Oceaneering International, Inc. (NYSE:OII) is one of the world's largest providers of remotely operated vehicle ("ROV") services, a service increasingly required by large national and international offshore oil and gas producers like BP p.l.c. (BP), Equinor (EQNR), and Shell (SHEL), as well as U.S. Gulf of Mexico producers.
The offshore energy sector has been roiled by challenges in the last several years: competition in the U.S. from onshore shale, environmentalists and EU governments pushing European energy companies to get out of oil and gas, the oilfield service downturn that started in 2019 compounded by the oil price downturn of 2020-2021, large U.S. companies' scale-back even now to a maintenance level of capital spending, and the U.S. Biden administration's hostility to oil and gas production that extends to a first-ever lack of future offshore leasing plans.
However, the Russian invasion of Ukraine has reoriented European countries toward both the critical necessity of oil and gas as immediate energy sources and the importance of getting oil and gas supply from non-Russian sources. There is already some interest and return towards drilling in the difficult but well-established North Sea.
National oil companies, like Brazil's Petrobras, also continue to want to develop their energy resources.
Because US political risk has grown, Oceaneering International is advantaged by being internationally diversified, 57% of its 2021 revenues coming from overseas: Africa, Norway, the UK, Brazil, Asia, and Australia.
Moreover, even multinational U.S. companies see competitive advantage in long-cycle, big offshore projects that they have less of in short-cycle onshore shale basins.
The OPEC+ countries, which mainly drill onshore, have adhered to their production limits and timetable-sometimes not even making the full +400,000 BPD monthly increases. And Western energy service companies have pulled out of Russia's (mainly onshore) mature production after Russia's invasion of Ukraine.
Oceaneering International depends mainly on offshore oil and gas development, and the appetite for it is growing again.
The company has considerable debt and doesn't pay a dividend. I do not recommend it to dividend-hunters. I do recommend Oceaneering International to speculative buyers who expect further recovery in offshore oil and gas development worldwide.
For the first quarter of 2022, Oceaneering's revenues were $446 million, gross margin was $45 million, loss from operations was -$1.0 million, and net loss was -$19.2 million.
Non-GAAP adjusted EBITDA was $31.9 million which included addbacks of non-cash depreciation and amortization of $32 million, interest expense of $8.6 million and provision for income taxes of $10.3 million.
CEO Roderick Larson explains that these results were seasonal and expected and that "we experienced higher costs for hiring and training of personnel and mobilization of equipment in preparation for a significant activity increase anticipated for the remainder of 2022."
Oceaneering divides into five operating segments. First quarter 2022 operating income by segment is shown below. The company groups all segments except aerospace and defense tech into a larger category of "total energy services and products." In this group, 1Q22 revenue was $365 million, gross margin was $50 million, and operating income was $18 million, or 5%.
Per CEO Larson's statement, despite the low 1Q22 results, the company's full-year 2022 guidance is largely unchanged, with expected adjusted EBITDA of $225-$275 million and free cash flow of $75-$125 million.
While numerous factors are in play, the reality is that the globe has a smaller oil and gas supply than expected post-Covid-19 due to the decision of many countries not to buy or support Russian oil and gas production after Russia invaded Ukraine.
Minor aspects that would be major in other circumstances and yet may be are China's surprising continuing lockdowns, Biden administration hostility to US oil and gas production, and OPEC+ adherence to a timetable of measured production increases.
Still, the driver is the uncertainty around the basic-not marginal-effect of uncertainty around what had been Russian oil production of 10 million barrels per day (10% of the world's supply) and its supplier as an inexpensive, convenient natural gas source throughout Europe, including half of industrial power Germany's supply.
Compounding this has been Europe's-and to some extent the United States'-reliance on cheap natural gas as baseload backup (while phasing out coal and nuclear) to intermittent wind and solar to generate electricity.
As an aside, it is worth remembering what a key role North Sea oil and gas has played in the past UK and European prosperity.
Oceaneering's revenues depend primarily on activity level among national and international oil companies that in turn are prompted by oil and gas prices. However, as we have seen with OPEC and US oil majors, higher oil prices are not the automatic activity prompt they have been in the past.
The May 31, 2022, futures Brent closing price was $122.84/barrel and the Dutch Title Transfer Facility (TTF) or European liquefied natural gas (LNG) reference price was $28.84/MMBTU. (In Oceaneering's case, international prices are as or more relevant than US prices.) For context, the West Texas Intermediate-Cushing (WTI) oil price is $114.67/bbl and the Henry Hub natural gas price is $8.15/MMBTU. This is between two and three times the level of a year ago.
