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Oceaneering International Reels In Solid Q4

Posted: Feb 20, 2009 14:55 PM by Eric Fox

Tickers in this Article: OII, BP, HLX, GLBL

Oceaneering International (NYSE:OII) recently reported fourth quarter earnings that demonstrate the company's resilience to its customers' cutbacks in capital spending. By increasing offshore drilling in the hunt for oil and gas, Oceaneering International will protect its earnings against this trend during the downturn in energy.

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Oceaneering International is an oil services company that focuses on providing services and products to the deepwater market, including remotely operated vehicles (ROV), mobile offshore production systems (MOPS) and subsea projects and products.

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Investment Thesis
The bull case for Houston-based Oceaneering International rests on the company's leverage to deepwater oil and gas exploration, which will be less susceptible to cutbacks in spending. The company also has a leading market share in products and services in that area.

World oil production in 2008 totaled approximately 85 million barrels per day. Assuming an average rate of decline in production of 5% per year, the world would need to add four million barrels of production per day to keep those levels from diminishing. Since the highest yielding oil and gas fields typically are located offshore and in deepwater areas like the Gulf of Mexico and offshore Brazil, much of that investment would be in deepwater.

Deepwater development is very expensive and takes many years to complete. Therefore, it often is planned using a lower, more normalized price for oil and gas, which makes it subject to deep cuts in spending only in instances of lengthy downturn in the sector. (Drill into financial statements, find the right companies and let the returns flow! Learn more in Unearth Profits In Oil Exploration And Production.)

By The Numbers
For the quarter, Oceaneering International reported net income of $51 million, or 93 cents per share. Due to the uncertainty of business in the current environment, the company is spreading out guidance for 2009 from $3.00 per share to $3.60 per share. The guidance assumes growth only in the company's ROV business and shows declines in all other areas. Even if we use the low end of the guidance range, the company trades at around 10 times earnings, which is an attractive multiple.

Oceaneering International's 223 ROVs comprised one of the company's largest businesses in 2008, at approximately 30% of revenue. Helix Energy Solution Group (NYSE:HLX), a competitor in the ROV business that operates a fleet of 39 ROVs, had $1.6 billion in revenue in the first nine months of 2008. Meanwhile, Global Industries (Nasdaq:GLBL), the smallest of the three ROV businesses with a fleet of 27, delayed the release of its fourth quarter earnings report by one week, for reasons that are not yet known.

Risk
Offshore projects are expensive and the number of customers that can implement projects are limited, which leads to customer concentration. In 2007, BP (NYSE:BP) represented 14% of Oceaneering International's revenues. As one of the top three international oil companies, BP spends billions of dollars each year on offshore exploration and development. Furthermore, Oceaneering International's top five customers accounted for 36% of its revenues in fiscal 2007.

Bottom Line
Oceaneering's leverage to the growth trend of deep offshore drilling will buffer its revenues and earnings during the downturn in energy, making its earnings less volatile and, therefore, more attractive to investors. (Read The Industry Handbook: The Oil Services Industry to learn more about this sector.)

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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