2009 Outlook
A tale of two halves--cutting
estimates broadly
Mike Urban
Research Analyst
(+1) 877 250-3113
michael.urban@db.com
Fleur Brown, CFA
Research Associate
(+1) 212 250-0334
fleur.brown@db.com
Resetting expectations; weathering the bad to get to better times
Although the group has shown signs of life in recent days, the full impact of lower
commodity prices and poor credit conditions have yet to be fully felt. We are
therefore cutting estimates for '09 by 31% and '10 by 44% (and adjusting some
target prices by smaller amounts). Despite these cuts, we are raising PDE to BUY
from HOLD (see Figure 1, page 3 for details). We remain neutral on the oil service
group but map out our view of the path to recovery in this note.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Top picks
Weatherford International (WFT.N),USD11.66 Buy
Companies featured
Weatherford International (WFT.N),USD11.66 Buy
2007A 2008E 2009E
EPS (USD) 1.66 2.00 1.49
P/E (x) 16.4 5.8 7.8
EV/EBITDA (x) 9.8 4.9 5.0
Exterran Holdings (EXH.N),USD22.96 Buy
2007A 2008E 2009E
EPS (USD) 3.24 2.32 2.34
P/E (x) 25.1 9.9 9.8
EV/EBITDA (x) 10.3 5.3 4.9
Diamond Offshore Drilling (DO.N),USD63.12 Buy
2007A 2008E 2009E
EPS (USD) 6.56 9.76 11.03
P/E (x) 15.0 6.5 5.7
EV/EBITDA (x) 9.3 3.9 3.4
Pride International (PDE.N),USD17.58 Buy
2007A 2008E 2009E
EPS (USD) 2.22 3.57 3.13
P/E (x) 15.0 4.9 5.6
EV/EBITDA (x) 6.7 3.2 3.8
Global Markets Research Company
Mirror image of ’08: First half marked by sharp activity/pricing declines…
Broad-based cuts to macro, commodity, CAPEX and earnings forecasts, a prerequisite
to properly re-calibrating expectations, are well under way. Unfortunately
we are in the midst of accelerating declines in rig count and pricing in the US and
many international markets. We are lowering our ’09 and ’10 global rig count
forecasts by 19% and 18%, respectively (see Figure 2). The corresponding
estimate cuts place us well below consensus and often lowest on the Street, a
position from which we believe the potential for upside is equally balanced against
further downside risk.
…but we see a second half recovery
With the group increasingly shrugging off bad news, we believe the stocks may
have already bottomed in absolute terms. A return to outperformance, however,
would seem more likely in 2H ‘09. Although rig count and estimates will probably
still be falling, history is very consistent in telling us that the bottoming in
commodity fundamentals marks the end of the (equity) downcycle (see Figures 7-
9). We believe global decline rates for oil remain under-appreciated and current
under-investment is exacerbating the issue, likely driving a sharp snap-back in
commodity prices as demand recovers mid-year (see Figure 6).
Recommendations, valuation and risks
As noted above, stocks may rise in absolute terms in a broader equity market
recovery but broad-based outperformance may have to wait until we find a firm
bottom for commodities and/or get past the current period of accelerating activity
declines. That said, select stocks could offer outperformance. We are currently
advocating a “barbell” approach. As credit markets stabilize and the market looks
for a return to growth, our Top Pick remains WFT. For investors continuing to play
defense, DO has strong contract visibility, a debt-free balance sheet and a 13%
cash yield. Catalysts can create opportunities as well which is why we are
upgrading PDE, which should become a pure deepwater play in Q2. We value
service companies on multiples of peak EPS which we assume to be 2008 for
most companies. For offshore drillers, we assume they reach historical low
multiples of fleet replacement value, adjusted for the NPV of cash flow from
backlog. Risks include commodity prices and their impact on demand for oilfield
services. Specific to offshore drillers, significant new supply is under construction.
(Please see pages 2 & 21-29 for company-specific details on valuation and risks).

Investment thesis
Outlook mixed for the group
We are neutral on the oilfield service sector given the current macroeconomic environment
and the increasingly global credit crisis. Although long-term fundamentals remain strong, we
believe energy demand will suffer further in early 2009. Credit market/ commodity price
concerns along with overcapacity in certain markets make stock selectivity important in the
current environment.
Even with the recent bounce in the group, most stocks remain cheap by just about any
historical measure. Despite this, we have argued for the last few months that expectations
remain too high and must be re-set lower. This process is well under way with estimates for
GDP and commodity prices falling dramatically. The next step comes in the field where the
US rig count has plunged in recent weeks and is now 20% of its September peak.
International activity has held up well so far but we expect the December international rig
count, to be released this week, to show a decline with weakness developing in the North
Sea and Russia.
Fortunately, the news is not all bad. We entered into this downturn at very high levels of
production capacity utilization, the adjustment in spending has been rapid and decline rates
are pervasive. Although the relationship is a bit circular, one could further argue that poor
credit market conditions have had as much to do with the deterioration in oilfield conditions
as commodity prices. Given this backdrop, we believe commodity prices could recover
rapidly as the global economy returns to growth, even in a relatively weak recovery scenario.
With the era of easy growth over, greater differentiation should emerge. Although the group
as a whole may struggle, we believe outperformance is still possible from names able to
continue to drive growth in the challenging environment now at hand. Names with well
defined catalysts can also present opportunities.
Valuation
Our target prices are based on a historical peak (low) multiple applied to 2008 or 2009
earnings which we assume are peak earnings depending on the company. We believe late
2008 will be peak earnings for most service companies in the current cycle. To determine the
appropriate target multiples of peak earnings, we use the historical peak multiples of EPS.
For offshore drillers, our target prices assume that these companies reach historical low Total
Enterprise Value (TEV)/ Replacement value multiples. We then apply these historical low
multiples to current fleet Replacement value and net debt. Given that most companies have
much better balance sheets and earnings visibility relative to historical lows, net debt is
adjusted to reflect the present value of the cash flow from each company’s backlog.
Risks
With GDP and oil demand under pressure, a further downward correction in commodity
prices could drive additional downside. As national oil company spending grows in
importance, visibility on upstream CAPEX may be limited. Meanwhile, capacity growth,
particularly in the shallow water drilling space, is significant.