Cal Dive International: A Surprisingly Undervalued O&G Service Company

Jun.20.07 | About: Cal Dive (DVR)

As I have mentioned before, I am quite bullish on cylicical oil and gas service companies. More specifically, those with deep water Gulf of Mexico exposure.

Last September, Chevron Corp. (NYSE:CVX), Devon Energy Corporation (NYSE:DVN) and Statoil SA (NYSE:STO) reported finding potentially the largest American oil deposit in a generation. According to a New York Times article, the find could hold anywhere from three to 15 billion barrels of oil. The only catch is that Jack No. 2 is located some 175 miles offshore, 30,000 feet below the gulf's surface, among formations of rock and salt hundreds of feet thick. With current United States' reserves at 29 billion barrels, this discovery could potentially increase our proven reserves nearly 50%. Although this sounds spectacular in writing, the situation is slightly more complicated.


This discovered came after nearly two years of drilling with the combined investments of three major oil companies. While this type of frontier oil drilling is possible with oil at $60 per/barrel, more exploratory drilling at record depths and pressures will be required to bring this oil the market. Even more daunting is that current U.S. demand of 20.5 million bpd will drain this supply within two years.

Daniel Yergin, president of Cambridge Energy Research Associates, noted that success at these depths in the Gulf of Mexico would facilitate ultra-deep-water exploration elsewhere in the world because it will have proven the technology and capabilities.

Aside from these integrated oil drillers and producers, companies set to perform well are the oil and gas service companies required to build, upgrade and repair existing and impending offshore rigs and piping.

Apparently this industry has already taken off, as evident by recent stock quotes, but due to an industry average P/E of 15.95, companies still look relatively undervalued with relation to estimated growth.


Even more appealing and apparently undervalued is Cal Dive International Inc. (NYSE:DVR). As stated on the company's website:

Based on the size of our fleet, we are the market leader in the diving support business, which involves services such as construction, inspection, maintenance, repair and decommissioning of offshore production and pipeline infrastructure, on the Gulf of Mexico Outer Continental Shelf, or OCS.

DVR's recent acquisition of Horizon Offshore Inc. (HOFF) will undoubtedly strengthen their position going forward.

Cal Dive

This company is, however, something of an enigma. It boasts an impressive operating margin of 35% compared to the industry average of 16.6%, yet only trades at an affordable forward P/E of 10.3. Interestingly, the company is as also a subsidiary of Helix Energy Solutions Group Inc., (NYSE:HLX) which effectively holds 61,000,000 of the company 84,000,000 outstanding shares. When one couples this with the nearly 4 million shares sold short, DVR could prove to be a highly volatile and lucrative investment as we gear up for yet another eventful hurricane season.

Going forward, I plan to add to my existing July $17.50 call options holdings.