Shares of McDermott International (MDR) are up 400% since 2004, as are its profits. Of the company's three divisions (offshore oil-and-gas construction, government operations and power-generation systems), the oil construction unit (presently 39% of growth) is powering growth. International rigs have doubled over the past eight years.
McDermott is expanding in the Middle East and Asia, including an undersea pipeline in the Caspian and expanding an exploration facility in Qatar. Likely project wins in Mexico and cost-cutting make earnings surprises likely (the company reports Monday). Analysts say its OxyFuel carbon-dioxide separation technology should benefit from the rush to reduce CO2 emissions at power plants; a pilot finishes this summer, and commercialization could be viable by 2012.
Its government operations sells nuclear components and provides high-profile site-management; growth should be slow but steady, and may benefit from an increase in new power plants. Some analysts say earnings will grow 20% a year for the next 3-5 years; operating-profit margin is an industry-leading 9%; it's debt-free and has $1 billion in cash which it will use for acquisitions; last year it returned 215% on equity. At 16x 2008e earnings, Barron's says, "the stock is a relatively inexpensive play on the upturn in energy, oil and gas exploration, and the push for cleaner-burning coal."
McDermott is expanding in the Middle East and Asia, including an undersea pipeline in the Caspian and expanding an exploration facility in Qatar. Likely project wins in Mexico and cost-cutting make earnings surprises likely (the company reports Monday). Analysts say its OxyFuel carbon-dioxide separation technology should benefit from the rush to reduce CO2 emissions at power plants; a pilot finishes this summer, and commercialization could be viable by 2012.
Its government operations sells nuclear components and provides high-profile site-management; growth should be slow but steady, and may benefit from an increase in new power plants. Some analysts say earnings will grow 20% a year for the next 3-5 years; operating-profit margin is an industry-leading 9%; it's debt-free and has $1 billion in cash which it will use for acquisitions; last year it returned 215% on equity. At 16x 2008e earnings, Barron's says, "the stock is a relatively inexpensive play on the upturn in energy, oil and gas exploration, and the push for cleaner-burning coal."
Laid low a few years ago by asbestos claims and other woes, McDermott International is enjoying a new power surge.
The Houston engineering and construction concern, which specializes in providing energy services, has seen profits zoom 400% since 2004, to last year's $342 million, while its stock has more than quadrupled, to 59. After losing almost $1 billion from 2000 through 2003, the 84-year-old firm has been re-energized by a resurgence in exploration and drilling among oil and gas producers -- driving demand for its offshore platforms and undersea pipelines. Its power-generation unit's emergence from bankruptcy protection last year also ...
Oil Patch
It's tough to make a living in the oil patch. Oil service firms are ultimately at the mercy of unpredictable commodity prices. As oil and natural-gas prices have risen over the past few years, so has the demand for service firms' offerings. Over an entire economic cycle, however, returns are typically subpar and very few companies have any trace of an economic moat. For context, the stock price of industry benchmark Schlumberger SLB went nowhere between 1980 and 2002.
We think the up cycle that began several years ago has started to lose steam. Operator rumblings about rising service prices are getting louder, and we expect margin expansion to slow. We do think service companies with differentiated technology and diversified operations will do well. Along with Schlumberger, the other members of the Big Three--Halliburton HAL and Baker Hughes BHI--should continue to lead the pack.
Nipping at their heels, Weatherford WFT has established a vast Eastern Hemisphere presence that will serve it well, as the future of the energy industry resides mainly in places like the Middle East and Western Africa. After acquiring the technological arm of Precision Drilling PDS last year, Weatherford now has the resources to play with the big boys. BJ Services BJS, a pressure pumping heavy hitter, and Smith International SII, a drill bit pioneer, are both technological titans, but generate the bulk of their revenue in North America. Hanover Compressor HC, the world's largest natural-gas compressor, also derives a substantial chunk of revenue and profit in the United States.
Operators are looking for reserves in deeper and deeper waters and are willing to pay up for sophisticated technology. FMC Technologies FTI and Cameron CAM continue to slug it out for deep-water dominance in subsea systems. The number of subsea installations will increase every year for the foreseeable future, and operators are not price-sensitive. Firms like Acergy ACGY and Oil States OIS have also established themselves as important deep-water contributors and will cash in on the deep-water explosion.
Persistent hydrocarbon demand and nasty decline rates have forced operators to increase exploration spending, allowing seismic companies to enjoy their 15 minutes of fame. In 2006, Schlumberger bought the rest of its seismic operation from Baker Hughes, Veritas DGC VTS agreed to be acquired, and Petroleum Geo-Services' PGS outlook just keeps getting better.
