Cameron: Deepwater dollars

by Elliott Gue, editor Energy & Income Advisor

As the offshore oil discoveries of recent years reach the development stage, the industry will benefit from rising orders for subsea equipment and floating production, storage and offloading facilities.

Here, we do a deep dive into our top pick in the capital equipment space: Cameron International (CAM), whose diverse business footprint and exposure to key secular growth trends in offshore and deepwater drilling make the stock an excellent pick for investors seeking long-term growth.

Six of Cameron International’s 11 business lines target deepwater operations, and the company holds the No. 1 or No. 2 market share in the majority of its product categories.

The firm also generates about two-thirds of its sales outside North America – a favorable revenue mix given the well-documented uncertainties in that geographic market.

Order intake, a critical metric for capital equipment companies, surged to a fourth-quarter record of $3.4 billion – up 80 percent from year-ago levels. Full-year orders totaled $10.9 billion, another all-time high, eclipsing last year’s number by about 39 percent.

At the end of 2012, Cameron International’s backlog stood at $8.6 billion, up from $6 billion at the beginning of the year.

Drilling systems benefited throughout the year from an upsurge in demand for blowout preventers (BOP), a hulking device that weighs hundreds of tons and is several stories in stature.

Ironically, this growth opportunity gained momentum after the 2010 Macondo oil spill in the Gulf of Mexico, a disaster that stemmed in part from the failure of an older BOP manufactured by Cameron that hadn’t been regularly inspected and properly maintained by the rig owner, Transocean.

Not only did the disaster tragedy spark a wave of equipment upgrades on existing rigs, but producers have also demonstrated a willingness to pony up for vessels with a second BOP.

Cameron International has capitalized on this upsurge in demand; for the year, the company recorded 39 new BOP orders, though the majority of this revenue won’t be recognized until the devices are delivered in 2015 and 2016.

Moreover, new rules requiring original equipment manufacturers to service this equipment on a regular basis should bolster the company’s aftermarket revenue.

But the biggest opportunity set comes from the long-anticipated upsurge in orders of floating production, storage and offloading facilities (FPSOs).

These are vessels that process the hydrocarbons extracted from offshore fields and store crude oil for eventual offloading. Industry participants estimate that about 130 FPSO projects could come to fruition over the next five years.

Cameron International’s impressive order intake in 2012 has larded the backlog with a highly visible revenue base, in particular, we expect the firm to enjoy significant margin improvement in 2014.

Investors should remember that project awards in the capital equipment space tend to move to the right; a quarter of disappointing order inflow can lead to a temporary pullback in the shares.

As such, prospective investors should build their position slowly and take advantage of any pullbacks stemming from order shortfalls.

Cameron International remains our favorite equipment company and rates a buy up to $67 per share. We’d back up the truck when the stock dips to less than $60 per share.

Learn more about this financial newsletter at Elliott Gue's Energy & Income Advisor.

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