You Can't Keep A Good ROV Down

10/5/2009


  Recent Price
$57
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
16
  Shares (millions)
55
  Long-Term Debt as % of Capital
11%
  52-Week Price Range
$60.70 - $18.05

Oceaneering International ($57; OII) is one of the few companies exposed to the full deepwater-drilling cycle. To support drilling projects, Oceaneering’s remotely operated vehicles (ROVs) labor at depths of up to 10,000 feet. The company also installs equipment and performs inspections and repair work on rigs. In addition, as wells get deeper, they require more umbilical tube for pumping oil. Oceaneering supplies that tubing.

This year, oil discoveries are on pace to reach their highest levels since 2000, which should embolden energy producers to keep spending on exploration unless oil prices fall sharply. Offshore rig capacity stands at an all-time high, with new rigs scheduled to enter service over the next four years at a rate triple the historical average. More rigs mean more work for Oceaneering, a Focus List Buy.

Business breakdown

ROVs accounted for 36% of the company’s sales and 52% of operating income in the first six months of 2009. The ROV fleet currently stands at 235 vehicles, up 88% from its size at the end of 2004. Rental rates are down only slightly from record highs last year. In the first half of 2009, Oceaneering put 87% of its capital spending into ROVs. That investment is paying off, with Oceaneering already winning contracts for 16 of its 19 new ROVs entering service this year.

In the first six months of 2009, Oceaneering’s ROV utilization was 80%, down from the all-time high in 2007 but well above rates common in the early part of the decade. The company controls a roughly 60% share of the global market for drilling support. Oceaneering’s focus on deepwater has helped the company avoid the brunt of the drilling downturn, which hit hardest in the shallow-water market.

The subsea-products unit generated 26% of Oceaneering’s six-month sales and 16% of operating income. The product backlog rose 24% to $350 million in the June quarter, helped by two new umbilical contracts. Oceaneering expects demand for umbilical tubing to rise at an annual rate of more than 30% over the next four years. Other key segments include subsea projects (14% of sales, 20% of operating income) and inspection (12%, 7%).

Conclusion

The shares dipped in September on news that CEO T. Jay Collins sold 30,000 shares, about 21% of his holdings. Nevertheless, the shares are up 97% so far this year. At 16 times estimated 2010 earnings, the stock trades at a 16% discount to the average energy equipment & services provider in the S&P 1500 Index. But unlike most rivals, Oceaneering is expected to resume profit growth in 2010.

Oceaneering is not without risks. Activity in shallow waters could remain weak for several quarters. Oceaneering has seen both greater pricing competition and delays in large awards for umbilicals. In addition, hiccups in the global economic recovery could cause oil prices to slump, which could further delay spending on drilling in shallow waters.

However, global rig expansion should support Oceaneering’s growth in coming years. The consensus anticipates a 4% rebound in per-share profits next year, and the company seems capable of double-digit profit growth over the next five years. 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

Jun '09 $0.87 vs. $0.93 - 10% $55.55 -

$35.34

15 - 10
Mar '09 0.81 vs. 0.74 0% 41.62 - 27.78 12 - 8
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
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $1.98 $3.58 $0.00 $82.49
-
$18.05 23 - 5
2007 $1.74 $3.24 $0.00 85.88
-
35.40 27 - 11
2006 $1.28 $2.26 $0.00 47.23
-
25.05 21 - 11
2005 $1.00 $1.17 $0.00 27.64
-
15.75 24 - 13
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
94 66 67 96 85 84 65

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


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