Rising commodity prices have contributed to healthier outlooks and balance sheets for most players in the oil patch. Operator economics still work at lower commodity prices, and we expect the good times to roll on a bit longer for the service companies. At some point, though, bargaining power will most likely shift back to the operators, and profits will probably flow into the most established companies' coffers.
Full Analyst Report : OIS
More Analyst Notes on : OIS
03-28-07 | 10:22AM Service Firms Look East, Offshore
Full Analyst Report : WFT
More Analyst Notes on : WFT
03-28-07 | 10:22AM Service Firms Look East, Offshore
02-01-07 | 1:27PM Canadian Oil, Gas Activity Weakens
10-24-06 | 1:57PM Weatherford Reports Strong 3Q
Full Analyst Report : HC
More Analyst Notes on : HC
02-05-07 | 9:25AM Hanover Compressor to Merge
Full Analyst Report : HAL
More Analyst Notes on : HAL
03-28-07 | 10:22AM Service Firms Look East, Offshore
03-06-07 | 1:41PM Halliburton Offers KBR Exchange
02-01-07 | 1:27PM Canadian Oil, Gas Activity Weakens
11-15-06 | 8:50AM KBR IPO Pushed Back a Day
10-31-06 | 9:09AM Halliburton's KBR sets IPO Range
10-23-06 | 10:19AM Halliburton Shrugs Off Lower Gas Prices
10-16-06 | 12:14PM Update on Halliburton's KBR Sale
Full Analyst Report : BJS
More Analyst Notes on : BJS
02-01-07 | 1:27PM Canadian Oil, Gas Activity Weakens
10-20-06 | 4:28PM Schlumberger Warns Other Pressure Pumpers
Full Analyst Report : CAM
More Analyst Notes on : CAM
03-28-07 | 10:22AM Service Firms Look East, Offshore
11-01-06 | 9:50AM Cameron Reports Decent 3Q
Full Analyst Report : SII
More Analyst Notes on : SII
03-28-07 | 10:22AM Service Firms Look East, Offshore
02-01-07 | 1:27PM Canadian Oil, Gas Activity Weakens
10-24-06 | 3:53PM Smith Shows Off Its Moat
Full Analyst Report : FTI
More Analyst Notes on : FTI
03-28-07 | 10:22AM Service Firms Look East, Offshore
10-25-06 | 10:41AM FMC's Backlog Slips in 3Q
Full Analyst Report : BHI
More Analyst Notes on : BHI
03-28-07 | 10:22AM Service Firms Look East, Offshore
Full Analyst Report : VTS
More Analyst Notes on : VTS
01-10-07 | 3:06PM Veritas Acquisition to Close Friday
09-06-06 | 1:31PM Seismic Consolidation Continues
09-05-06 | 9:41AM CGG to Acquire Veritas
Full Analyst Report : PDS
More Analyst Notes on : PDS
04-27-07 | 10:23AM Oil Sands Still Driving Activity
02-15-07 | 8:59AM Precision's 4Q Meets Expectations
11-01-06 | 9:39AM Canada Proposes Trust Taxation
Full Analyst Report : SLB
More Analyst Notes on : SLB
03-28-07 | 10:22AM Service Firms Look East, Offshore
01-19-07 | 1:53PM Schlumberger Posts Solid 4Q, Year
10-20-06 | 4:28PM Schlumberger Warns Other Pressure Pumpers
Full Analyst Report : ACGY
More Analyst Notes on : ACGY
03-28-07 | 10:22AM Service Firms Look East, Offshore
Full Analyst Report : PGS
More Analyst Notes on : PGS
03-28-07 | 10:22AM Service Firms Look East, Offshore
11-14-06 | 3:04PM Petroleum Geo-Services under Review
We think the up cycle that began several years ago has started to lose steam. Operator rumblings about rising service prices are getting louder, and we expect margin expansion to slow. We do think service companies with differentiated technology and diversified operations will do well. Along with Schlumberger, the other members of the Big Three--Halliburton HAL and Baker Hughes BHI--should continue to lead the pack.
Nipping at their heels, Weatherford WFT has established a vast Eastern Hemisphere presence that will serve it well, as the future of the energy industry resides mainly in places like the Middle East and Western Africa. After acquiring the technological arm of Precision Drilling PDS last year, Weatherford now has the resources to play with the big boys. BJ Services BJS, a pressure pumping heavy hitter, and Smith International SII, a drill bit pioneer, are both technological titans, but generate the bulk of their revenue in North America. Hanover Compressor HC, the world's largest natural-gas compressor, also derives a substantial chunk of revenue and profit in the United States.
