Hornbeck Offshore Services (HOS) is growing sequentially by publicly providing supply vessels to the Gulf of Mexico and is positioning itself to increase its exposure to the region by 2014, the fastest growing deepwater market in the world, says James West, Lead Oil Service and Drilling Analyst at Barclays Capital.
“We’re running some 35 to 36 deepwater rigs as we speak, and we think that number could be 45 to 50 deepwater rigs as we go into the middle of 2014. They are at a point now where utilization is almost full. They are pushing day rates higher, and earnings are ramping up considerably as a result of that,” West said.
West likes this small-cap company as it is preparing aggressively for increased activity in the GOM next year. HOS, along with its equipment and services peer group, should also benefit from a global E&P spending increase of 7% in 2013.
“Hornbeck also has a very aggressive new build program, and they have a series of new builds that will start to enter market really in a big way in 2014, which will be perfectly timed for this increase in overall activity in the Gulf. That will add another layer of earnings and EBITDA growth for Hornbeck, so they are a nice pure play on the expansion of deepwater drilling in the Gulf,” West said.
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Baker Hughes (BHI) will likely lag its peers in revenue growth over the next two years as it continues working to fully integrate its acquisition of BJ Services and tries to improve its customer base in the North American market, says James West, Lead Oil Service and Drilling Analyst at Barclays Capital.
“The next round of self-help is going to involve trying to get a better customer base. Unfortunately a lot of these customers are working with Halliburton (HAL) and Schlumberger (SLB), and that creates a dynamic that may not be favorable for them. That said, with their margins below 10%, there is obviously clear and good margin upside for Baker as they do resolve their issues,” West said.
West also says BHI is pulling back from international markets, and he expects expects 9% spending growth outside of North America in 2013. He adds that BHI has said it expects a flattish rig count this year, although it may start to rise in the second quarter.
“They have a returns-focused strategy in certain geographies and product lines where they just are getting their return internationally. They have also given up some market share in Latin America, particularly Brazil. The combination of those two factors will likely cause their revenue growth to lag their peers over the next one to two years,” West said.
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Petroleo Brasileiro Petrobras SA (PBR) repels oil service companies because of the difficulty and uncertainty in the contract-renewal process, raising questions about how the company will increase production while acting as a political machine, says Trey Stolz, Managing Director of Oilfield Services Research for IBERIA Capital Partners.
“As Petrobras misses production targets and apparently needs to get those levels up, the question is how and where they’ll be able to do that. It seems lately that service companies are shying away from Brazil somewhat, with the uncertainty and the difficulty they have in renewing contracts with Petrobras because of the quasigovernmental nature of working with that NOC,” Stolz said.
Oil service companies are having a difficult time navigating the red tape and political issues in Brazil, as the normal process of renewing a contract or day rate increase does not work the same there as in other regions. These companies are moving assets out of the country despite the attractive market and the likelihood of a long run of activity in the future.
“You’ve seen Hornbeck (HOS) move four of their 12 OSVs out of Brazil back to the Gulf. I think you’re going to see more of that. You’ve seen Tidewater (TDW) continue to retire boats out of Brazil,” Stolz said. “For Brazil to come around as a region, you need political change, and that will probably take a couple of years. It appears that Brazil needs to revisit how they do their contracts in order to attract service companies and keep the activity going.”
Helix Energy Solutions (HLX) specializes in deepwater well intervention and possesses three of the world’s six vessels. This cost-cutting technology recently became widely accepted among majors, and Helix continues to add technology to its fleet of vessels that is in extremely high demand, says Trey Stolz, Managing Director of Oilfield Services Research for IBERIA Capital Partners.
“The industry has come out with specialized well intervention vessels that cost significantly less per day than a drilling rig and are more suited to the well service tasks. That’s what Helix specializes in. Helix provides the platform by which another service company, such as Schlumberger (SLB), could service a well in the deepwater,” said Stolz.
The ramping up of deepwater activity primes Helix for increased interest in its services, especially from NOCs in frontier regions. Stolz adds that HLX‘s potential earnings growth and simplified assets make the company attractive to larger players in the industry.
“We are looking at significant earnings growth as you add assets in over the course of 2013. Then in 2015, [Helix] can add the Q5000, a very large well-intervention vessel. It looks like they’ll have the Q6000 coming in 2016, and they can potentially add a Q7000. It’s a great space to be in, and they’ve got great growth prospects. They are also packaged up nicely to be a nice buyout target, so for all those reasons we like Helix over the next 12 months,” Stolz said.
Noble Corporation (NE) is improving the execution of its ambitious new rig construction program by decreasing drilling downtime, leading James West, Lead Oil Service and Drilling Analyst at Barclays Capital, to choose the name as its favorite in the offshore drilling group.
“They’ve had some operational hiccups recently, mostly driven by some new rig deliveries,” West said. “They saw the need to re-fleet early and they ordered new rigs. While they’ve had some downtime related to bringing these rigs into the fleet, we think that will start to dissipate and execution will improve. Earnings estimates are now much more achievable.”
West adds that Noble Corporation trades at a discount to peers and expects upside for the company’s stock. He likes the name despite his expectations of a plateauing of day rates for the industry in the $600,000 to $650,000 range.
