Nearly three years after the explosion of the Deepwater
Horizon rig, drilling has returned to normal in the Gulf of
Mexico. That's good news for Houston'sOceaneering International (
), which provides products and services for oil and gas
Oceaneering has escaped the billions in legal settlements that
have entangled BP and others since the lethal sinking of the
Deepwater Horizon killed 11 workers and released millions of
gallons of oil into the Gulf.
Now, as rig counts on the Gulf have surpassed pre-explosion
levels, Oceaneering is enjoying the revived activity.
It even has products and services that benefit from the
tighter inspection requirements imposed since the disaster.
The deep-water drilling industry requires massive, long-term
capital commitments. This tends to make the business of serving
deep-water drillers less volatile than the onshore oil services
"Given the exaggerated volatility in North American onshore
service companies, people should prefer the visibility and
predictability of the offshore business," said Tudor Pickering
analyst Joe Hill.
"The economics of deep water are better than the economics of
shale," observed Stephens Inc. analyst Michael Marino. "It makes
sense to drill in deep water with oil at $65 or better," he
Oceaneering has been able to grow earnings by an annual rate
of roughly 20% over the last decade, notes Marino. And he expects
that to continue. "They can maintain 20% annual EPS growth over
the next three years," he said.
Oceaneering hasn't yet reported its fourth quarter and
year-end 2012 earnings. But it did report a solid third
"We remain on track to achieve record EPS for the year," CEO
M. Kevin McEvoy told analysts in reporting third-quarter results.
He offered 2013 EPS guidance of $3 to $3.25. "That's up nearly
20% at the midpoint over our expectations for 2012," he said.
Oceaneering's chief products are remotely operated vehicles
(ROVs), equipped with robotics, that perform a variety of tasks
to support drilling and its massive subsea infrastructure.
Controlled by human operators on a floating rig, ROVs will, for
example, provide sonar and video of the seabed floor thousands of
feet below the rig deck. With 285 ROVs at the end of the third
quarter, Oceaneering claims the world's largest fleet of these
Analyst Hill likes the predictability of the ROV market. Every
new deep-water rig will use at least one ROV.
And because it takes more than two years to build a deep-water
rig, analysts can project how many new rigs will be put to work
over a relatively long period. Hill puts the number at 93 over
the next several years. This year, 22 new rigs will be delivered,
he says. In 2014, another 29 will go into service. In 2015 and
beyond, Hill expects 42 new deep-water rigs.
Oceaneering currently has 70% market share for ROVs used to
support drilling. But it is unlikely to retain that share on rigs
now being built. The problem is a pricing dispute with Petrobras,
the Brazilian oil giant heavily involved in offshore drilling.
Oceaneering has refused to match lower ROV leasing rates offered
by rival SubSea 7.
Stephens' analyst Marino said the Oceaneering pricing strategy
is, "Our price is the same everywhere. We're not going to cut day
Petrobras decided to go with Subsea 7, says Marino. "Their
market share in Brazil has dwindled," he said of Oceaneering.
But in the Gulf of Mexico, off the coast of Africa and other
bustling offshore drilling venues, Oceaneering continues to
Could pricing pressures soon spread to these areas? "I
wouldn't think so," said Justin Sander, an analyst with RBC
Capital. ROVs may cost $10,000 a day to rent. But that's still "a
very, very small percent" of total drilling costs. So drillers
have relatively little incentive to push down on ROV pricing.
Wells Fargo analyst Tom Curran wrote in December that
Oceanneering has won 10 of 11 ROV contracts outside of Brazilian
waters over the last year. Oceaneering, he notes, is content to
focus on the non-Brazilian market as it continues to "seek better
pricing" from Petrobras; he estimates that 51 non-Petrobras
Apart from ROVs, Oceaneering also markets a broad range of
products and services to offshore drillers. These products
include "umbilical" systems, rugged tubing used to control
hydrocarbon flow and deliver power and chemicals in deep water.
Oceaneering is not as dominant in the umbilicals market, which
has recently suffered from overcapacity. Analyst Marino estimates
its market share at around 20%.
"That market will be oversupplied for the next two years,"
said RBC Capital analyst Sander. Margins on subsea products are
not as rich as those on ROVs. With overcapacity continuing in
umbilicals, margins could contract further, especially if
umbilicals become a bigger share of sales, notes Sander.
Oceaneering also offers inspection repair and maintenance
services to offshore drillers. New Gulf drilling regulations
benefit Oceaneering, says analyst Hill, as there are now
increased inspection requirements.
Analysts like Oceaneering's balance sheet. With low debt and
growing cash flow, Oceaneering is in position to make
investor-friendly moves like hiking its dividend or buying back
shares. The dividend is currently 18 cents per quarter and Sander
says a 20% hike this year is "certainly possible."
The fortunes of energy companies are typically tied to the
price of oil. But as a hardware and services provider to
deep-water drillers, Oceaneering should be less volatile than
most. "Offshore operators take a longer-term view of pricing,"
Even a dip below $65 a barrel oil might not result in
cancellation of long-term deep-water drilling plans. "The
offshore market is different. You don't flip the switch at
different oil prices," said Sander.
An industry that survived a disaster like the Deepwater
Horizon explosion should be sufficiently hardy to survive the
vagaries of oil pricing.