Operators are looking for reserves in deeper and deeper waters and are willing to pay up for sophisticated technology. FMC Technologies FTI and Cameron CAM continue to slug it out for deep-water dominance in subsea systems. The number of subsea installations will increase every year for the foreseeable future, and operators are not price-sensitive. Firms like Acergy ACGY and Oil States OIS have also established themselves as important deep-water contributors and will cash in on the deep-water explosion.
Persistent hydrocarbon demand and nasty decline rates have forced operators to increase exploration spending, allowing seismic companies to enjoy their 15 minutes of fame. In 2006, Schlumberger bought the rest of its seismic operation from Baker Hughes, Veritas DGC VTS agreed to be acquired, and Petroleum Geo-Services' PGS outlook just keeps getting better.
Rising commodity prices have contributed to healthier outlooks and balance sheets for most players in the oil patch. Operator economics still work at lower commodity prices, and we expect the good times to roll on a bit longer for the service companies. At some point, though, bargaining power will most likely shift back to the operators, and profits will probably flow into the most established companies' coffers.
Full Analyst Report : OISMore Analyst Notes on : OIS
03-28-07 | 10:22AM Service Firms Look East, Offshore
Full Analyst Report : WFTMore Analyst Notes on : WFT
03-28-07 | 10:22AM Service Firms Look East, Offshore
02-01-07 | 1:27PM Canadian Oil, Gas Activity Weakens
10-24-06 | 1:57PM Weatherford Reports Strong 3Q
Full Analyst Report : HCMore Analyst Notes on : HC
02-05-07 | 9:25AM Hanover Compressor to Merge
Full Analyst Report : HALMore Analyst Notes on : HAL
03-28-07 | 10:22AM Service Firms Look East, Offshore
03-06-07 | 1:41PM Halliburton Offers KBR Exchange
02-01-07 | 1:27PM Canadian Oil, Gas Activity Weakens
11-15-06 | 8:50AM KBR IPO Pushed Back a Day
10-31-06 | 9:09AM Halliburton's KBR sets IPO Range
10-23-06 | 10:19AM Halliburton Shrugs Off Lower Gas Prices
10-16-06 | 12:14PM Update on Halliburton's KBR Sale
Full Analyst Report : BJSMore Analyst Notes on : BJS
02-01-07 | 1:27PM Canadian Oil, Gas Activity Weakens
10-20-06 | 4:28PM Schlumberger Warns Other Pressure Pumpers
Full Analyst Report : CAMMore Analyst Notes on : CAM
03-28-07 | 10:22AM Service Firms Look East, Offshore
11-01-06 | 9:50AM Cameron Reports Decent 3Q
Full Analyst Report : SIIMore Analyst Notes on : SII
03-28-07 | 10:22AM Service Firms Look East, Offshore
02-01-07 | 1:27PM Canadian Oil, Gas Activity Weakens
10-24-06 | 3:53PM Smith Shows Off Its Moat
Full Analyst Report : FTIMore Analyst Notes on : FTI
03-28-07 | 10:22AM Service Firms Look East, Offshore
10-25-06 | 10:41AM FMC's Backlog Slips in 3Q
Full Analyst Report : BHIMore Analyst Notes on : BHI
03-28-07 | 10:22AM Service Firms Look East, Offshore
Full Analyst Report : VTSMore Analyst Notes on : VTS
01-10-07 | 3:06PM Veritas Acquisition to Close Friday
09-06-06 | 1:31PM Seismic Consolidation Continues
09-05-06 | 9:41AM CGG to Acquire Veritas
Full Analyst Report : PDSMore Analyst Notes on : PDS
04-27-07 | 10:23AM Oil Sands Still Driving Activity
02-15-07 | 8:59AM Precision's 4Q Meets Expectations
11-01-06 | 9:39AM Canada Proposes Trust Taxation
Full Analyst Report : SLBMore Analyst Notes on : SLB
03-28-07 | 10:22AM Service Firms Look East, Offshore
01-19-07 | 1:53PM Schlumberger Posts Solid 4Q, Year
10-20-06 | 4:28PM Schlumberger Warns Other Pressure Pumpers
Full Analyst Report : ACGYMore Analyst Notes on : ACGY
03-28-07 | 10:22AM Service Firms Look East, Offshore
Full Analyst Report : PGSMore Analyst Notes on : PGS
03-28-07 | 10:22AM Service Firms Look East, Offshore
11-14-06 | 3:04PM Petroleum Geo-Services under Review
