When it comes to equipment and services in the energy space, “strong market share” is usually pretty relative. In many markets, a company is doing very well if it can get 25% or one-third of a market to themselves, which makes Oceaneering International's (NYSE:OII) nearly 60% share of the deepwater rig support market pretty significant.
What's more, this is not just a “market share at any cost” story, as the company has a pretty remarkable record of consistent operating margin and ROIC performance despite the vagaries of the deepwater energy market. The problem for investors is in figuring out what constitutes a fair multiple for all of these positives.
SEE: Oil And Gas Industry Primer
A Strong ROV Fleet Leads The Way
Oceaneering operates a fleet of nearly 300 ROV vehicles, which is the largest fleet out there insofar as I can tell. These ROVs are useful in a wide range of tasks, including visual inspection, repair, and equipment installation, and in many cases are essential to a deepwater operation. About three-quarters of this fleet is used to support deepwater drilling and production platforms, while the remainder is used in the construction and field maintenance activities of companies like Saipem and Tidewater (NYSE:TDW).
Oceaneering is one of the relatively few companies to both manufacture and operate ROVs, and it costs about $5 million to build a new one (for a useful life of about eight years). Having the means to build an ROV is not really the relevant factor in this business, though, as the ability to operate them effectively and get the job done is paramount. To that end, Oceaneering enjoys close to 60% share across the floater fleet and close to 80% share in the deepwater and ultra-deepwater operations, with Saipem and Helix Energy (NYSE:HLX) among the very few publicly-traded rivals of any size.
It's Not All About ROVs, Though
While Oceaneering has an excellent business with its ROV operations, that's only about half of what the company does. Another significant part of the company's operations involve subsea products and projects – providing products like umbilicals and the installation of the undersea hardware (trees, valves, connectors, blowout preventers, and so on) made by companies like FMC Technologies (NYSE:FTI) and General Electric (NYSE:GE).
Oceaneering also has substantial operations in “asset integrity” and “advanced technologies” - businesses that involve improving safety and reliability for energy companies and special services for clients ranging from the U.S. Navy to NASA to water theme park operators.
Tied To The Right Trends
With it strong share and limited competition, Oceaneering looks like a near-certain winner in this building offshore cycle. Whether an E&P company goes with Transcoean (NYSE:RIG) or Seadrill (Nasdaq:SDRL) for a deepwater drilling project, there's a good chance Oceaneering gets the call to support its with its ROVs. Whether a company goes with GE's subsea trees or those from Aker, there's a good chance that Oceaneering will install them. That's a good place for any company to be, and I like the odds that Oceaneering will see a significant pick up in activity over the next few years.
The Bottom Line
The only real issue with the story is that none of this is a secret. Analysts and investors know all about the company's strong share in its targeted markets, as well as the significant awards that have been made for offshore drilling and production projects. Likewise, it's no secret that Oceaneering has registered some rather remarkably consistent financial results over the years.
So what is all of that worth? On the whole, it's pretty rare to see an energy services company support an EV/EBITDA multiple above 9x until well into the cycle, and that would only suggest a fair value in the mid-$60s today. While I think you can argue that Oceaneering is as deserving of a premium valuation as any service company (particularly in the offshore space), I think a lot of the benefits of the coming offshore cycle are in this stock and I'd wait for a pullback before making a major purchase.