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+47 22016395/+47 958 26729 r.jensen@platoumarkets.com +47 22016374/+47 934 28655 a.bergland@platoumarkets.com
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100
50
Sep-11
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Jun-12
OSX Index
Large cap drilling stocks are still trading about 30% below 2008 peak
Sep-12
Comparison of cycles
Market observation
Macro environment
Stable high commodity prices Accelerating E&P spending Fleet utilization close to 100% Limited availability over the next 12-18 months relative to demand Steady increase in dayrates Contract duration and lead time rapidly increasing Cash on cash return exceeding 20% Opportunities for contract backed newbuilds New regulatory changes creates incremental demand for new assets Clear preference for modern assets by operators Harsh environment New deepwater frontiers like East Africa & South East Asia Significant discoveries fuel demand for development work
2005-08
2010-12
Fleet utilization
Project economics
Regulatory changes
USGoM /Mexico
South China Sea
India
West Africa
Brazil
East Africa
Harsh-Environment is expected to hold more than 20% of undiscovered oil and gas resources
Source: RS Platou Markets, USGS
600
546 490 492
582
500
468
487
464 424
430
469
443
400
300
200
100
H1/07 H2/07 H1/08 H2/08 H1/09 H2/09 H1/10 H2/10 H1/11 H2/11 H1/12 H2/12 TD
400
366
350
USD per day
345 328
337 309
334
300
264
250 200
150
100 50 H1/07 H2/07 H1/08 H2/08 H1/09 H2/09 H1/10 H2/10 H1/11 H2/11 H1/12 H2/12 TD
300
250
200
15 10 5 0 -5
7 1 6 2 1 1 2 3 5 1 14
150
21 17
Brazilian newbuilds
1 1 1 2 7 1 5 2 7 1 2
100
11
10
8 1 3
50
5 1
-1
-50
Drillship newbuilds Sete semi newbuilds Total supply w/o Sete newbuilds
# total supply
40 32 30
20
17
10
97 rigs are older than 30 years today this will increase to 137 by YE 15, or about 40% of the fleet
120
Reliance
Statoil Chevron
100
# rig years
80
Shell
Petrobras
60
40
20
0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
10
95 %
250 000
90 %
200 000
Utilization
85 %
80 %
50 000
75 %
0 Dec-99 Apr-01 Sep-02 Jan-04 May-05 Oct-06 Feb-08 Jul-09 Nov-10 Apr-12 Aug-13
USD/day
150 000
100 000
11
50 36 14 32
153 88
14
213
57
0
Current jack- Cold stacked/ NonIran & China up fleet Out of service copetitive* Norway** Mat/slot rigs Rigs > 30 years Newbuilds NonTotal competitive competitive newbuilds* fleet of which are HS/HE
Operational rigs
Removal of older rigs from the market will likely outpace arrival of newbuild over the coming years
* Excludes state-owned and other rigs which are not offered for hire in the open market ** Rigs contracted for operations in Norway, including 4 rigs under construction Source: RS Platou Markets, ODS-Petrodata
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High specification jack-ups are still only a small part of the fleet
Jack-up fleet overview
Premium 14 %
HS/NH 3% HS/HE 4%
Mat/Slot 12 %
Conventional 51 %
High specification fleet accounts for only 7% of the global jack-up fleet, or 13% when including rigs on order
High-spec jack-up supply is falling short of demand as operators search for more advanced rigs
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# idle jack-ups
140
120
100
80
10 8 6
60
40
4
20
Week 24/09
Week 39/09
Week 02/10
Week 17/10
Week 32/10
Week 47/10
Week 10/11
Week 25/11
Week 40/11
Week 4/12
Week 19/12
Week 34/12
2 0
Hot Stacked
Source: ODS Petrodata, RS Platou
Warm Stacked
Cold Stacked
Source: ODS Petrodata, RS Platou Markets
Cold stacked rigs are not being re-activated they leave the market
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800
760 758 749 718 717 694 651 631 606 552 486 435
140 120
100
200 180
USDm
198
199
USDm
700
600
160
500
133
400
300
SDRL NADL FOE ATW VTG ESV PACD NE ORIG DO RIG RDC SEVDR
NE ABAN DO
RIG RDC
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1.4
1.2
P/NAV
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
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Conclusion
Floaters UDW fully booked through 2013 with increasing demand for development work Ultra-deepwater rigs continues to replace vintage assets in shallower water Dayrates back at peak levels gives rise to contract backed newbuild opportunities Real supply of jack-ups is not what it appear to be as bifurcation continues High-spec/HE jack-up supply falls short of demand, while older rigs are cannibalized Dayrates expected to strengthen as premium fleet is near full utilization Large cap drillers trades roughly in-line with historical EV/EBITDA but below on P/NAV Implied valuation giving limited credit to contracted cash flow Strong performance during the past months makes stock selection more important
Jack-ups
Valuation
Recommendation
Rowan Companies
North Atlantic Drilling Prospector Offshore Drilling
Prefer stocks have some combination of HE/UDW exposure, contracted EPS growth and dividend
