidates likely remain high due to continued dayrate and utilization strength for high-spec jackups and improvement in the deepwater and ultra-deepwater floater markets.
The case for industry consolidation among the offshore rig companies is further strengthened by the aging of the offshore drilling fleet. The majority of the offshore drilling units currently in operation were built during the 1970’s to mid 1980’s construction cycle.
Source: ODS-Petrodata, Bloomberg , Company data and Barclays Capital estimates
As a result, a significant portion of the offshore rig fleet (notably jackups) is at or close to the end of their useful lives. Increasingly, operators are also requiring that new drilling programs be completed using new-generation equipment, effectively forcing older assets into retirement. With newbuild capacity dwindling and the major offshore rig companies looking for ways to renew their fleets and replace lost earnings power, we believe acquisitions are becoming a more likely outcome.
Figure 6: Recent Offshore Rig Company Consolidation Activity
Date Buyer Seller
Value Implied by Acquisition Value per Rig
Implied EBITDA Multiple
Jackups/ Floaters
3Q10 Rowan Companies Skeie Drilling $1.2 billion $410 million NA Jackups3Q10 Seadrill Scorpion Offshore $1.35 billion $193 million NA Jackups3Q10 Noble Corp Frontier Drilling $2.16 billion $309 million 5x 2012E EBITDA Floaters1Q11 Hercules Offshore Seahawk Drilling $106 million $5 million NA Jackups1Q11 ENSCO PLC Pride International $8.6 billion $430 million 8x 2012E EBITDA Both
Source: Company data
Rig Market Bifurcation Continues
The bifurcation between high-spec and lower-quality rigs in both the jackup and floater markets continues. In the jackup market, utilization for high-spec assets remains 90%+, while utilization for conventional equipment is in the mid 70% range. Although we expect demand for standard equipment to increase somewhat in the coming quarters due to a pickup in tendering activity and as the economics of operating older equipment improves further, we believe there is a significant amount of older equipment that is likely to be retired given a renewed focus on safety, increased complexity of drilling and the reality that a number of units are nearing the end of their useful lives. For floaters, activity levels for ultra-deepwater assets remains elevated; however, the deepwater and midwater markets remain somewhat challenging as overcapacity in the market has resulted in increased competition from higher-quality assets. We believe the low-spec portion of the offshore rig fleet will continue to face a challenging demand environment.
Barclays Capital | U.S. Oil Services & Drilling
7 April 2011 7
NOV Raising Prices; Taking Share in BOPs
We continue to believe that National Oilwell Varco will be the primary beneficiary of the new rig construction cycle. New rig orders represent a significant revenue opportunity for the company and we expect NOV to capture a high market share of new rig equipment orders, consistent with historical levels. We believe the company is also selectively raising prices for components with high steel content in light of rising steel prices.
Historically, the revenue potential on a new jackup is $50 million to $75 million and NOV captured roughly 70% market share for rig packages on new jackups last cycle. NOV’s revenue potential on a floating rig order is $200 million to $250 million and NOV secured a dominant amount of rig packages on new drillships and semisubmersibles last cycle. This cycle, we believe NOV’s revenue per rig order could be toward the higher end of the range as rig companies are increasingly packaging orders for critical rig components, in contrast to prior cycles where a higher percentage of equipment (particularly BOP’s) was separately bid. For recent floater awards, Cameron International’s market share for BOP’s (considered by many to be the leader in offshore BOP manufacturing) has moved down to 35-40% compared to its historical average of 50%.
Other equipment manufacturers with leverage to the ongoing new rig construction cycle include Cameron International, Aker Solutions and to a lesser extent Rowan Companies (through LTI). For the offshore drillers, we prefer those companies which have premium fleets and are adding to earnings power with newbuilds. Our two favorite offshore drillers are Ensco Plc and Rowan Companies.
Barclays Capital | U.S. Oil Services & Drilling
7 April 2011 8
ANALYST(S) CERTIFICATION(S)
We, James C. West, Mick Pickup and Tom Ackermans, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, isor will be directly or indirectly related to the specific recommendations or views expressed in this research report.
IMPORTANT DISCLOSURES CONTINUED
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The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities.
Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA.These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSERule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’s account.
