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IU RATING TARGET CHANGES Energy: Offshore Drilling Energy: Oilfield Services February 11, 2013 Investment Opinion Changes and James Crandell, Managing Director [email protected] 212.702.4515 Alterations to Coverage Peter Hatfield, Analyst [email protected] 212.372.5710 J.B. Lowe, CFA, Analyst [email protected] 212.372.5705 We are reducing our investment opinion on nine of the 50 oil service stocks we have under Jonathan Hunter, Associate coverage, reflecting the strength in oil service stocks in recent weeks; the fact that certain [email protected] 212.372.5715 stocks we have had Buy recommendations on are approaching our price targets; the still Novid Rassouli, Associate sluggish outlook for E&P spending in North America; and a change in analyst coverage. [email protected] 212.702.4502

The stocks we are downgrading to Hold from Buy are , Basic Energy Services, Calfrac Well Services, Trican Well Service, Ensco, , Lufkin Industries, Newpark, and Tenaris.

We continue to have a positive view on the performance of the oil service group. At this point, we have a clear preference for those companies strongly exposed to the multiyear upturn forecast for international exploration and production spending and those oriented toward the exceptional outlook for ultra-deepwater. Given the sluggish outlook for North American E&P spending and the outperformance recently of North America-oriented stocks, we are deemphasizing this group.

Please read Required Disclosures & Analyst Certification on the last pages of this report.

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Oil Service Stocks Have Been Strong Since the oil service group's recent bottom (11/14/2012), the OSX has risen by 20%, Performers compared with a 12% rise by the S&P 500. Leading the way have been the North American- oriented companies – almost all of which have had a significant move off of their lows. Shortly after the bottom, we turned positive on the North American stocks on November 19, 2012 with our report: Upgrading North American Service & Drillers - Recovery in 2013 Likely. Given the sluggish outlook for exploration and production spending and the excellent performance of the group, we believe it's time to take money off of the table in these names. We are reducing our investment opinion to Hold from Buy for Baker Hughes, Basic Energy Services, Calfrac Well Services, Trican Well Service, Ensco, Ensign Energy Services, Lufkin Industries, Newpark, and Tenaris (most of which have strong exposure to North America).

Performance of Our Entire Coverage Universe since North American Upgrade

Current NAM Upgrade Ticker Rating Price 19-Nov-12 % Return Hercules Offshore HERO Buy $7.09 $4.61 54% Basic Energy Services BAS Hold $14.75 $9.73 52% Geospace Technologies** GEOS Buy $109.49 $74.72 47% RPC, Inc RES Hold $16.22 $11.10 46% Weatherford WFT Buy $13.30 $9.47 40% Key Energy Services KEG Hold $8.74 $6.33 38% Patterson-UTI PTEN Buy $23.47 $17.13 37% HAL Buy $41.26 $31.71 30% Core Labs CLB Hold $131.81 $101.73 30% Trican Well Service TCW-T Hold $14.22 $11.39 25% Helmerich & Payne** HP Buy $64.39 $51.64 25% Transocean RIG Buy $56.38 $45.46 24% Precision Drilling PDS Buy $9.10 $7.38 23% Cameron International CAM Buy $65.41 $53.37 23% Newpark Resources NR Hold $8.75 $7.17 22% C&J Energy Services CJES Buy $23.57 $19.47 21% NBR Buy $16.57 $13.69 21% Ensign Energy Service ESI-T Hold $17.20 $14.24 21% U.S. Silica SLCA Buy $20.08 $16.73 20% Atwood Oceanics** ATW Buy $54.46 $45.38 20% WEIR Group Plc WEIR-LN Sell 2,116.00 1,764.00 20% Tesco TESO Hold $12.32 $10.31 19% ION Geophysical IO Hold $7.36 $6.21 19% Bristow BRS Buy $59.13 $49.99 18% Calfrac Well Services CFW-T Hold $26.89 $22.77 18% Oil States International OIS Buy $78.31 $66.83 17% Lufkin Industries LUFK Hold $61.41 $52.50 17% Oceaneering International OII Buy $63.68 $54.79 16% Noble Corporation NE Buy $39.76 $34.34 16% Ocean Rig UDW ORIG Buy $17.57 $15.22 15% Carbo Ceramics CRR Hold $86.37 $74.99 15% TGS-Nopec TGS-OS Hold 207.20 180.60 15% ENSCO International ESV Hold $63.72 $55.54 15% Tidewater* TDW Buy $49.37 $43.98 12% Diamond Offshore DO Hold $74.81 $66.77 12% Schlumberger SLB Buy $79.07 $70.69 12% FMC Technologies FTI Hold $59.82 $53.74 11% Baker Hughes BHI Hold $45.65 $41.62 10% Rowan Companies RDC Hold $35.14 $32.76 7% Vantage VTG Buy $1.80 $1.69 7% Forum Energy Technologies FET Buy $25.55 $24.16 6% Pacific Drilling PACD Buy $10.45 $9.99 5% Tenaris TS Hold $40.06 $38.37 4% Trinidad Drilling TDG-T Buy $7.06 $6.87 3% Global Geophysical GGS Hold $4.00 $3.93 2% Seadrill SDRL Hold $38.40 $38.96 -1% Petroleum Geo-Services PGS-OS Buy 94.25 96.70 -3% Fred Olsen Energy FOE-OS Hold 247.90 255.10 -3% CGG Veritas CGG Buy $28.14 $29.19 -4% National Oilwell Varco NOV Buy $69.08 $73.29 -6%

