Wachovia Increases Valuation Ranges for Drilling Sector (ATW, DO, ESV, PDE, RDC, RIG)

July 2, 2008 8:53 AM EDT

Wachovia Increases Valuation Ranges for Drilling Sector

The firm said, "We've dialed back the further correction in jackup rollover day rates we're projecting in our DCF models. We're now modeling a further fall of 10%, on average, in rates by late '10E, vs. a prior drop of 15%." This is the reason for the increase in the valuation ranges.

Wachovia increases their valuation ranges on the following companies:

Atwood Oceanic (NYSE: ATW) from $106-$117 to $127-$140
Diamond Offshore Drilling (NYSE: DO) from $142-$155 to $143-$156
Ensco International (NYSE: ESV) from $65-$75 to $75-$86
Pride International (NYSE: PDE) from $40-$6 to $42-$48
Rowan Companies (NYSE: RDC) from $39-$44 to $44-$49
Transocean (NYSE: RIG) from $196-$208 to $199-$211

Wachovia's ratings on the companies are:

ATW: maintains Outperform
DO: maintains Outperform
ESV: downgrades from Outperform to Market Perform based on fair valuation
PDE: maintains Underperform
RDC: maintains Market Perform
RIG: maintains Outperform

In addition, the firm said, "Over H1 '08, jackup contracting trends have been healthier than we expected. In the U.S. GoM, demand has clearly rebounded, appearing set to hold steady in the low 60s if not climb a bit higher based on permit volumes and anecdotal evidence; and resulting in the lock-up of several units through hurricane season. Internationally, contracting has continued to see a historically high % of 2-yr+ terms and awards granted 100+ days in advance in a day rate range that has held steady since early '08. On the supply side, the (1) pace of newbuild ordering has slowed to an annualized rate of 20 versus a mean of 30 for the past 3 years; and (2) we haven't seen much evidence, yet, of National Oil Companies actually undertaking internal construction programs. Still, we remain wary of 64 available new builds."

Wachovia maintains their Overweight rating on the drilling sector.

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