“As a result some of the missteps in recent quarters the valuation has come down, and it’s trading at a discount to the group. We think as they improve and they can execute going forward, that discount should shrink considerably and there may be some upward momentum to earnings estimates at that point,” West said.
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Cameron International Corporation (CAM) is expected to continue growing its oil and gas capital equipment backlog through 2013 and into 2014 as demand for its blowout preventers and subsea equipment continue on the rise, says James West, Lead Oil Service and Drilling Analyst at Barclays Capital.
“Cameron really hits the market in two of our favorite ways. Number one is their blowout preventer business, which is benefiting from new rig construction from heightened safety standards following the Macondo incident, so there is growth in aftermarket for BOPs, as well as in the move toward using dual BOPs on new offshore rigs,” West said.
West adds that CAM benefits greatly from the secular growth of the subsea production market, the second prong of his positive thesis on Cameron International. He also says the joint venture with Schlumberger Limited (SLB) will make the company a large force in this particular vertical.
“Number two, Cameron is one of the largest players in the subsea production market. They recently entered into a joint venture with Schlumberger called OneSubsea, which we think will be a very powerful force in the subsea market. And subsea, as I mentioned earlier, is one of the key themes of this cycle,” West said.
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Envision Solar International (ESVI) increases the efficiency and profitability of its Solar Tree offering to serve the energy and bottom-line needs of increasingly larger client types, forgoing the race to the bottom many solar companies are engaging with the utilities, says Desmond Wheatley, President and CEO of the company.
“Our structures do generate cheap electricity, and they will pay for themselves based on energy alone in their lifetimes; and that’s certainly one component of it, but how much more interesting is it when you leverage a solar deployment to improve your customer’s existing business model?” Wheatley said.
Wheatley says EVSI‘s relationship with Cadillac as a prime example of how this leverage could work by highlighting a company’s environmentally friendly initiatives, thus creating a positive brand image in the eyes of consumers without incurring higher energy costs.
“The Solar Trees are acting as giant green billboards for Cadillac, for General Motors, for their sustainability program. And at the end of the day, the conversations I want to be having with those dealerships for whom we have installed these Solar Trees is not how much money did you save on your electric bill measured in dollars and cents, but how many more Cadillacs did you sell as a result of having this infrastructure in place?” Wheatley said.
Clean Energy Fuels Corp (CLNE) focuses its strategy on providing natural gas to high-fuel-use fleet vehicles used in airports and by transit agencies, says Andrew J. Littlefair, Co-Founder, President and Chief Executive Officer of Clean Energy Fuels Corp.
“We target airports, and that segment is growing about 30% a year. We’re now at 35 airports — that’s taxicabs and airport shuttles and hotel shuttles, that kind of thing. That is one of our core markets, it’s grown well,” Littlefair said.
In addition to the airport segment, CLNE continues to fuel transit agencies around the U.S., though this market has slowed because buses are kept for a longer period of time, says Littlefair.
“The earliest and fastest adopters were transit agencies, such as L.A. Metro or DART, Dallas Area Rapid Transit, or similar transit agencies. Today about 30% of all the transit buses in the United States are on natural gas,” Littlefair said.
Mellanox Technologies, Ltd. (MLNX) surprised investors with a relatively in-line performance compared to its guidance after a negative preannouncement in early January, says Andrew Nowinski, Assistant Vice President & Research Analyst at Piper Jaffray & Co.
“Management stated that an inventory overhang at one of their large OEMs forced them to guide the March quarter well below expectations as that OEM burns through their existing inventory,” Nowinski said. He also adds that the stock, along with the data storage sector in general, is volatile, having gone from $33 all the way to $120 last year, and now trading around in the $50s.
Nowinski says that, although Mellanox may not deliver results like it did in the past, results assumed for this year are achievable, especially if factoring in deals that may realize in 2013.
“Now, I am not suggesting that Mellanox will again deliver 8% growth in 2013, and in fact we are actually modeling for just $450 million in revenue, which equates to about a 10% decline. However, I do think the sequential growth rates we are assuming for Q2 to Q4 are achievable, and moreover, those assumptions are not factoring in any large deals that may come in throughout the year,” Nowinski said.
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SolarCity Corp. (SCTY) reduces the upfront costs of solar energy by leasing its own equipment to businesses and consumers, where this new solar leasing business takes away the need to invest in expensive equipment and reduces overall energy costs, says Ben Kallo, Senior Analyst at Robert W. Baird & Co.
“This gives the consumer the advantage of the solar power, which is 10% to 15% cheaper than regular electricity, and they don’t have to invest so heavily in the hardware. That is an easy model that is getting some traction. That is probably the biggest growth area we are seeing right now,” Kallo said.
Kallo says downstream companies like SolarCity also benefit from the lower costs of polysilicon and module production. He says alternative energy company performance ultimately depends on cost, and the reduced cost increases the potential for increased adoption.
“Prices have dropped precipitously really because of oversupply, but what that means is it’s actually good for the solar market, because as costs come down for the whole system it makes more cost competitive with fossil fuel generation,” Kallo said. “Those downstream people — the First Solar (FSLR), SunPower (SPWR), SolarCity — they’re actually going out there building out projects, actually benefit from oversupply that’s occurring in the module side of the business.”
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