Source: Bloomberg & DRCO Research

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However, We Continue with Our Despite our downgrades, we remain positive on oil service stock performance and maintain Positive Investment View an overweight stance toward the group. Our focus is on companies strongly exposed to the multiyear upturn we forecast in international exploration and production expenditures. We estimate a high single-digit percentage increase in international E&P spending, which would be the third consecutive annual increase. Historically, international spending has tended to move in long cycles (for example, the 2000-2008 period had eight consecutive years of sequential increases), and we think several more up years are likely after 2013. We also continue to prefer stocks that are leveraged to ultra-deepwater. In our view, the two biggest secular trends in the business are tremendous growth in ultra-deepwater spending and the globalization of horizontal drilling in the shales, which to date has been largely a North American phenomenon.

Following our nine downgrades, we now have 27 stocks rated Buy, 22 rated Hold, and 1 rated Sell. Our top picks for six to twelve-month appreciation are Buy-rated Weatherford International, Halliburton, National Oilwell Varco, Noble Corporation, Petroleum Geoservices, and Ocean Rig.

With an analyst departure (Doug Garber) on our team, we are realigning coverage of the 50 oil service stocks that we cover. We are now covering all the mid- to large-cap oil service and equipment companies, including three previously covered by Doug; Peter Hatfield, in addition to covering his six seismic companies, will also cover 11 small-cap North American companies formerly covered by Doug; J.B. Lowe will cover the 12 offshore drillers formerly covered by Doug and me. I will still have responsibility for the macro outlook, overall strategy and management of the group.

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Stock Coverage by Analyst

Monday, February 11, 2013 Dahlman Rose Oil Services & Drilling Comparative Analysis Price Fair Value EPS CFPS EBITDA Company TKR 2/8/13 Rtg. est* 2011A 2012E 2013E 2011A 2012E 2013E 2011A 2012E 2013E

