Pritchard Capital: Oil Service Weekly Report

Pritchard Capital says, “The Oil Service Index (OSX) fell 2.2%, underperforming the S&P 500's (SPX) 0.7% decline as the front-month crude oil and natural gas prices gave up 3.0% and 5.1%, respectively. Production services stocks were the worst performers, with the group median declining 2.4%, followed by the offshore drillers (-2.1%), land drillers (-1.8%), large-cap service providers (-1.1%), manufacturers and vessel companies (-0.5%). The top performer was easily Xtreme Coil Drilling Co, popping 33.1% following a positive earnings release and improved outlook for the company, while Tesco Corp TESO fell the hardest, dropping 10.4%.” “Intraweek we swapped Ensco plc ESV for PDE. Our rationale for PDE as a top pick is: (1) downward EPS revisions mitigated - over 80% of its deepwater and midwater fleet is contracted into 2012, minimizing idle time and weak rates likely to continue well into 2011 for these rig classes, (2) flight to quality - PDE has the third largest fleet of DP rigs (11) and based on its enterprise value is trading at the cheapest valuation per DP floater ($447,000 per rig, or a 57% discount to its peers' $1.038 million), and (3) attractive valuation - trading at a 37% discount to its median five-year multiple (11.2x) despite its earnings visibility,” the analysts mention. Pritchard Capital adds, “Our reasoning for removing ESV is: (1) floater uncertainity - there is a possibility the ENSCO 7500 may not bring in revenue until 2H 2011 given the rig will be out of service Q4 2010 through most of Q1 2011 and then will require a heavy lift vessel to mobilize it to its next drilling location. If the rig were to not start its contract until Q3 2011 and the rate were to come in around $375,000/day, our 2011 estimate would drop 30 cents. Additionally, if Nexen Inc NXY gets its way and the ENSCO 8502's contract does not commence until 2011, 2010 estimates will come down (23 cents our model), (2) stagnant standard jackup demand - this segment of the market lacks near-term upside, an area where ESV gets its earnings momentum, as rates should hold relatively firm through 2H 2010 and into 2011 given 25% of the marketed fleed is idle and Transocean Ltd RIG has 24 stacked or idle standard jackups to go back to work, and (3) performed too well - the stock is 79% of its 52-week high versus the group's 61%.” More Analyst Ratings here