We are downgrading Loews Corporation (L) to Neutral from Outperform on the back of disappointing second quarter results. Earnings substantially missed the Zacks Consensus Estimate and the year- ago results. Lower earnings at Diamond Offshore and soft results from equity and limited partnership investments at the parent company weighed on the results.
Diamond Offshore (DO) posted lower earnings in the second quarter yet again, attributable to lower utilization of rigs as more of them were going through special surveys, lower day rates, higher contract drilling expenses including the costs of the special surveys. However, the ultra-deepwater and deepwater floater markets are gaining momentum, in particular the ultra-deepwater, where there were a few uncontracted rigs available for work in 2012. As a result, it expects boost on dayrates for the remainder of 2012. It has more than 90 floater rigs, ultra-deepwater and deepwater units, on order or under construction.
Another subsidiary, HighMount generated lower revenue and income due to lower sales volume stemming from lower drilling activity as well as decline in natural gas prices. They also recorded a non-cash ceiling test impairment charge of $142 million related to the carrying value of natural gas and oil properties.
On the positive side, Boardwalk Pipeline, a subsidiary of Loews, formed a joint venture with Boardwalk Pipeline Partners LP (BWP) to foray into the natural gas liquids business. Natural gas is usually an attractive choice because of its relative fuel efficiency, low emissions, quick construction timelines and low capital costs. Gradually, it is expected to become a major source of power generation.
Also, Loews scores strong with credit rating agencies. Fitch Ratings reiterated the long term Issuer Defaults Rating at ‘A+’ of Loews. The rating agency also affirmed the senior unsecured debt ratings at ‘A+.’ The outlook remains stable. Also, Moody’s Investors Service upgraded the senior unsecured ratings of Loews, CNA Financial and Diamond Offshore to A2. Moody’s also reiterated CNA insurance company’s financial strength ratings and upgraded the outlook on these ratings to positive from stable.
Loews has a Zacks #3 Rank (Hold), indicating no clear directional pressure on the shares over the near term.
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