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Making an Oil Discovery
By JACK WILLOUGHBY
FINDING REASONABLY PRICED OIL services stocks with promising prospects is almost as tough these days as discovering the black liquid itself. Even some relatively unknown companies' shares fetch price/earnings multiples of 25 or more. But we think we've found a sleeper.
Cameron International (ticker: CAM), a Houston-based rig specialist with nearly $5 billion in annual revenue, is well positioned to profit as the search for oil takes on added urgency. About two-thirds of its revenue comes from making custom underwater and surface oil-drilling and production systems; a quarter comes from valve and measurement systems, and the rest from the sale of compression systems that help force the oil up to the surface.
Robert Seale
New Cameron CEO Jack Moore: "Execution is going to be key."
Owing to uncertainties about new order flows and vacillating margins, the shares have been volatile, rising to 52 in early January before falling to 38 in March. They since have come back only to 50, roughly where they started the year, despite oil's rise to $126 a barrel from $95 and a jump in Cameron's backlog.
The stock trades at about 19 times 2008 estimated earnings, versus a 25 multiple enjoyed by arch-rival FMC Technologies (FTI). FMC's shares are up 30% so far this year.
Citing a record $5.4 billion in orders, Morgan Stanley analyst Ole Slorer has a 65 price target on Cameron shares. That's about 30% above the recent price of the stock, which he rates Buy.
"Delays have resulted from overly ambitious oil companies estimating that they would be able to grow without being sure of the rigs," Slorer says of Cameron's occasional problems in planning and delivery. "It's more a question of one hand not knowing what the other's doing" than any inability on Cameron's part to meet demand, he adds.
Since early 2006, the average day rate for floating rigs has jumped to more than $500,000 for the Gulf of Mexico, from about $200,000. This will lead to a dramatic increase in the number of rigs in use and a "more than doubling" of industry revenue over the next few years, Slorer says. Cameron, with a 30% market share, has a claim on the increased revenues. "The direction is clear," Slorer says. "Just don't ask me about which quarter."
Realizing revenues on these huge projects can be tough. "The issue is balancing between long- and short-term earnings," says Jack Moore, who added the title of CEO to his presidency of Cameron a few weeks ago. "West African projects are going to be very significant for us in time. But it just isn't going to be an instant success."
Some African and other nations with offshore reserves are new to the oil business and its huge capital demands. As a result, they sometimes get cold feet before major decisions or big payments are needed for massive equipment. Most major operators have similar problems that require patience, Moore said at a recent press conference.
Cameron's accounting also complicates matters, because it doesn't count any revenue on a percentage-completion basis. "We can't book one dollar of revenue until the client has accepted it. That's what makes execution critical," says Moore, who has gradually assumed command from longstanding chief Shel Erikson. (Erikson, Cameron's biggest individual shareholder, will stay on as chairman until next March.)
Estimating the precise profit of a job can also be tricky, because the big, complex undersea systems often require components manufactured by outside sources.
As a result, margins have sometimes been unpredictable. They exceeded 15% in the third quarter of last year before dropping in each of the last two quarters.
These short-term fluctuations shouldn't obscure the long-term trend. "Cameron's dual exposure to sub sea and surface should put the company in an operational sweet spot over the coming three years," wrote Slorer in a May 1 note. He thinks the company could do "materially better" than its forecast of $2.55 a share for 2008.
Deepwater-rig orders arising from offshore discoveries are multiplying quickly. Industry wide, another 100 rigs are expected to join the existing worldwide fleet of 170 -- a 60% jump in three or four years.
The Bottom Line:
Oil-rig maker Cameron International's shares look cheap compared with its peers'. A 30% rise to 65 in the next 12 months is possible, according to a Wall Street analyst. Noted investor Ken Heebner is a big holder.
Investors tend to view Cameron primarily as a force in offshore drilling and sub sea systems, but it also has a 40% share of the land market. North American activity should increase significantly in the second half of this year as natural-gas prices begin to catch up with oil prices.
What's more, via its valve and measurement and its surface units, Cameron will have a shot at offering critical servicing and parts on about 100,000 miles of pipeline currently on the drawing board and expected to be built in the next four years around the world. (Nearly two-thirds of Cameron's revenue comes from outside North America.)