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Swapping low margin non-core business with high-margin UDW UDW investments more than offset the EPS cut from non-core disposals EPS capacity nearly doubles to about USD 7.0 upon delivery of 4 drillships RDC will secure more ultra-deepwater contracts First rig signed at impressive USD/day 620k Expect signing of rig #2 over the coming months at similar dayrate US GoM and Africa the preferred regions Strong position in a buoyant jack-up market Repositioning of assets are now mainly in the rearview mirror Holds the largest high-spec jack-up fleet in the world 30% of available days open for 2013 provides market leverage Re-pricing expected at higher levels as market fundamentals strengthen Expect continued increases in dayrates driven by high utilization Trend already confirmed by recent contracts Jack-up dayrates expected to increase by USD 20-30k into 2013 Valuation uplift expected as catalysts play out More UDW contracts will unlock value as EPS growth becomes visible Rowan Viking the first available Heavy Duty jack-up worldwide Trading at 0.6x P/NAV compared to peers at 1.1x
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36
34
32
30
28 okt. 11 okt. 11 nov. des. 11 11 jan. 12 jan. 12 feb. mar. mar. apr. 12 12 12 12 mai. mai. jun. 12 12 12 jul. 12 jul. 12 aug. sep. 12 12 okt. 12
Rowan Companies
Key financial figures Revenue (USDm): EBITDA, adj. (USDm): EBITDA-margin Net profit (USDm): EPS, adj. (USD): Dividend per share (USD): Net debt, year-end (USDm): EV/EBITDA, adj. P/E, adj. P/B Dividend yield
2013 1 580 673 42.6% 355 2.87 0.00 1 764 8.4x 11.0x 0.8x 0.0%
2014E 2 011 1 009 50.2% 596 4.81 0.00 2 223 6.1x 6.5x 0.7x 0.0%
2015E 2 375 1 247 52.5% 740 5.98 0.00 2 094 4.8x 5.3x 0.6x 0.0%
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0.5 0.4
4.1 3.2
2.9 1.0
DS #2 @ $575k
DS #3 @ $575k
DS #4 @ $575k
Full run-rate EPS in the region of USD 6.5-7.0 upon delivery of UDW drillships
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More backlog is required for market to fully price in earnings growth from UDW rigs We expect more contracts to be signed over the coming months Each UDW rig adds about USD 0.8-1.0 to RDC EPS Fair value of around USD 60, assuming average historical P/E multiple of around 9.0x and full runrate EPS of USD 6.5, fair value of RDC.
6.00
5.00
4.9 45
4.1 4.1
4.00
3.00
2.00 1.1
1.00
1.7
1.1
25
0.7
0.8
0.9 15
0.00 -0.1
0.0 -0.3
-1.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e2013e2014e2015e2016e
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(USD):
10.05
Attractive and stable dividend will lift valuation 9.5% yield on current quarterly run-rate expectations Fair value of USD 2.3 based on 8% yield valuation in-line with Seadrill Upside to dividend as newbuilds start to hit water from 2014 FCF to equity per share will grow from USD 0.14 in 2011 to USD 0.36 in 2015 Industry leading contract coverage and backlog No rigs available until 3Q14 and ~40 months avg. remaining contract duration USD 2.3bn EBITDA backlog vs. current market cap of USD 2.2bn De-risking the company at the same time as distributing dividend Net debt per UDW dropping from USD 475m to USD 335m by YE 2015 Total net debt relatively un-changed, but spread over a larger fleet Leading player in the most attractive and resilient drilling market No real harsh environment availability between now and 2014 NCS dayrates will push higher due to long-term undersupply of rigs Several near-term opportunities to secure a contract for the newbuild(s)
2015E 1 214 744 61.3% 416 1.81 1.29 2 732 6.8x 5.5x 1.9x 12.8%
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35 des. 11 feb. 12 apr. 12 jun. 12 aug. 12 okt. 12
North Atlantic Drilling OSX index (Rebased) OSEBX index (Rebased)
Key financial figures Revenue (USDm): EBITDA, adj. (USDm): EBITDA-margin Net profit (USDm): EPS, adj. (USD): Dividend per share (USD): Net debt, year-end (USDm): EV/EBITDA, adj. P/E, adj. P/B Dividend yield
2013 930 546 58.8% 274 1.19 0.95 2 315 8.5x 8.4x 2.5x 9.5%
2014E 1 041 620 59.6% 331 1.44 1.00 2 555 7.9x 7.0x 2.2x 10.0%
Highly attractive valuation with share catalysts 9.5% 2013 dividend yield backed by 100% contract coverage 8.0x/7.3x 2013E EV/EBITDA and P/E 30%/50% discount to relevant peers Near term triggers include contract for HE semi newbuild and US listing
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12%
11%
10%
9.2 % 9%
8%
Seadrill; 8.1 %
7%
6% Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Yield pricing will compress as market grows more confident in the distribution
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700
600
70 %
500
60 %
USDm
753
300
400
50 % 40 % 30 %
100 %
100 %
100 % 93 %
200
48 %
20 %
100
10 %
2011 2012E 2013E 2014E 2015E
Source: RS Platou Markets, North Atlantic Drilling
Upside to dividend as FCF to equity per share will grow from USD 0.14 in 2011 to USD 0.36 in 2015
