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Cameron International Renergizes

Posted: Feb 11, 2009 15:30 PM by Eric Fox

Tickers in this Article: CAM, BP, PTEN, NOV

Cameron International Corporation (NYSE:CAM) could be a safe way to play a rebound in oil services due to its low financial leverage and exposure to offshore capital spending that may be more resilient during an economic downturn. Customers of Cameron are typically stronger financially, and the customers plan this spending using longer time horizons and lower oil-and-gas prices - which makes it less likely that the offshore market will see the draconian cuts that the land segment has seen.

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Cameron International is a capital equipment company with three segments: drilling and production systems, valves and measurements, and compression systems. Drilling and Production Systems is Cameron’s largest segment, and sales in 2008 reached $3.7 billion. Products here include blowout preventers, wellheads, risers, and other equipment needed in surface- and sub-sea applications.

Revenues in the Valves and Measurements segment reached $1.47 billion in 2008. This segment has grown nicely since Cameron purchased the valve business of Dresser-Rand (NYSE:DRC) in 2005. It paid $224 million for the flow control part of Dresser.

Compression equipment is used with natural gas gathering systems, and the compression business is Cameron’s smallest, but it hit revenues of $638 million in 2008. (Learn more in The Industry Handbook: The Oil Services Industry.)

Backlog
70% of the company's backlog is directed to the offshore market, and many in the industry believe that offshore drilling should prove to be more resilient during a downturn. While there is some truth in that, it is not immune from cuts in capital spending. Cameron reported a $5.61 billion backlog at the end of 2008. This was down from the $6.15 billion just three months earlier. This reflects lower orders of $1.17 billion in the quarter.

The first quarter of 2009 got off to a good start when BP Inc. (NYSE:BP) agreed to purchase $100 million of sub-sea production equipment.

Other oil service companies have also seen a decline in backlog recently. National Oilwell Varco (NYSE:NOV) said its backlog at the end of 2008 was $11.1 billion, down from $11.8 billion in the previous quarter.

While this is certainly not the trend a company wants to see, it might be instructive to examine the business of companies who are leveraged to the land drilling segment. Patterson-UTI (Nasdaq:PTEN) saw its rig activity drop from an average of 213 in December 2008, to an average of 162 rigs in January 2009.

Financials
Cameron International is in a strong financial position to weather a downturn in the economy. At the end of 2008, the company actually had more cash than debt on its balance sheet. Cash ended the year at $1.6 billion and debt was $1.4 billion. This is a nice position to be in given the state of the economy and credit markets. (To learn about the components of the statement of financial position and how they relate to each other, see Reading The Balance Sheet.)

Cameron is a safe oil services name to consider during the energy bear market due to its low debt, and leverage to the offshore drilling market, which may yet prove to be less impacted by the capital spending cutbacks roiling the industry. The land market will suffer a much deeper trough than the offshore segment, and Cameron's lack of significant exposure to land drilling markets will protect its backlog better during a downturn.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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