GW

[David Randolph]

GW earned $8 M in 2004, $120 M in 2005 and $219 M in 2006. The market cap is just $1.56 B.

I see there are convertible debentures, warrants or something like that outstanding, because basic EPS in 2006 was $1.16 and EPS on a fully diluted basis was "only" $0.98. I'm going to have to investigate this for the next update.

Anyway, even considering the fully diluted EPS of $0.98, the company is trading at $8.44/$0.98 = 8.6 times earnings. Too cheap to handle, since the Oil & Gas Drilling & Exploration trades at an average of 13.35 times earnings.

Nice come back yesterday, I'll keep holding GW. 

[yukiii]

Buy HERO instead

Analysts at Capital Bank Southcoast reiterate their "buy" rating on Hercules Offshore Inc (ticker: HERO), while revising their estimates for the company. The target price is set to $41.

In a research note published this morning, the analysts mention that the company has bought a 200' liftboat for $7.4 million, which is expected to commence work in early 2008 at a dayarate close to $20,000. Hercules Offshore has indicated that three of its jackups are idle and are expected to remain so until the end of the month. The EPS estimate for 2007 has been reduced from $4.19 to $3.95 to reflect idle jackup time and insurance costs. The EPS estimate for 2008 has been raised from $5.27 to $5.35 to reflect the liftboat acquisition.

[David Randolph]

Buy HERO instead

Analysts at Capital Bank Southcoast reiterate their "buy" rating on Hercules Offshore Inc (ticker: HERO), while revising their estimates for the company. The target price is set to $41.

In a research note published this morning, the analysts mention that the company has bought a 200' liftboat for $7.4 million, which is expected to commence work in early 2008 at a dayarate close to $20,000. Hercules Offshore has indicated that three of its jackups are idle and are expected to remain so until the end of the month. The EPS estimate for 2007 has been reduced from $4.19 to $3.95 to reflect idle jackup time and insurance costs. The EPS estimate for 2008 has been raised from $5.27 to $5.35 to reflect the liftboat acquisition.

Yes, at first sight HERO looks very nice. I'll take a look at it over the weekend, thanks for the suggestion.

About the table you show for GW and others, I know analysts expect earnings to decline in 2007 versus 2006, but the company surprised everybody in Q1 2007 reporting record EPS of $0.27. If the 1st quarter momentum continues, it will earn $1.08 in 2007, against the average $0.85 expectation.

[yukiii]

Buy HERO instead

Analysts at Capital Bank Southcoast reiterate their "buy" rating on Hercules Offshore Inc (ticker: HERO), while revising their estimates for the company. The target price is set to $41.

In a research note published this morning, the analysts mention that the company has bought a 200' liftboat for $7.4 million, which is expected to commence work in early 2008 at a dayarate close to $20,000. Hercules Offshore has indicated that three of its jackups are idle and are expected to remain so until the end of the month. The EPS estimate for 2007 has been reduced from $4.19 to $3.95 to reflect idle jackup time and insurance costs. The EPS estimate for 2008 has been raised from $5.27 to $5.35 to reflect the liftboat acquisition.

Yes, at first sight HERO looks very nice. I'll take a look at it over the weekend, thanks for the suggestion.

About the table you show for GW and others, I know analysts expect earnings to decline in 2007 versus 2006, but the company surprised everybody in Q1 2007 reporting record EPS of $0.27. If the 1st quarter momentum continues, it will earn $1.08 in 2007, against the average $0.85 expectation.

The addition of newly built rigs into the land drilling market has created some excess rig capacity which has led to a decline in spot market dayrates. This downward pressure could continue as additional new rigs enter the market, however, Grey Wolf's portfolio of term contracts and our premium quality equipment coupled with our skilled rig crews have helped buffer our exposure to the erosion in spot market dayrates. Because of strong commodity prices for both oil and natural gas, we believe there will be demand for additional land rigs later this year."

[la-onda]

GW: Raymond James Cuts to Outperform from Strong Buy
Monday , July 02, 2007 09:47ET
Issuer: Grey Wolf, Inc. (AMEX: GW)
Analyst Firm:  Raymond James Financial Inc.
Ratings Action: DOWNGRADE
Current Rating: Outperform (from Strong Buy)

[David Randolph]

GW: Raymond James Cuts to Outperform from Strong Buy
Monday , July 02, 2007 09:47ET
Issuer: Grey Wolf, Inc. (AMEX: GW)
Analyst Firm:  Raymond James Financial Inc.
Ratings Action: DOWNGRADE
Current Rating: Outperform (from Strong Buy)

What a pity. Any reason for the downgrade, do you know la-onda? I want to know more about GW, because the stock has been performing quite poorly since I bought it, and I'm already losing 5.65% in it, even though it trades at just 8 times 2006 EPS. I guess that, like Warren Buffet says "if the key to a big fortune was the knowledge to divide two numbers" LOL

Over the past few years GW grew strongly, but what does the future lies? I guess that with the oil price this high, the future can only get better, right? Anyway, in my valuation model I expect just 5% revenue CAGR for the next three years, and still, I get an optimal selling price of  $15.81.

