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Superior Valuation

Posted: Jan 24, 2008 09:05 AM by Eugene Bukoveczky

Tickers in this Article: CVX, APA, BP, SPN

While the recent market turmoil may have raised a lot of people's blood pressures, one consolation is that it has also created some interesting valuation situations in companies whose earnings are essentially recession proof. One such example is Superior Energy Services (NYSE:SPN), a rather thinly followed energy services company.

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Shares Soar Then Slump After Contract Win
Earlier this month, the shares soared when the company announced that it had won a $750 million contract to decommission seven downed platforms and related well facilities located offshore of Louisiana. The platforms were formerly operated by BP (NYSE:BP), Chevron (NYSE:CVX) and Apache Corporation (NYSE: APA).

Strong buying interest pushed the shares past the $45 mark, but they've since settled back to around $38 in the recent sell-off, giving back about two-thirds of the gain that occurred following the announcement.

Analysts Up Estimates And Price Targets
While some investors might still be skeptical concerning the impact of these developments, analysts following the stock were quick to boost their earnings estimates for the company and make note of its value as a possible takeover candidate.

In a follow-up report, stockbroker Johnson Rice & Co. boosted its 2008 EPS estimate to $4.60 from $4.05, an increase of 13%. The broker also projected that the annual EPS impact of the contract would be 80 cents in the remaining years of the three year contract.

Bear Stearns also echoed this positive sentiment by upping its 2008 EPS forecast 40 cents to $4.45 and also adding 80 cents to its 2009 earnings estimate, boosting it to $5.30. It also upped Superior's price target to $50 and added the company to its top-10 list of potential acquisition candidates, arguing that several large oil service companies would be attracted by its earnings consistency, technology leadership and low valuation. (To learn more, see Target Prices Vs. Ratings.)

Attractive Valuation
While it's unclear whether the company is a target for takeover, its current valuation is compelling. Based on the consensus EPS estimate of $4.32 for this year, the shares now trade at just under 9-times earnings. According to Johnson Rice, a 10-times to 12-times multiple is more reasonable given the company's strong international growth prospects, which are currently providing 20% of revenues and are expected to grow further. (To learn the basics of earnings multiples, check out our P/E Ratio Tutorial.)

The Bottom Line
The Gulf of Mexico is just the beginning; there are plenty of mature oil and gas fields around the world that now require reworking and renovation. That means there's going to be lots of contract work available for an operator like Superior. Not only does this recent contract signing boost Superior's near-term earnings, it also establishes the company's credibility at being able to handle the big jobs.

By Eugene Bukoveczky

Eugene Bukoveczky is a freelance writer and investment researcher. He holds a CFA designation and has spent several decades working in the investment business in places like Toronto, New York, London and Dubai. He currently resides in Nova Scotia, where, when not writing, he devotes his time to chopping wood, growing his own vegetables, riding his bike to the store, and thinking about other ways to reduce his carbon footprint.

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