Oil Service James Crandell Coverage Baker Hughes BHI $45.65 Hold $50 $4.20 $3.21 $3.00 $6.98 $6.48 $6.53 $4,306 $3,837 $3,762 Bristow BRS $59.13 Buy $70 $3.60 $3.12 $3.85 $4.12 $6.29 $7.01 $269 $277 $314 Cameron International CAM $65.41 Buy $74 $2.67 $3.15 $4.05 $3.50 $4.17 $5.30 $1,119 $1,318 $1,721 Carbo Ceramics CRR $86.37 Hold $74 $5.67 $4.62 $4.60 $4.84 $5.88 $5.09 $235 $205 $204 Core Labs CLB $131.81 Hold $96 $3.79 $4.51 $5.20 $4.27 $4.99 $5.74 $284 $318 $351 FMC Technologies FTI $48.62 Hold $42 $1.64 $1.85 $2.35 $2.09 $2.41 $2.93 $665 $756 $925 Forum Energy Technologies FET $25.55 Buy $28 $1.37 $1.85 $2.00 $2.28 $2.56 $2.78 $201 $307 $359 Halliburton HAL $41.26 Buy $50 $3.36 $3.00 $3.15 $4.83 $4.77 $5.24 $6,216 $6,133 $6,479 Key Energy Services KEG $8.74 Hold $8 $0.91 $0.68 $0.55 $2.07 $2.08 $2.17 $419 $422 $433 Lufkin Industries LUFK $61.41 Hold $66 $2.43 $2.83 $3.90 $1.51 $2.24 $4.97 $142 $200 $263 National Oilwell Varco NOV $69.08 Buy $95 $4.77 $5.91 $6.20 $6.08 $7.38 $7.84 $3,534 $4,316 $4,667 Oceaneering International OII $63.68 Buy $62 $2.06 $2.65 $3.30 $3.24 $3.43 $4.02 $468 $593 $683 Oil States International OIS $78.31 Buy $99 $5.86 $8.27 $7.65 $3.91 $10.80 $11.10 $698 $927 $908 Schlumberger SLB $79.07 Buy $92 $3.66 $4.18 $4.90 $6.07 $6.80 $7.92 $10,098 $11,187 $11,478 Tenaris TS $40.06 Hold $45 $2.26 $2.94 $3.25 $3.35 $3.90 $4.25 $2,449 $2,836 $3,099 Tidewater* TDW $49.37 Buy $56 $2.32 $1.97 $2.80 $4.97 $4.67 $5.78 $273 $265 $343 Weatherford WFT $13.30 Buy $18 $0.56 $0.92 $1.30 $1.84 $1.20 $3.15 $2,608 $2,924 $3,564 Peter Hatfield Coverage Basic Energy Services BAS $14.75 Hold $15 $1.88 $0.88 ($0.05) $6.75 $7.09 $5.03 $333 $306 $271 C&J Energy Services CJES $23.57 Buy $32 $3.28 $3.45 $3.20 $3.37 $4.38 $5.28 $285 $334 $334 Calfrac Well Services CFW-T $26.89 Hold $32 $4.72 $2.22 $2.00 $5.22 $6.28 $4.61 $422 $274 $274 Newpark Resources NR $8.75 Hold $10 $0.80 $0.66 $0.82 ($0.33) $1.59 $1.21 $162 $138 $162 RPC, Inc RES $16.22 Hold $14 $1.35 $1.27 $0.95 $1.75 $2.58 $2.06 $666 $663 $567 Tesco TESO $12.32 Hold $12 $0.71 $1.06 $1.00 $0.49 $1.41 $2.53 $82 $105 $100 Trican Well Service TCW-T $14.22 Hold $15 $2.32 $0.47 $0.85 $2.11 $1.82 $1.40 $623 $258 $369 U.S. Silica SLCA $20.08 Buy $19 $0.83 $1.41 $1.65 $0.85 $2.04 $2.25 $94 $146 $166 WEIR Group Plc (in £, pence) WEIR-LN 2,113 Sell 1530p 132 147 142 93 163 173 473 567 539 Offshore Contract Drilling J.B. Lowe Coverage Atwood Oceanics** ATW $54.46 Buy $62 $4.16 $4.14 $4.85 $5.01 $5.73 $7.49 $372 $390 $506 Diamond Offshore DO $74.81 Hold $75 $6.89 $4.99 $4.30 $10.84 $8.78 $7.95 $1,643 $1,336 $1,216 ENSCO International ESV $63.72 Hold $69 $2.88 $5.19 $6.90 $4.43 $7.06 $9.09 $1,195 $2,053 $2,673 Fred Olsen Energy FOE kr 247.70 Hold NA kr 31.49 kr 27.45 kr 21.05 kr 48.64 kr 48.13 kr 43.27 kr 3,525 kr 3,528 kr 3,189 Hercules Offshore HERO $7.09 Buy $7.50 ($0.58) ($0.55) $0.50 $0.39 $0.48 $1.74 $147 $196 $345 Noble Corporation NE $39.76 Buy $51 $1.31 $2.01 $3.45 $3.90 $5.05 $6.67 $1,128 $1,530 $2,023 Ocean Rig UDW ORIG $17.57 Buy $24 $0.98 ($0.35) $0.95 $2.50 $2.09 $4.22 $380 $347 $594 Pacific Drilling PACD $10.45 Buy $12.50 ($0.01) $0.14 $0.35 $0.04 $0.73 $1.12 $473 $567 $566 Rowan Companies RDC $35.14 Hold $31 $1.10 $1.90 $2.15 $3.11 $4.86 $5.03 $358 $547 $596 Seadrill SDRL $38.40 Hold $39 $3.73 $2.99 $2.75 $3.81 $3.75 $3.94 $2,272 $2,375 $2,557 Transocean RIG $56.38 Buy $63 $1.46 $3.44 $4.80 $5.69 $7.58 $8.12 $2,898 $3,542 $3,984 Vantage VTG $1.80 Buy $2.50 ($0.19) $0.01 $0.10 $0.03 $0.25 $0.44 $175 $246 $365 Onshore Contract Drilling James Crandell Coverage Helmerich & Payne** HP $64.39 Buy $81 $3.90 $5.15 $5.65 $6.82 $8.75 $9.80 $1,004 $1,278 $1,400 Nabors Industries NBR $16.57 Buy $20 $1.49 $1.77 $1.35 $5.27 $6.32 $6.00 $1,843 $2,069 $1,991 Patterson-UTI PTEN $23.47 Buy $21 $2.15 $1.72 $1.10 $4.90 $5.19 $4.73 $958 $959 $817 Precision Drilling PDS $9.10 Buy $11 $1.01 $0.73 $0.70 $1.93 $2.10 $1.85 $695 $650 $672

