As energy companies continue to drill deeper and into more unconventional regions in order to find trapped hydrocarbons, CAPEX budgets continue to surge upwards. After all, it costs some serious dough and high technology to drill in these harsh and challenging environments. Already, we have seen some pretty large and record setting amounts from majors like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX).
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However, Brazilian giant Petrobras’ (NYSE:PBR) spending on drilling takes the cake. The company’s latest capital spending plan for the next five years to tap Brazil’s rich sub-salt fields of its coast is truly staggering.
For investors, that spending will directly benefit those firms that provide all the associated undersea drilling equipment and perhaps none more so than FMC Technologies (NYSE:FTI).
The state-owned oil giant’s CAPEX for the 2013-2017 period of time is of mammoth proportions at $236.7 billion. While that is only marginally up from the $236.5 billion Petrobras targeted for investments in the 2012-2016 period, the investment plan remains one of the world's largest overall corporate spending plans.
Certainly, it is one of the largest in the oil and gas sector.
SEE: A Guide To Investing In Oil Markets
The key for the plan is that 62% of the total- or about $148 billion- will be spent on exploration and production activities over the next five years. Most of the company’s projects will take place deep below the ocean floor in the so-called pre-salt formation on Brazil’s continental shelf. Most of the oil deposits lie deep below the ocean’s surface and roughly below 2 ½ miles worth of earth. Petrobras estimates that It that this pre-salt production will account for 35% of its total output in 2017.
That’s where FMC Technologies comes in. The firm provides a variety of subsea equipment needed for drilling in deep water and has been racking up new supply contracts all over the world. More importantly, FMC has made Brazil a top priority with its various expansion plans. Back in 2010, the company opened up a new Technology & Production Center in the nation. That facility was designed to support the growth of the Brazilian subsea market, including development of the nation’s major pre-salt discoveries. Overall, FMC has been supplying Brazil oil equipment for nearly 30 years.
That commitment to Brazil has paid off for FMC as the firm continues to Petrobras’ go-to supplier. So far, FMC has delivered well over 600 “subsea trees” -which monitor and control underwater well production- for projects in Brazil as well as countless other necessary pieces of undersea hardware. That partnership with Petrobras continues to grow as the oil service firm has been tapped through new work. Last year, the pair inked a $1.5 billion, four-year agreement to supply 130 subsea trees, multiplex controls and other equipment to use in Petrobras’ pre-salt fields.
There’s no reason to think that FMC won’t be the number one choice for Petrobras when it comes time to deploy that huge newly announced CAPEX budget.
Making A Play
For investors, FMC could be the best way to play Brazil’s offshore potential.
As of December of 2012, the company’s Subsea backlog sits at $4.6 billion. While that does include contracts for firms like Hess (NYSE:HES) and BP (NYSE:BP), the bulk of it consists of work for Petrobras. FMC anticipates that 55% to 65% of this backlog will convert into revenue in 2013 and provide substantial growth.
That boost the firm’s earnings even more. Back in February, FMC Technologies reported fourth-quarter results with adjusted profit of 57 cents. That was better than the profit of 41 cents in the year-ago period. All in all, any continued deployment of CAPEX spending by Petrobras should help improve FMC’s outlook even more.
SEE: 5 Must-Have Metrics For Value Investors
The Bottom Line
At 30 times earnings, FMC isn’t necessarily cheap. But as the number one supplier for the energy firm spending the most dough, that higher multiple is certainly warranted. As deepwater drilling in Brazil and the rest of the world grows, so should FMC’s bottom line and share price. For investors, adding the stock to a portfolio could prove fruitful as PBR begins spending its CAPEX.
At the time of writing, Aaron Levitt did not own any shares in any company mentioned in this article.
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