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Oceaneering International, Inc. (OII) is a global provider of engineered services and equipment, primarily for the offshore oil & gas industry. The company was the product of a merger between three diving operators in the 1960s. Incorporated in 1969, Oceaneering grew its operations worldwide to become a leading equipment and service provider in the industry. Indeed, the company services exploration & production firms in the North Sea, West Africa, Brazil, Australia, Asia, and the Gulf of Mexico. 

Products and Services

The oilfield equipment provider offers remotely operated vehicles, subsea hardware, engineering and project management services, subsea intervention, and asset integrity services. The company reports under five business lines, which include: Remotely Operated Vehicles (ROV), Subsea Products, Subsea Projects, Asset Integrity, and Advanced Technologies. Ninety percent of revenue is derived from the oil & gas market within the first four businesses. The Advanced Technology unit performs maintenance and engineering services for equipment prototypes or project design for the U.S. government, entertainment, and space industries.

Segment Breakdown

The ROV segment is Oceaneering’s largest revenue generator, contributing roughly 31% of the firm’s total top line in 2012. The submersible vehicles are used to support drilling, subsea hardware installation, construction and repair services to oil & gas drillers. The company currently has 296 ROVs in its fleet, with 20 additional ROVs set to come online in 2013. We believe Oceaneering is the industry leader for ROVs, capturing between 30%-50% of new contracts. The equipment provider has improved utilization and days-on-hire ratios, helping to drive this division’s operating margins of 30% in recent years. We expect the company’s market position and product diversification to continue to support margins going forward.

The Subsea Products division is the second largest profit driver. The segment provides subsea tooling, valves, clamp connectors, and umbilicals. The company has been quite active on the acquisition front over the past 8 years, purchasing five manufacturers and offshore equipment providers. Oceaneering has been increasing its umbilical capacity over the past few years, with upgrades to both its Scotland and Brazilian facilities. We believe these decisions are wise, considering the strong growth opportunities we foresee in this market.

The Subsea projects segment utilizes its 6 (2 owned and 4 chartered) deepwater vessels to perform subsea installation, inspection, and repair work on various offshore jobs. The vessels are equipped with ROVs and umbilicals, which are utilized for the installation of pipeline, various subsea hardware, and well intervention services. These vessels primarily operate in deep- and ultra-deepwater fields in the Gulf of Mexico and West Africa. Revenue growth in this segment has been substantial in the last year, due to new contracts utilizing project management and engineering services.

Industry Outlook

We believe the subsea equipment and services market is set to grow at a rapid clip, driven by the current exploration of offshore oilfields worldwide.  In fact, Quest Offshore, a leading data provider is projecting growth in subsea tree and umbilical orders to increase by 55% and 40% clips in the next five years, respectively.  Additionally, Quest expects E&P companies to spend $70 billion on subsea trees, umblilicals, and flowlines through 2017. The international market should remain a longer-term catalyst as governments look to develop their offshore resources for the tax revenue and employment opportunities.

Conclusion

Given the healthy longer-term outlook, we believe the company will post solid bottom-line gains in the coming years. Recently, management raised its share-earnings guidance to $3.35 to $3.40, from $3.20 to $3.35 a share for 2013. Consequently, we are forecasting double-digit share-net gains in 2013 and 2014. Additionally, Oceaneering has little debt and is one of the few in the industry to pay a quarterly dividend. Therefore, we believe these shares are a suitable selection for a well-diversified portfolio.

For more information in regard to Oceaneering’s prospects, as well as the particular investment merits of the stock, subscribers are encouraged to check out our full report in The Value Line Investment Survey.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.