I'll keep holding GW, perhaps the recent market action is just a simple voyage to the 50 days SMA support, now at $7.84 (it may very well open right there, because of the downgrade).

[la-onda]

thats all what I have David:

cheers
Oliver

.....

ENERGY
The Energy sector was a solid performer today, but was not able to garner the top leadership position. Oil prices fluctuated all day but ended the day higher allowing the price to move above $71 per barrel. The Energy sector came out of the gate hot today before slipping during midmorning trading. Heading into noon trading the sector caught a bid and moved it to its session highs and ending the day up around 1%.

Raymond James made several ratings change in the sector. These changes included:
- InterOil Corp (IOC) upgraded from Outperform to Strong Buy
- Schlumberger Ltd (SLB) upgraded from Outperform to Strong Buy
- Cameron International Corp (CAM) upgraded from Outperform to Strong Buy
- FMC Technologies Inc (FTI) upgraded from Market Perform to Outperform.
- Patterson0UTI Energy Inc (PTEN) downgraded from Strong Buy to Outperform
- Nabors Industries Ltd (NBR) downgraded from Strong Buy to Outperform
- Grey Wolf Inc (GW) downgraded from Strong Buy to Outperform
- Pride International Inc (PDE) downgraded from Strong Buy to Outperform
- BJ Services Co (BJS) downgraded from Outperform to Market Perform

Goldman Sachs upgraded Buckeye Partners LP (BPL) from Neutral to Buy, and downgraded Buckeye GP Holdings LP (BGH) from Buy to Neutral.

[BigSully1]

Too bad we didn't buy BTJ instead, before breaking out of the 7 week base on Monday.

http://stockcharts.com/h-sc/ui?s=BTJ&p=D&b=5&g=0&id=p19195000122

[David Randolph]

Too bad we didn't buy BTJ instead, before breaking out of the 7 week base on Monday.

http://stockcharts.com/h-sc/ui?s=BTJ&p=D&b=5&g=0&id=p19195000122

Too bad we didn't bought LOCM instead, up 228% in 4 days

I don't know if GW's fall is due to any fundamental problem or just a normal correction from the last advance phase with no fundamental meaning. At first sight I say it is the latter, that is, the stock is very attractive from a fundamental standpoint, however profit taking (and loss taking) took it down 5.88% from my buying price.

If this is the case the stock will come back up and breakout above $9.

But I need to study this stock, and the next two of the Main, more deeply, therefore I'll start by GW's update this weekend (I always have more patience for the first few updates, when I get to the last ones on the list I'm always feeling tired and less enthusiastic).

I'll continue holding GW.

[David Randolph]

GW's management thinks it is a good business to buy the company's stock:



In Q1 2007, the company bought 1.6 million shares for $10.8 M. That means $6.75 a share, on average. Nice entry price.

The company still has cash and equivalents of $273.7 M, so it will probably buy some more shares if the price goes down. The downside is somewhat protected by this. Buying back shares also helps to report higher EPS numbers, since EPS = Net Income/# shares outstanding.

However I've identified the problems of overcapacity that yukiii talked about in the beginning of this thread:



The company says the following about its own business:

«Our business is cyclical and our financial results depend upon several factors. These factors include the overall demand for land drilling services, the dayrates we receive for our services, the level of demand for turnkey services, our success drilling turnkey wells and the demand for deep versus shallow drilling services.»

So I need to investigate these five factors:

1) Overall demand for land drilling services
2) The dayrates
3) The level of demand for turnkey services
4) Their success drilling turnkey wells
5) The demand for deep versus shallow drilling services.

Not an easy task, but I have this:

«Our average daywork dayrate realized during the first quarter of 2007 was approximately 19% higher than it was during the first quarter of 2006. As a result of newly-built and refurbished rigs that have come to market, there is currently some excess capacity of land drilling rigs, and this may increase as additional new rigs enter the market. Since the fourth quarter of 2006, we and some of our competitors have experienced and may continue to experience some rigs becoming idle. Spot market dayrates have been weakening in connection with the excess supply of land drilling rigs. While we have a significant number of existing term contracts at fixed dayrates that have buffered our exposure to the recent erosion in spot market dayrates and the effects of extra capacity, we expect to experience additional pressure on our overall dayrates in the second quarter of 2007 as some of our spot and term contracts come up for renewal at lower rates. As of April 30, 2007, our leading edge rates range from $15,000 to $22,000 per rig day, without fuel or top drives, which is an approximate 15%-25% decline from six months ago.»

I see at their historical financial results that indeed, the business is very cyclical (for example, 2002 revenues were 40% lower than in 2001). I would also like to know how GW's revenues and profits correlate with the Oil & Gas prices. Perhaps the cycle comes from fluctuations in the oil price (it appears to be that way), but $oil has come back and is near its all time highs now:



The higher the oil price, the higher demand for GW's land drilling services, right?

