cet
Cathedral Energy Services Ltd. - CET $5.48 April 8, 2010
Outlook
We view the transaction as a positive for Cathedral.
Indeed, it is focusing its business on directional
drilling and production testing, which provide the best
return on capital. The wireline business had been
underperforming due to overcapacity in Canada and
the lack of scale by Cathedral.
We are updating our model to reflect a revenue reduc-
tion from the sale of the wireline business. As such, our
2010e revenue falls $11.9 MM to $143.5 MM, while our
2011e falls $19.0 MM to $151.3 MM. Our EBITDAS
estimates in 2010e and 2011e are largely unchanged as
the Wireline business was not expected to be a signifi-
cant contributor to the bottom line. Based on our
estimates, Cathedral is now trading at 2011 EV/
EBTIDAS of 4.1x (group average: 4.2x).
We are maintaining our target price of $7.75, which
equates to 2011e 5.9x EV/EBITDAS and 14.6x earn-
ings. We believe this is a fair multiple for a Company
that has narrowed its focus on directional drilling, a
high growth area given the trend toward unconven-
tional wells, and the directional exploitation of existing
mature oil fields. With projected return of 50.2%, we
maintain our Outperform ranking.