TLM

We are upgrading our recommendation on Loews Corporation (L) to Outperform from Neutral on the back of strong first quarter results and initiatives taken to strengthen its hotel business.

Loews’ first quarter earnings comfortably surpassed the Zacks Consensus Estimate. The company witnessed lower earnings at Diamond Offshore Drilling Inc. (DO), and HighMount during the quarter. However, higher earnings at CNA Financial Corporation (CNA) and higher parent company investment income were the positives. Higher revenues at CNA Financial coupled with higher investment income besides investments gains aided the year-over-year growth in the top line. 

Loews aims to strengthen its hotel business, which is the company’s smallest unit. Loews aims to add more hotels to its portfolio in order to take the count from 18 to more than 30 in the next three to five years, besides tripling its net income by 2015. Hence, Loews Hotels & Resorts, entered into an agreement with CIM Group with the objective of purchasing Renaissance Hotel & Spa in Hollywood, California. Loews has also planned the renovation of Loews Regency Hotel, New York. With capital at disposal to acquire and develop properties, the company is on the look out for opportunities in Boston, Chicago, San Francisco, Washington, D.C., New York, Dallas, Toronto and Seattle to add assets to its portfolio and hence cater to a larger customer base.

Loews’ other subsidiaries also continued to deliver solid results. CNA Financial's net written premium growth improved 5% on the heels of strong retention of existing business, rate improvement on retained business and new businesses in target markets. Also, in the first quarter, CNA agreed to buy Hardy Underwriting for $227 million in order to boost the company’s international operations.

Boardwalk Pipeline’s first quarter benefited from improved storage and transportation revenues earned from HP Storage, though lower natural gas price was a partial offset.  The company had already bought back 80% stake in Boardwalk HP Storage for $225 million that Loews had purchased to support Boardwalk's purchase of those storage assets in December. Furthermore, for the Eagle Ford expansion project, Boardwalk entered into a long-term fee-based gathering and processing agreement with Statoil ASA (STO) and Talisman Energy Inc. (TLM) for almost 50% of the processing plants capacity.

However, HighMount generated lower revenue and income in the first quarter due to lower sales volume stemming from lower drilling activity as well as decline in natural gas prices. To weather the declining natural gas price environment, HighMount is reducing the dry gas development activity in the Permian Basin and focusing on gas-rich wells with high liquid yield and oil potential, specifically in the Wolfcamp strata. They also remain focused on acquiring and developing a core position in the Mississippian line.

Diamond Offshore Loews’ another subsidiary, again posted lower earnings in the first quarter, spurred by lower utilization due to planned downtime, further worsened by increased contract drilling expenses reflecting the higher costs of operating rigs internationally rather than domestically.  However, Diamond Offshore continues to work on improving its fleet. The company has three ultra-deepwater drillships and one moored semisubmersible rig under construction for an estimated cost of $1.8 billion and $300 million respectively, upon completion. The company has already contracted two of the drillships to begin working for Anadarko Petroleum while the remaining two are yet to be contracted. Management expects these drillships to capitalize on the current robust day rate environment.

The quantitative Zacks #1 Rank (short term Strong Buy rating) for the company indicates upward boost on the stock over the near term.

 
CNA FINL CORP (CNA): Free Stock Analysis Report
 
DIAMOND OFFSHOR (DO): Free Stock Analysis Report
 
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