Peter Hatfield Coverage Ensign Energy Service ESI-T $17.20 Hold $17 $1.39 $1.41 $1.45 $2.22 $3.27 $2.93 $498 $572 $576 Trinidad Drilling TDG-T $7.06 Buy $9 $0.63 $0.74 $0.80 $1.55 $2.10 $1.79 $247 $276 $273 Seismic Peter Hatfield Coverage CGG Veritas CGV $28.14 Buy $42 ($0.18) $1.55 $2.85 $5.06 $4.79 $7.94 $851 $1,270 $1,579 Geospace Technologies** GEOS $109.49 Buy $105 $2.36 $2.73 $6.00 $0.45 $2.77 ($1.10) $51 $60 $126 Global Geophysical GGS $4.00 Hold $0.15 $0.56 $0.53 ($2.21) ($1.54) $1.34 $187 $219 $204 ION Geophysical IO $7.36 Hold $6 $0.22 $0.35 $0.47 ($0.20) $0.03 $0.78 $158 $202 $253 Petroleum Geo-Services PGS-OS kr 94.45 Buy kr 128 $0.16 $0.84 $1.65 $1.61 $3.28 $4.15 $535 $810 $1,025 TGS-Nopec TGS-OS kr 207.20 Hold kr 180 $1.65 $2.50 $2.80 $4.85 $5.90 $7.31 $489 $770 $897 Source: Dahlman Rose & Co estimates *FY ended March 31. Estimates are for March 31 of following year. **FY ended September 30.

Source: DRCO Research

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Ticker Rating Price Price Target Ticker Rating Price Price Target ATW Buy $54.46 $62.00 BHI Buy $45.65 $50.00 BAS Buy $14.75 $15.00 BRS Buy $59.13 $70.00 CJES Buy $23.57 $32.00 CFW.TO Buy C$26.89 C$32.00 CAM Buy $65.41 $74.00 CRR Hold $86.37 -- CGV Buy $29.03 $42.00 CLB Hold $131.81 -- DO Hold $74.81 -- ESV Buy $63.72 $69.00 ESI.TO Buy C$17.20 C$17.00 FTI Hold $48.62 -- FET Buy $25.55 $28.00 FOE.NO Hold NOK248.50 -- GEOS Buy $109.49 $130.00 GGS Hold $4.00 -- HAL Buy $41.26 $50.00 HP Buy $64.39 $81.00 HERO Buy $7.09 $7.50 IO Hold $7.36 -- KEG Hold $8.74 -- LUFK Buy $61.41 $66.00 NBR Buy $16.57 $20.00 NOV Buy $69.08 $95.00 NR Buy $8.75 $10.00 NE Buy $39.76 $51.00 OII Buy $63.68 $62.00 ORIG Buy $17.57 $24.00 OIS Buy $78.31 $99.00 PACD Buy $10.45 $12.50 PTEN Buy $23.47 $21.00 PGS.NO Buy NOK95.55 NOK142.00 PDS Buy $9.10 $11.00 RDC Hold $35.14 -- RES Hold $16.22 -- SLB Buy $79.07 $92.00 SDRL Hold $38.40 -- TS Buy $40.06 $45.00 TESO Hold $12.32 -- TGS.NO Hold NOK207.60 -- WEIR.LN Sell £2,123.00 £1,530.00 TDW Buy $49.37 $56.00 RIG Buy $56.38 $63.00 TCW.TO Buy C$14.22 C$15.00 TDG.TO Buy C$7.06 C$9.00 SLCA Buy $20.08 $19.00 VTG Buy $1.80 $2.50 WFT Buy $13.30 $18.00