Moore, a long-time manager who's regarded as an excellent operating person, has kept Cameron on Erikson's conservative course, generally under promising and over delivering on financial results. The company has posted a long string of positive quarterly-earnings surprises.
The main task, however, is turning the huge backlog into bucks. By and large, Cameron has done an excellent job on that score: Since 2005 orders have increased 55% to $5.4 billion, while revenues are up 85% to $4.7 billion.
"Execution is going to be key. We got to bust this stuff out of here," Moore said on the first-quarter conference call. Translation: Earnings growth will be based on big gains in product sales.
Consolidation among the drillers has further strengthened the hand of Cameron and its two main rivals, FTI and General Electric unit Vetcogray. One big Cameron deal was the purchase of Dresser's valve division in 2005, which has proven to be a success.
Rather than chasing big acquisitions, however, cash flow mostly has gone to repurchase shares. During the first quarter, Cameron bought back about 2.2 million shares at an average price of $46.61 each. The board has OK'd boosting the repurchase plan to 12.2 million shares.
"The energy cycle benefits the suppliers last, making this a great late-cycle play," says Tim Call, a manager for the Richmond, Va.-based Capital Management, with $343 million in assets. Ignore conservative guidance and expect 20% growth to continue as long as oil is above $40 a barrel, Call says.
Value hunters like Ken Heebner of CGM Capital Development Fund (LOMCX) have taken big positions in Cameron; Heebner declined to comment. The T. Rowe Price New Era Fund (PRNEX) has also been a buyer.
In its first-quarter report released earlier this month, Cameron again boasted solid revenues and earnings fueled by drilling systems, sub sea systems and engineered valves. Revenues for the period were $1.3 billion, up 34% from the first quarter a year earlier. Pretax earnings hit $185 million, up 20% from $155.4 million in the first 2007 quarter.
"We expect to see margin improvements, particularly in the second half of the year, as the recent additions to orders and backlog are converted into revenues," Moore says.
Sooner or later, the shares look to be headed to parity with their pricier peers
By JACK WILLOUGHBY
FINDING REASONABLY PRICED OIL services stocks with promising prospects is almost as tough these days as discovering the black liquid itself. Even some relatively unknown companies' shares fetch price/earnings multiples of 25 or more. But we think we've found a sleeper.
Cameron International (ticker: CAM), a Houston-based rig specialist with nearly $5 billion in annual revenue, is well positioned to profit as the search for oil takes on added urgency. About two-thirds of its revenue comes from making custom underwater and surface oil-drilling and production systems; a quarter comes from valve and measurement systems, and the rest from the sale of compression systems that help force the oil up to the surface.
Robert Seale
New Cameron CEO Jack Moore: "Execution is going to be key."
Owing to uncertainties about new order flows and vacillating margins, the shares have been volatile, rising to 52 in early January before falling to 38 in March. They since have come back only to 50, roughly where they started the year, despite oil's rise to $126 a barrel from $95 and a jump in Cameron's backlog.
The stock trades at about 19 times 2008 estimated earnings, versus a 25 multiple enjoyed by arch-rival FMC Technologies (FTI). FMC's shares are up 30% so far this year.
Citing a record $5.4 billion in orders, Morgan Stanley analyst Ole Slorer has a 65 price target on Cameron shares. That's about 30% above the recent price of the stock, which he rates Buy.
"Delays have resulted from overly ambitious oil companies estimating that they would be able to grow without being sure of the rigs," Slorer says of Cameron's occasional problems in planning and delivery. "It's more a question of one hand not knowing what the other's doing" than any inability on Cameron's part to meet demand, he adds.
Since early 2006, the average day rate for floating rigs has jumped to more than $500,000 for the Gulf of Mexico, from about $200,000. This will lead to a dramatic increase in the number of rigs in use and a "more than doubling" of industry revenue over the next few years, Slorer says. Cameron, with a 30% market share, has a claim on the increased revenues. "The direction is clear," Slorer says. "Just don't ask me about which quarter."
