Land Drillers Are Trading Below Cost - Evercore ISI (PD) (HP) (NBR)

Evercore ISI analyst, James West, published an interesting update to his "Oil Patch Weekly" series. After discounting the value of Tier 3 rigs, land drillers are trading below new built cost which seems to make acquisitions more likely as bankruptcies reduce expectations for takeout prices on the weak and eliminate competition for the strong.

He updated the EV/AC rig model for land drillers (HP, NBR, PD, PTEN, ICD) to reflect expected 2015/2016 rig counts, 4Q15 and 2016 capex guidance. In this model he values Tier 3 rigs at $0. On this basis, there is value in each of the land drillers as they all trade below their newbuild costs of $20 million. Based on 2015 rig counts, he sees the most value in PD followed by HP, ICD, NBR, and PTEN.

Nearly forty North American E&Ps have filed for Chapter 11 bankruptcy in 2015 with additional bankruptcy filings expected as the fed increases the federal funds rate, leading to higher interest expenses and additional pressure on commodity prices (due to a stronger dollar). They expect a similar phenomenon to play out on the services side with up to a third of the service companies ultimately filing for bankruptcy protection. Both these trends should ultimately create a more rational industry throughout the life of the cycle.

Schlumberger (NYSE: SLB) stands out as an active company in restructuring taking the following actions in the month:

-issued $6 billion in senior notes to fund its acquisition of Cameron
-received a provisional deadline to rule on the acquisition of February 5 by the EU

- signed a previously-announced JV agreement with Bauer to manufacture land rigs and associated products for SLB and other third parties. Bauer will own 51% of the JV with SLB owning the remainder

-taking advantage of the Mexican government opening licensing rounds to non-government companies in the Mexico side of the Gulf for the first time. SLB is using eight vessels for the shoot and expects the project to take three years.

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