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Materially Mentioned Stocks (Ticker, Date, Price)
Aker Solutions (AKSO.OL, 06-Apr-2011, NOK 127.70), 3-Underweight/1-Positive
Cameron International (CAM, 06-Apr-2011, USD 55.30), 1-Overweight/1-Positive
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Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the “sectorcoverage universe”).
In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investorsshould carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.
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2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.
3-Negative - sector coverage universe fundamentals/valuations are deteriorating.
Below is the list of companies that constitute the "sector coverage universe":
Key Energy Services (KEG) Nabors Industries (NBR) National Oilwell Varco (NOV)
Noble Corp. (NE) Oceaneering International (OII) Parker Drilling (PKD)
Patterson-UTI Energy (PTEN) Rowan Companies (RDC) Schlumberger Ltd. (SLB)
SEACOR Holdings, Inc. (CKH) Seadrill Limited (SDRL) Superior Energy Services Inc. (SPN)
Tenaris S.A. (TS) Tetra Technologies Inc. (TTI) Tidewater Inc. (TDW)
Transocean Ltd. (RIG) Weatherford International (WFT)
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Barclays Capital Inc. Equity Research has 1709 companies under coverage.
43% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 52% ofcompanies with this rating are investment banking clients of the Firm.
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Barclays Capital | U.S. Oil Services & Drilling
7 April 2011 10
IMPORTANT DISCLOSURES CONTINUED
Aker Solutions (AKSO NO / AKSO.OL) Stock Rating Sector View
NOK 127.70 (06-Apr-2011) 3-UNDERWEIGHT 1-POSITIVE
Rating and Price Target Chart - NOK (as of 06-Apr-2011) Currency=NOK
Date Closing Price Rating Price Target
26-Oct-2010 89.50 3-Underweight 109.00
19-Mar-2010 88.40 2-Equal Weight 112.00
18-Feb-2010 80.25 88.00
17-Aug-2009 50.50 83.00
15-Jun-2009 56.00 1-Overweight 85.00
Closing Price Target Price Rating Change
Jul- 08 Jan- 09 Jul- 09 Jan- 10 Jul- 10 Jan- 11
25
50
75
100
125
150
175
23-Feb-2009 32.55 3-Underweight 49.00
Link to Barclays Capital Live for interactive charting
Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Aker Solutions in the past 12 months.
Barclays Bank PLC and/or an affiliate trades regularly in the shares of Aker Solutions.
Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from Aker Solutions within the past 12 months.
Aker Solutions is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.
Aker Solutions is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLCand/or an affiliate.
Valuation Methodology: Our price target for Aker Solutions is derived from a DCF-based methodology. We have used our forecasted cash flows for the 2010-2013F period and thereafter assumed a cyclical growth (10% pa) until a turn in 2015 when revenues fall (10% pa) until 2016.Margins used for 2014-17F period are comparable to those over the 2004-2008 period. Our terminal value is then taken on a (WACC-g) basis assuming 3% long-term growth. Our discount rate used is 10%, in line with the 10% that we use for the sector. We then apply a 10% premiumbased on historical trading patterns and compared to the 0-30% that we use for the sector. The valuation is then checked against historical trading multiples.
Risks which May Impede the Achievement of the Price Target: All our estimates are based on Barclays Capital European Oil & Gas equityresearch teams estimates for future energy supply-demand patterns, exchange rates, commodity prices and the availability of assets within the oils service industry. These estimates are subject to revision and may be materially different from eventual out comes. In addition workload isexecuted on a global basis in many regions with unstable regimes. All estimates assume no marked changes in the current political landscape. ForAker Solutions specifically, some earnings are exposed to lump sum contracts, which if executed incorrectly can produce significant negativemargins. In addition backlog award can be lumpy and profit recognition on projects is often in a non-linear fashion. As a result there may be periodic swings in profitability.