The much higher European LNG price explains the vacuum-like draw of U.S. LNG to Europe. Just-published statistics for March 2022 from the Energy Information Administration (EIA) show U.S. net exports (exports less imports) reached their highest level since the EIA began tracking this statistic in 1973 of 12.2 billion cubic feet/day (BCF/D). US imports were 8.4 BCF/D and US exports were 20.6 BCF/D.
The futures curve for oil is backwardated (lower prices in later months) but the curve for natural gas is relatively flat.
Oceaneering provides engineered services and robotic solutions to offshore energy, defense, aerospace, and manufacturing industries and is headquartered in Houston, Texas.
In offshore energy services, the company has many competitors, some of whom could be customers also. This includes large companies that offered bundled services such as Schlumberger (SLB), Baker Hughes (BKR), and Halliburton (HAL). Some smaller, more specialized competitors are Diamond Offshore Drilling (DO), Dril-Quip (DRQ), Helix Energy Solutions (HLX), TechnipFMC (FTI), Transocean (RIG), and Valaris Ltd. (VAL). Additionally, Noble Corp. (NE) (the drilling company, not to be confused with Noble Energy which was acquired by Chevron (CVX)) and Maersk Drilling announced a 50-50 combination in the fall of 2021.
At May 1, 2022, Institutional Shareholder Services ranked Oceaneering's overall governance as a 3, with sub-scores of audit (2), board (2), shareholder rights (8), and compensation (2).
Insiders own 2.05% of shares. At May 13, 2022, shares shorted as a percentage of float was 4.1%.
The company's beta is 3.01, so its volatility is far higher than that of the overall market, as would be expected of a small company dependent on volatile oil prices and offshore activity worldwide.
At March 30, 2022, the five largest institutional stockholders, some of which represent index fund investments that match the overall market, were Blackrock (18.7%), Vanguard (11.4%), Fidelity/FMR (6.6%), Van Eck Associates (5.0%), and State Street (4.6%). Be aware that BlackRock, Vanguard, and State Street are all signatories to the Net Zero Asset Managers Initiative whose goal is to limit investments in hydrocarbon energy as much as possible.
The company's market capitalization is $1.3 billion at a May 31, 2022, closing price of $12.72/share. The 52-week stock price range is $9.92-$18.20/share, so this closing price is 70% of its 52-week high and 69% of the one-year target price is $18.56/share.
Enterprise value is $1.6 billion.
Oceaneering's trailing twelve months' earnings per share (EPS) is -$0.59. The averages of analysts' 2022 and 2023 EPS are $0.42 and $0.78, respectively, for a forward price/earnings ratio range of 16.3 to 30.3.
Trailing twelve-month operating and levered free cash flows are $146.5 million and $145.6 million.
Oceaneering does not pay a dividend.
At March 31, 2022, the company had $1.40 billion in liabilities and $1.90 billion in assets, giving Oceaneering a challenging liability-to-asset ratio of 74%. Of the $1.4 billion in liabilities, long-term debt was $702 million, long-term operating lease liabilities were $153 million, and other long-term liabilities were $80 million.
The company's mean analyst rating is a 3.0, or "hold," from twenty-four analysts.
Oceaneering's book value per share is $4.95, well below the market price, indicating positive investor sentiment.
The company's enterprise value (EV) divided by EBITDA of $160 million is 9.8, just below 10.0 (or less) that suggests a bargain.
The ratio of levered free cash flow to equity is 0.12. This compares favorably to larger companies like Schlumberger or Baker Hughes, with levered free cash flow-to-equity ratios of 0.03 and 0.04.
Oceaneering's major exposure is the volatile, derivative level of major offshore activity, which depends on oil (and gas) price risk.
Moreover, it is exposed to inflation in terms of higher labor, equipment and financing costs.
The challenge of relying on large national and international oil companies like BP, Shell, and Petrobras, is that budgets and operations can be influenced or even changed by the government for political or non-economic reasons.
However, Oceaneering International is diversified across global producing basins, which may offset its political risk from-for instance-the US Gulf of Mexico at present or some remaining Europeans still dubious about any energy sources other than wind and solar.
Oceaneering does not pay a dividend, and so is not recommended for investors who want regular, quarterly yield. It also has substantial long-term debt in its capital structure.
The company reported positive EBITDA in 1Q22 but lost money as it geared up for activity it expects during the rest of the year. With less production at present from OPEC (onshore), Russia (onshore), and the U.S. administration's limits on drilling (onshore and offshore), there is demand for offshore oil and gas drilling, even-and especially-near and by European countries and their energy companies.
Supply-demand fundamentals driven by the reorientation by many countries (but not all, of course) away from Russian oil and gas means a much more significant opening than recently for offshore energy services that companies like Oceaneering International provide. I recommend the company to speculative buyers who expect an upswing in offshore oil and gas development and who expect Oceaneering to be part of the increased activity.
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