Bloomberg News

Goldman Sachs EPS Estimate Rises 21% at ISI on Angola Oil Find

February 13, 2012

Feb. 13 (Bloomberg) -- Goldman Sachs Group Inc.’s first- quarter profit estimate was raised 21 percent at International Strategy & Investment Group Inc. after an oil discovery near Angola boosted the value of one of the firm’s investments.

Ed Najarian, an analyst at ISI, raised his earnings per share estimate to $3.50 from $2.90, according to a research note he distributed yesterday. Najarian cited the higher value of Cobalt International Energy Inc., a Houston-based deep-water oil explorer whose stock surged 33 percent on Feb. 10 after it said test results at an oil discovery off the coast of Angola were better than expected.

Goldman Sachs, the fifth-biggest U.S. bank by assets, owns 19 percent of Cobalt through one of the firm’s private-equity funds. Najarian estimates that 70 percent of the investment was made with client money, with about 30 percent -- or about 6 percent of Cobalt -- owned by Goldman Sachs itself. At the current price, Cobalt could provide Goldman Sachs with a $365 million private-equity gain, Najarian wrote.

“Overall, we now estimate that private-equity and debt gains should cause Goldman’s total investing and lending revenue to jump to about $2 billion” in the first quarter, Najarian wrote. The gains probably won’t recur and the firm may fall short of consensus earnings in subsequent quarters, Najarian wrote, so he kept his “hold” recommendation on the stock. The shares advanced 1.2 percent to $115.51 at 9:40 a.m. in New York.

Effect on Volatility

Najarian’s analysis underscores the volatility of Goldman Sachs’s earnings created by investment losses and gains in the firm’s private-equity funds, which have traditionally received about 30 percent of their money from the firm. Under the so- called Volcker rule being drafted by regulators, banks like Goldman Sachs would be prohibited from contributing more than 3 percent of the money in a private-equity or hedge fund.

David A. Viniar, Goldman Sachs’s chief financial officer, said in a presentation to investors last week that the change may mean that swings in the firm’s return on equity, or ROE, are smaller because revenue from fund-management fees will be more consistent than revenue from investment gains and losses.

“Interestingly, our ROE does not change materially,” Viniar said on Feb. 8, describing a hypothetical analysis of the firm’s results under the Volcker rule. “But the range of outcomes is much narrower.”

--Editors: Rick Green, William Ahearn

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.


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