*As of 02/08/2013 Valuation Methodology & Investment Risks

Valuation Methodology Offshore drilling assets vary among a broad range of specifications, rendering valuation methodologies highly specific to individual exposure of companies. Further, the offshore drilling market is cyclical, adding additional variance to our methodologies depending on industry performance. We favor EV/EBITDA multiples to value companies within our coverage universe, with companies with greater deepwater exposure, larger backlogs, and more modern assets typically receiving higher multiples. While the market for secondhand offshore drilling rigs is less liquid than for shipping assets, NAV can provide another valuation metric.

We favor EV/EBITDA and/or P/E multiples to value companies within our coverage universe, with companies with greater international exposure, larger backlogs, and more modern assets typically receiving higher multiples. We also use earnings multiples with a premium or discount based on where the oilfield service group is trading relative to the current cycle.

Investment Risks Primary Offshore Drilling Investment Risks -

The offshore drilling sector is cyclical, seasonal and susceptible to external shocks, which may lead to volatility.

Offshore drilling companies are dependent on the capital expenditure activity from the E&P sector which is driven by the price of oil and natural gas. This results in a strong positive correlation between equities and the price of these two commodities.

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Growth depends on continued global economic expansion; any adverse economic conditions can lead to negative results. Worldwide events such as economic recessions, hydrocarbon demand destruction, civil unrest, changes in legislation, terrorism, and currency fluctuations may impact the price of oil and thus affect company profitability.

Furthermore, unexpected downtime or excess capacity could adversely affect our earnings forecasts.

There is potential for construction delays and cost overruns on newbuildings. Though operators and shipyards are insured in case of delays, operator contracts could be cancelled or renegotiated if delays extend beyond a reasonable amount of time.

Primary Oilfield Services Investment Risks Include: A material change in commodity prices has the potential to change our view on the entire oil service and drilling sector. A deterioration in the economic climate, increasing non-OPEC oil production or international political and economic risks could impede the price performance of the shares.

The strength of the global economy and its impact on the global demand for oil and natural gas.

Upstream (E&P) budget fluctuations that directly impact demand for oil services, which may be affected by M&A, commodity prices, or access to capital markets.

Capacity expansions within various product lines in the oilfield services industry that may create supply overhangs and influence marginal pricing.

Political issues that may lead to higher taxes on the industry or limit access to potential resource developments, due to geopolitical issues or regulatory changes.

Technology changes that may negatively impact the lifecycle of various products and services.

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Disclosures

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Stock Ratings:

Dahlman Rose & Company, LLC assigns the following ratings to the securities of its subject companies:

Buy – The fundamentals/valuations of the subject company are improving and the investment return is expected to be 5 to 15 percentage points higher than the general market return.

Sell – The fundamentals/valuations of the subject company are deteriorating and the investment return is expected to be 5 to 15 percentage points lower than the general market return.

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Ratings Distribution:

Distribution of Ratings/Investment Banking Services (IB) as of 12/31/12 Rating Count Ratings Distribution Count Investment Banking Buy -rated 171 62.64 21 12.28 Hold -rated 99 36.26 3 3.03 Sell -rated 3 1.10 0 0.00

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