For Oceaneering, Future Is Offshore

3/23/2009


 

  Recent Price
$36
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
10
  Shares (millions)
55
  Long-Term Debt as % of Capital
19%
  52-Week Price Range
$82.49 - $18.05

While oil prices don’t directly affect Oceaneering International’s ($36; OII) profits and cash flows, they do move the stock. Oil prices fell by two-thirds in the second half of 2008, pushing Oceaneering shares under $20 for the first time since July 2005. This year, oil prices have risen 10% and the shares have gained 22%. Any sustained rally in energy prices should boost Oceaneering.

Oceaneering’s success depends heavily on the fortunes of offshore drillers, and though profit growth could stall this year, the long-term picture looks bright. Most of the world’s untapped oil reserves lie under the ocean floor, and oil producers are spending an increasing portion of their capital budgets on deepwater drilling. Oceaneering is a Focus List Buy.

Oceaneering is big offshore
Oceaneering’s most profitable segment (32% of revenue, 47% of profits) operates a fleet of 227 remote operating vehicles (ROVs) that support drilling and production activities at depths up to 10,000 feet. Operating income from ROVs surged 32% last year, and growth should continue this year as new rigs come online. Oceaneering controls 35% of the ROV market, with a fleet twice the size of its largest competitor.

Subsea products (33% of revenue, 24% of profits) grew earnings 3% in 2008. This unit sells cables, deepwater hoses, and umbilicals (tubes used to pump oil). While industry demand fell 10% last year, Oceaneering grabbed market share, capturing 30% of new orders for umbilicals, up from a 21% share in 2007.

Oceaneering operates several smaller businesses. The subsea-projects unit (13% of revenue, 18% of profits) services and repairs drilling equipment. The smallest three segments — inspection services, mobile production systems, and engineering services — combine for 23% of sales and 12% of profits. The larger ROV and subsea-products units represent Oceaneering’s strongest growth drivers.

Smooth seas ahead
In February, Oceaneering said it expects per-share profits between $3.00 and $3.60 this year. The guidance implies earnings will be flat to down 16%, numbers the company should be able to top if conditions improve.

The company has secured ROV contracts on 14 of the 21 floating rigs it expects to enter service this year and is competing for five more rigs. Oceaneering expects to expand its fleet by 24 to 30 vehicles this year, with 22 of these new ROVs already under contract.

Although some of the larger energy companies plan to boost spending despite the downturn, many producers are slashing their budgets, potentially delaying new projects. Management believes deepwater markets are less vulnerable to spending cuts because of projects’ size and long lead times.

Conclusion
Oceaneering expects at least $290 million in cash flow this year, enough to cover all capital investments and repay all debt coming due for the year. At 10 times trailing earnings, Oceaneering shares look cheap considering the company’s long-term growth outlook and near-term ability to top conservative profit targets. An annual report for Oceaneering International Inc. is available at 11911 FM 529, Houston, TX; 77041; (713) 329-4500; www.oceaneering.com.

OCEANEERING INTERNATIONAL
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Dec '08 $0.93 vs. $0.81 + 9% $52.10 -

$18.05

15 - 5
Sep '08 0.99 vs. 0.96 + 6% 78.22 - 49.00 23 - 14
Jun '08 0.93 vs. 0.86 + 16% 82.49 - 60.63 24 - 18
Mar '08 0.74 vs.

0.56

+ 27% 76.40 - 54.37 24 - 17
           
Year
(Dec.)

Sales
 (Mil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $1,977 $3.58 $0.00 $85.88
-
$35.40 24 - 10
2007 $1,743 $3.24 $0.00 47.23
-
25.05 15 - 8
2006 $1,280 $2.26 $0.00 27.64
-
15.75 12 - 7
2005 $999 $1.17 $0.00 19.53
-
13.85 17 - 12
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
88 63 70 95 86 15 69

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com