Oil Service Company Sees Steady Offshore Growth Ahead
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 ( OII ), which provides products and services for oil and gas deep-water drilling.
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 industry.
"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 added.
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 quarter.
"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 submersible vehicles.
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 rates."
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 thrive.
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 opportunities remain.
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," explained Sander.
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.