However, Natural Gas prices have been going down. Which is more important, oil or natural gas?



Natural gas is the answer, look here in the company's website:

«Approximately 95% of the wells we drill on a daywork and turnkey basis are targeted to natural gas.»

Clearly GW is a business I don't understand very well. I was very attracted by the recent historical revenue growth, the fat net profit margin and a very low P/E Ratio. Also the 1st quarter was quite strong, beating analysts estimates by 17.4%:



I have a lot of conflicting information. I'm in doubt and my hands ... aren't as strong as I would like them to be. Certainly, if the stock goes down another 10% from here I'll be shaking and afraid like a small kid in the dark. I would definitely take the loss if that were to happen.

So I decide to take the loss right away. 4% (0.27% of total equity) isn't all that much to pay for a trading mistake. I'm sure I'll find better/more confident picks.

The trading plan for GW is SELL.

Lesson for the future: Understand the nature of the business better before investing. Don't pursuit just positive fundamental trends and a low valuation. Strong revenue and profit growth coupled with a low valuation may mean the business is cyclical and about to turn south.

In general, avoid cyclical stocks.

[Garoh]

David
I think you can sell it for  break even ...   
The chart just started to look nice

[David Randolph]

David
I think you can sell it for  break even ...   
The chart just started to look nice

Maybe. But the price I bought isn't a variable in my hold/sell decision process.

[setravis]

The GW Threads in Previous 3SOF Picks
Have been merged.
Got the go ahead to do so from Ramsburg.
I will be working here on this board to merge other threads also.

I will leave you Friday's closing chart while I'm in this thread....... 

Good trading to all !   

Regards,
Your fellow trader @3SOF
setravis   

[David Randolph]

GW's Fundamental Case:



The following is the full report from Credit Suisse Research:

• Higher gas outlook supports re-rating. Owing to the increase in CS's gas price outlook to $8/MMBtu and more signs land rig margins could plateau by mid-2008, we are upgrading GW to Outperform from Neutral. We expect to see rising U.S. drilling activity under our new gas price forecast, setting the stage for pricing improvement in the back half of 2008. While the shares have performed well in 2008 and we have missed some of the positive relative performance, the stock is 11% below recent highs and we believe there is still meaningful upside to the shares given the discounted valuation on replacement cost and cash flow.

• Capacity additions fading. We adopted a bearish outlook on the land drilling sector in January 2006, citing worrisome capacity additions and an oversupplied gas market. Between 2004 and 2007, we estimate the industry added 670 land rigs to the fleet, including 265 rigs in 2007; however, capacity additions are forecasted to decline to less than 80 rigs in 2008 and gas fundamentals have improved. We estimate the return from drilling an average onshore prospect is 32% with $8.00 gas, providing substantial incentive for producers to increase drilling. Meanwhile, recent surges in oil permit activity suggest the oil rigcount could march higher, which would also support higher onshore activity in 2008.

• Our replacement cost work suggests meaningful upside. GW is the cheapest land driller in our coverage group, trading at 4.7X 2009E cash flow and 59% of replacement cost, sizeable discounts to the historical average multiples of 9.0x cash flow and 73% of replacement cost. Based on our EV-to-replacement cost framework, the current valuation represents a good entry
point for the stock, particularly if margins start to improve in the back half of 2008 as we expect.

• Raising target price. We are maintaining our 2008 and 2009 EPS estimates at $0.60/$0.75 versus consensus of $0.55/$0.60, but are raising our 12-month target price to $7.50 from $6.50, which assumes reversion to an average EV/replacement cost valuation of 73% and 6.0x 2009E cash flow. We believe multiple expansion is possible given above average cyclical conditions, rising gas price expectations, and declines in industry capacity additions.

It appears that the most important factor driving GW's shares is changes in capacity. Analysts expect much less additions of rigs in 2008 and this should drive the price of $gas higher. In fact, $NATGAS is bullish:



(the right part of the chart is higher than the left part - this is bullish)

Technical Analysis:

This upgrade produced a long white candle with volume above average which allowed GW to close above $6.6:



The short term technical target of this bullish breakout is $7.39. The analyst's target is $7.5, so I'll say that any bullish move will find some resistance in that area. The target objective is small, but for now is what we have.

In terms of risk, studying the chart tells me that the relevant support for traders is the 200 days SMA. Watch how GW was unable to cross that line in February. Now it is above this moving average. I guess traders would feel disappointed, would stop believing in $7.5, if the stock were to close back below the 200 days SMA, which currently stands at $6.4. They would bail out if this happens.

Trading Plan:

Buy GW today in the $6.55 - $6.65 range. Take profits at $7.39. SELL if the stock is set to close below $6.40.

[tokyopua]

Count me in