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4 F&G JU 2000E under construction in China 2 units under construction at Dalian shipyard Payment terms : 10%/90% Delivery schedule: 1Q13/3Q13 2 units under construction at SWS shipyard in China Payment terms : 1%/99% Delivery schedule: 1Q14/3Q14 Sold PROS #2/#4 at USD 230m/USD 228m or all-in cost of about ~USD 250m (inc non shipyard cost) Closing of agreement expected during December 2012 Will realize a book gain of USD 39.2m/23.5m and give a net cash gain of USD 60.6m/48.5m Contract secured for 1st unit secured with Total in UK North Sea Duration: 690 days + 365 days option Dayrate: USD 185k Expected contract commencement: May 2013 Financing first unit fully funded assuming USD 139m debt financing USD 60m equity raise USD 139m debt financing expected for rig #1 from Chinese export credit (first lien) Attractive valuation despite recent share issue Cash flow adj. NAV of USD 3.6 leaving a staggering ~70% upside Implied value of USD 213m, or ~ 13% below replacement cost Fair value of about USD 4.30 based on full run rate EBITDA multiple of 6.5x Average of valuation methods indicates a target price of USD 3.30
(USD):
2.20
9
8 des. 11 feb. 12 apr. 12 jun. 12 aug. 12 okt. 12
Prospector Offshore Drilling S&P 500 Index (Rebased) OSEBX index (Rebased)
2015E 302 188 62.2% 114 1.24 0.00 408 3.3x 1.8x 0.5x 0.0%
Key financial figures Revenue (USDm): EBITDA, adj. (USDm): EBITDA-margin Net profit (USDm): EPS, adj. (USD): Dividend per share (USD): Net debt, year-end (USDm): EV/EBITDA, adj. P/E, adj. P/B Dividend yield
2014E 236 143 60.7% 79 0.85 0.00 536 5.2x 2.6x 0.6x 0.0%
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PROS Ownership 100 % 100 % 100 % 100 % Design F&G JU-2000E F&G JU-2000E F&G JU-2000E F&G JU-2000E Delivery jan.13 aug.13 mar.14 sep.14 Replacement cost 240 240 210 210 900 -181 828 253 Adjusted rig Adj rig value value Per share 282 3.1 278 3.0 210 2.3 210 2.3 980 10.6 -181 -2.0 828 9.0 333 3.6 Sources: RS Platou Markets, RS Platou Offshore Cash Flow advantage 42 38 80
Driller 1 Driller 3 SWS Driller I SWS Driller II Total offshore assets Net debt Remaining capex Net Asset Value # shares (mill)
92
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Disclaimer
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RS Platou Markets AS may have or has acted as manager for a number companies mentioned in this report. For an overview of RS Platou Markets AS and/or its employees positions in financial instruments in addition to an overview of the companies to whom RS Platou Markets AS has provided investment banking services to over the latest 12 months, please see www.platoumarkets.com. This report does not provide individually tailored investment advice or offer tax, regulatory, accounting or legal advice. The securities, commodities or other instruments (or related derivatives) discussed in this report may not be suitable for all investors. This report has been prepared and issued for distribution to professional investors only and all recipients should seek independent investment advice prior to making any investment decision based on any information contained in this report. 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Each major U.S. institutional investor that receives a copy of a RS Platou Markets AS research report by its acceptance thereof represents and agrees that it shall not distribute or provide copies to any other person. Any U.S. recipient of this research report that desires to effect transactions in any securities discussed within this report should do so through RS Platou Markets, Inc., a U.S. registered broker-dealer and an affiliate of RS Platou Markets AS. All such transactions will be effected pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 and related interpretations. Financial statements included in the report, if any, may have been prepared in accordance with non-U.S. accounting standards that may not be comparable to the financial statements of United States companies. It may be difficult to compel a non-U.S. company and its affiliates to subject themselves to U.S. laws or the jurisdiction of U.S. courts. The analysts whose names appear in this research report certify that all of the views expressed in this research report accurately reflect their personal views about the subject securities or issuers. The analysts also certify that no part of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report. This report is issued by RS Platou Markets AS. RS Platou Markets AS is a company established under the laws of Norway being licensed and supervised by Norwegian regulators, and all matters relating to this report shall be governed by the laws of Norway. RS Platou Markets AS is a subsidiary of RS Platou ASA.
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