Realizing revenues on these huge projects can be tough. "The issue is balancing between long- and short-term earnings," says Jack Moore, who added the title of CEO to his presidency of Cameron a few weeks ago. "West African projects are going to be very significant for us in time. But it just isn't going to be an instant success."
Some African and other nations with offshore reserves are new to the oil business and its huge capital demands. As a result, they sometimes get cold feet before major decisions or big payments are needed for massive equipment. Most major operators have similar problems that require patience, Moore said at a recent press conference.
Cameron's accounting also complicates matters, because it doesn't count any revenue on a percentage-completion basis. "We can't book one dollar of revenue until the client has accepted it. That's what makes execution critical," says Moore, who has gradually assumed command from longstanding chief Shel Erikson. (Erikson, Cameron's biggest individual shareholder, will stay on as chairman until next March.)
Estimating the precise profit of a job can also be tricky, because the big, complex undersea systems often require components manufactured by outside sources.
As a result, margins have sometimes been unpredictable. They exceeded 15% in the third quarter of last year before dropping in each of the last two quarters.
These short-term fluctuations shouldn't obscure the long-term trend. "Cameron's dual exposure to sub sea and surface should put the company in an operational sweet spot over the coming three years," wrote Slorer in a May 1 note. He thinks the company could do "materially better" than its forecast of $2.55 a share for 2008.
Deepwater-rig orders arising from offshore discoveries are multiplying quickly. Industry wide, another 100 rigs are expected to join the existing worldwide fleet of 170 -- a 60% jump in three or four years.
The Bottom Line:
Oil-rig maker Cameron International's shares look cheap compared with its peers'. A 30% rise to 65 in the next 12 months is possible, according to a Wall Street analyst. Noted investor Ken Heebner is a big holder.
Investors tend to view Cameron primarily as a force in offshore drilling and sub sea systems, but it also has a 40% share of the land market. North American activity should increase significantly in the second half of this year as natural-gas prices begin to catch up with oil prices.
What's more, via its valve and measurement and its surface units, Cameron will have a shot at offering critical servicing and parts on about 100,000 miles of pipeline currently on the drawing board and expected to be built in the next four years around the world. (Nearly two-thirds of Cameron's revenue comes from outside North America.)
Moore, a long-time manager who's regarded as an excellent operating person, has kept Cameron on Erikson's conservative course, generally under promising and over delivering on financial results. The company has posted a long string of positive quarterly-earnings surprises.
The main task, however, is turning the huge backlog into bucks. By and large, Cameron has done an excellent job on that score: Since 2005 orders have increased 55% to $5.4 billion, while revenues are up 85% to $4.7 billion.
"Execution is going to be key. We got to bust this stuff out of here," Moore said on the first-quarter conference call. Translation: Earnings growth will be based on big gains in product sales.
Consolidation among the drillers has further strengthened the hand of Cameron and its two main rivals, FTI and General Electric unit Vetcogray. One big Cameron deal was the purchase of Dresser's valve division in 2005, which has proven to be a success.
Rather than chasing big acquisitions, however, cash flow mostly has gone to repurchase shares. During the first quarter, Cameron bought back about 2.2 million shares at an average price of $46.61 each. The board has OK'd boosting the repurchase plan to 12.2 million shares.
"The energy cycle benefits the suppliers last, making this a great late-cycle play," says Tim Call, a manager for the Richmond, Va.-based Capital Management, with $343 million in assets. Ignore conservative guidance and expect 20% growth to continue as long as oil is above $40 a barrel, Call says.
Value hunters like Ken Heebner of CGM Capital Development Fund (LOMCX) have taken big positions in Cameron; Heebner declined to comment. The T. Rowe Price New Era Fund (PRNEX) has also been a buyer.
In its first-quarter report released earlier this month, Cameron again boasted solid revenues and earnings fueled by drilling systems, sub sea systems and engineered valves. Revenues for the period were $1.3 billion, up 34% from the first quarter a year earlier. Pretax earnings hit $185 million, up 20% from $155.4 million in the first 2007 quarter.
"We expect to see margin improvements, particularly in the second half of the year, as the recent additions to orders and backlog are converted into revenues," Moore says.
Sooner or later, the shares look to be headed to parity with their pricier peers
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