Focus Of Blowout Preventers Increases After Macondo Incident: Barclays Oil Services Analyst Picks Cameron (CAM) As The Market Leader
February 14, 2012 - The Wall Street Transcript has just published Oil & Gas: Exploration & Production Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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James West is the lead oil service and drilling Analyst for Barclays Capital. Mr. West joined Barclays Capital in September 2008, and prior to that he was at Lehman Brothers beginning in October 2000. His broad coverage universe includes large-capitalization, diversified oil service companies, niche technology providers, offshore and onshore contract drillers, supply vessel providers and energy capital equipment companies. Prior to joining Lehman Brothers, Mr. West worked at Donaldson, Lukfin & Jenrette. He earned a B.A. from the University of North Carolina at Chapel Hill.
TWST: What other factors or themes will drive this international upcycle? Which companies are best positioned to benefit as these themes play out?
Mr. West: There are a variety of kind of major themes going on in the industry right now. One is that international cycle that I mentioned, but I think within that international cycle we are seeing a push in the offshore markets, and particularly in the deepwater. And that has to do with several factors: one being the resource nationalism that's occurring in certain markets around the world, where the IOCs can't operate; number two, the technology advancements that have been made in the industry in the last 15 to 20 years have allowed us to explore and drill in deepwater in an economic fashion; and three, the commodity prices of course support of the major deepwater campaigns, and so we think that a lot of the kind of growth will be above and beyond the industry growth is going to occur offshore, and a lot of that is going to occur in deepwater and the deepwater subsea-type markets, and we think that because this is an offshore theme because it is international because it is subsea, there's two areas of the industry.
There are three areas of the industry that actually benefit pretty significantly from this. One is the large-cap diversified service companies, so Schlumberger (SLB), Halliburton (HAL), Baker Hughes (BHI) and Weatherford (WFT) clearly are the leaders in the service industry internationally. In North America, you tend to have more smaller competitors. Internationally, it is the Big Four, as we refer to them, and these are the companies that supply a lot of the high-end technologies that use offshore deepwater rigs.
And the second area is the capital equipment suppliers, the companies that build rigs like National Oilwell (NOV), the companies that supply a major piece of equipment like Cameron (CAM), and Cameron is the leader in blowout preventers - which following the Macondo incident, the focus on blowout preventers has increased dramatically, and as a result Cameron's aftermarket business on blowout preventers has also increased somewhat dramatically and we think will increase further from here. And the third area is of course the rig companies and the logistics providers, so the rig companies that drill these wells.
We just saw recently that Noble (NE) signed a contract for an ultradeepwater rig with Shell (RDS-A) in the Gulf of Mexico, which if they achieve their bonus, which is about 15% potential bonus, they would be above $600,000 per day - that is the day rate for that rig. Right after the Macondo incident, deepwater day rates were about $400,000 a day, and the last kind of eight to nine months, we have been bouncing around $450,000 to $500,000.
It was only recently that we hit $550,000, that was probably two months ago, and now we are looking at potentially about $600,000 a day, so you've already seen the benefits of that growth in deepwater and a shortage developing for deepwater rigs, so companies that have either deepwater rigs like Transocean (RIG), Noble and Ensco (ESV) we think are well positioned, and then the companies that support those rigs like the supply vessel providers. Tidewater (TDW) is the biggest, the largest and a global provider, and they should clearly benefit from just supplying crew and equipment and services to these rigs, and Hornbeck Offshore (HOS) is actually one of our favorites. It's more levered to the domestic market of the U.S., Gulf of Mexico, and is a premium asset provider as well.
TWST: Your coverage broad and there are several subsectors you follow within oil services. Is there one in particular that you would say is the best way to get exposure to the space in 2012 and why?
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