Cameron International (CAM) Stock Rating Sector View
USD 55.30 (06-Apr-2011) 1-OVERWEIGHT 1-POSITIVE
Rating and Price Target Chart - USD (as of 06-Apr-2011) Currency=USD
Date Closing Price Rating Price Target
03-Feb-2011 56.99 64.00
15-Dec-2010 49.24 57.00
03-Nov-2010 43.66 54.00
06-Aug-2010 39.07 51.00
17-Feb-2010 41.16 49.00
04-Nov-2009 38.47 46.00
05-Aug-2009 34.69 41.00
27-Mar-2009 23.32 33.00
04-Feb-2009 21.66 34.00
18-Nov-2008 20.92 38.00
31-Oct-2008 24.26 43.00
14-Oct-2008 29.41 45.00
31-Jul-2008 47.76 63.00
20-May-2008 55.20 67.00
Closing Price Target Price
Jul- 08 Jan- 09 Jul- 09 Jan- 10 Jul- 10 Jan- 11
15
22
30
38
45
52
60
68
05-May-2008 48.44 54.00
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Barclays Bank PLC and/or an affiliate is a market-maker and/or liquidity provider in securities issued by Cameron International or one of itsaffiliates.
Barclays Bank PLC and/or an affiliate trades regularly in the shares of Cameron International.
Barclays Bank PLC is associated with specialist firm Barclays Capital Market Makers, which makes a market in Cameron International stock. At anygiven time, the associated specialist may have "long" or "short" inventory position in the stock; and the associated specialist may be on theopposite side of orders executed on the Floor of the Exchange in the stock.
Valuation Methodology: Our $64 price target is based on 18x our 2012 EPS estimate of $3.55.
Risks which May Impede the Achievement of the Price Target: A material change in commodity prices would alter our earnings outlook andpotentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks.
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Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Ensco plc in the past 12 months.
Barclays Bank PLC and/or an affiliate trades regularly in the shares of Ensco plc.
Ensco plc is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.
Valuation Methodology: Our price target is based on 8x 2012E EV/EBITDA (EV of $19.1 billion and EBITDA of $2.4 billion).
Risks which May Impede the Achievement of the Price Target: A material change in commodity prices would alter our earnings outlook andpotentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economicclimate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks.
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Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from National Oilwell Varco in the past 12months.
Barclays Bank PLC and/or an affiliate trades regularly in the shares of National Oilwell Varco.
National Oilwell Varco is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.
Valuation Methodology: Our price target of $94 is based on 18.8x our 2012 earnings estimate of $5.00.
Risks which May Impede the Achievement of the Price Target: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economicclimate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks.
Rating and Price Target Chart - USD (as of 06-Apr-2011) Currency=USD
Date Closing Price Rating Price Target
28-Feb-2011 42.67 46.00
29-Nov-2010 30.76 1-Overweight 40.00
04-Nov-2010 32.27 37.00
07-Sep-2010 28.19 33.00
05-Aug-2010 27.20 30.00
05-May-2010 28.81 29.00
08-Apr-2010 29.81 27.00
02-Mar-2010 27.41 28.00
04-Nov-2009 24.68 24.00
04-Aug-2009 21.37 21.00
27-Mar-2009 13.20 2-Equal Weight 18.00
02-Mar-2009 10.84 23.00
20-Jan-2009 12.91 30.00
18-Nov-2008 16.05 32.00
04-Nov-2008 22.25 35.00
14-Oct-2008 20.76 38.00
30-Sep-2008 30.55 46.00
05-Aug-2008 36.85 48.00
Closing Price Target Price Rating Change
Jul- 08 Jan- 09 Jul- 09 Jan- 10 Jul- 10 Jan- 11
10
15
20
25
30
35
40
45
50
55
20-May-2008 47.34 53.00 Link to Barclays Capital Live for interactive charting
Barclays Bank PLC and/or an affiliate trades regularly in the shares of Rowan Companies.
Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from Rowan Companies within the past 12months.
Rowan Companies is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLCand/or an affiliate.
Valuation Methodology: Our 12-month price target of $46 is based on 7.75x our 2012 EV/EBITDA estimate (Enterprise Value of $7,140 millionand 2012 EBITDA of $921 million).
Our $46 PT coincides with the upper range of our sumo-of-the-parts (SOTP) NAV analysis.
Risks which May Impede the Achievement of the Price Target: A material change in commodity prices would alter our earnings outlook andpotentially our stance on the entire oil service and drilling sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-OPEC oil production, and international political and economic risks.
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