Oceaneering still a growth story

8/18/2008


  Recent Price
$56
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
16
  Shares (millions)
56
  Long-Term Debt as % of Capital
18%
  52-Week Price Range
$85.88 - $54.37

Oceaneering International ($56; NYSE: OII) shares have fallen 28% since the end of June, reflecting a drop in petroleum prices and somewhat disappointing guidance for the second half of 2008. The pullback represents a buying opportunity, as the stock seems cheap considering Oceaneering’s profit outlook.

Though off their highs this year, oil prices remain well above historical norms at about $115 per barrel. Oceaneering makes its money by selling equipment and providing services to drillers, a business that should remain lucrative as long as drilling demand remains strong. Exploration activity is likely to remain robust even if per-barrel oil prices fall to the $80 to $100 range.

In the short term, shares of oilfield-services companies tend to move in the same direction as oil prices. But since Oceaneering’s profits and cash flows are not directly affected by changes in oil prices, we expect the shares to recover, rising substantially over the next year on the strength of robust operating results. Oceaneering is a Focus List Buy.

Business breakdown
Citing lower-than-expected orders for subsea products (30% of revenue, 28% of profits) — such as drilling tools, flow regulators, valves, and umbilicals for pumping oil to the surface — Oceaneering in July trimmed its per-share-earnings guidance below the consensus estimate. Wall Street still expects per-share-profit growth of 11% in 2008 and 22% in 2009, targets that could prove conservative.

Research firm Quest Offshore says the number of offshore wells completed per year has tripled this decade and should double over the next decade. Given the large number of offshore wells now being drilled (300-plus in 2008), with even more to come, demand for Oceaneering’s products should pick up. In addition, today’s deeper wells will require longer umbilicals, the tubes used to pump oil. Results at the subsea-products unit should improve in 2009.

Robust demand for remotely operated vehicles (ROVs) is driving rental rates up. Oceaneering’s 214 vessels represent the world’s largest ROV fleet, generating 30% of company revenue and 35% of profits.

Inclement weather has boosted results at the subsea-projects division (15%, 21%) in recent years, as a spate of hurricanes and tropical storms created demand for repairs on offshore oil rigs. Because of friendlier weather, profits should decline this year. Oceaneering’s three other divisions, combining for 25% of revenue and 16% of profits, provide inspection services, mobile production systems, and engineering services to companies in a variety of sectors, including energy.

Conclusion
Though Oceaneering’s lowered forecast disappointed investors, the growth story remains compelling. June-quarter profits topped the consensus, powered by revenue and profit growth in every division. Company guidance looks conservative, and we expect Oceaneering to exceed Wall Street expectations over the next year. In the wake of the recent sell-off, the shares trade at a modest 14 times estimated year-ahead earnings, roughly in line with the five-year average forward P/E. An annual report for Oceaneering International Inc. is available at 11911 FM 529, Houston, TX; 77041; (713) 329-4500; www.oceaneering.com.


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