Oceaneering Hits 52-Week High, but Will the Rally Continue?

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Oceaneering International, Inc. 's OII shares hit a 52-week high of $28.60 during the trading session on Aug 28, before retracting a bit to close at $28.41. Also, the stock has had an impressive run on the bourses over a year. Shares of Oceaneering have rallied 25.6% in the said period against the industry 's decline of 3.5%.

Let's find out the factors responsible for this upsurge.

Catalysts Behind the Uptrend?

One of the leading suppliers of integrated technology solutions, Oceaneering boasts an impressive portfolio of diversified products and services. It is well positioned to supply equipment for the deep-water projects and is active at all phases of the offshore oilfield lifecycle. The company operates in five business segments, namely Remotely Operated Vehicles (ROVs), Subsea Products, Subsea Projects, Asset Integrity and Advanced Technology.

Stronger Sequential Second Quarter

Notably, since its last earnings report on Jul 25, shares of Oceaneering have moved up around 4.6%. The company posted better-than expected results in the second quarter of 2018. It also recorded sequential revenue and income improvement in four of its segments, with Subsea Projects being the only exception.

Higher seasonal activity and increasing number of floating rigs helped the company reverse first-quarter operating loss at its ROVs segment, generating $4.5 million income in the second quarter. Advanced Technologies Unit also witnessed a whopping increase in its operating income to $7.8 million from $1.7 million in the prior-year quarter.

Ecosse Subsea Buyout Bodes Well

Oceaneering's recent acquisition of Ecosse Subsea Limited bodes well, as it extends the former's service line capabilities directed toward the renewable energy market. Oceaneering expects the acquisition to lead to cost efficiencies, and be accretive to the company's cash flow and earnings in 2018.

Recent Contract Wins

During this month, the company clinched two long-term contracts from Petrobras PBR and Equinor ASA EQNR . Oceaneering will support Petrobras' intervention and completion works in Brazil through supplying and operating three drill pipe riser systems with installation workover control systems through a four-year contract. It also won a three-year contract from Equinor for providing a resident, electric remotely operated vehicle (E-ROV) system powered by battery, which will be used for subsea inspection, repairing activities and maintenance purposes.

Is Further Upside Left?

Well, the company does expect another sequential improvement in third-quarter results, mostly driven by higher contribution from its Subsea Projects and Advanced Technologies. The company expects the Subsea Projects segment to return to profitability in the third quarter, due to the inclusion of revenues from the Ecosse buyout.

However, it is to be noted that the crude rally is yet to bring about a conspicuous recovery in the offshore drilling market. Bearing the brunt of reduced spending and delays in project awards, offshore markets are likely to remain challenging for the remainder of 2018. Also, the fourth quarter is generally not so strong for the energy sector due to weather issues.

As such, the company has trimmed the guidance for the full year of 2018. The company now expects EBITDA within $140-$160 million versus prior guided range of $140-$180 million. At the midpoint of this range, the EBITDA would represent a 43.3% decline from 2017 levels. Oceaneering now anticipates its capital expenditure within $100-$140 million versus prior guided range of $80-$100 million. The increased capex is also likely to put further pressure in its cash flow.

Notably, Oceaneering's negative free cash flow in the fourth quarter of 2017 prompted it to suspend dividends. Also, the company does not plan to resume its dividend payout anytime soon, unless the macro environment improves sufficiently to drive its earnings and free cash flow.

Considering soft full-year view and ongoing challenges in the offshore market, we are not too certain if the company will be able to continue with its solid momentum.

Zacks Rank and A Key Pick

Oceaneering currently carries a Zacks Rank #3 (Hold).

A better-ranked player in the same industry is Archrock, Inc. AROC , which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Archrock's 2018 earnings are expected to grow 250% year over year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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