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McDermott's New Life
For McDermott (NYSE: MDR), it is now all about energy. With the completion of the Babcock and Wilcox (NYSE: BWC) spinoff at the end of July, McDermott is now an EPCI (engineering, procurement, construction, installation) company with a laser focus on the upstream energy market. In particular, the new company focuses on offshore projects in the Middle East and Asia. If Apache (NYSE: APA), Chevron (NYSE: CVX) or OMV want to build a new offshore installation (whether a production rig, subsea field or floating production system), they hire a company like McDermott to build it.
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The First New Quarter In The Books
On the surface, this third quarter was not an auspicious beginning. Revenue dropped 28%, and operating income fell about 14%, though net income from continuing operations was actually up an encouraging 39%. Although there was weak order flow for the quarter, and the company's backlog declined on a sequential and year-over-year basis, McDermott has booked $1.2 billion in new orders for October.
Where To From Here?
There is a recent rule of thumb that major oil companies need to see oil prices in the $70-$80 per barrel range to justify large-scale offshore projects. Today's price of $87-plus per barrel should be encouraging in that respect. What's more, McDermott does a lot of its business with national oil companies, and for better or worse these entities do not always make go/no-go decisions for project-based economic regions. Said differently, if the government of Vietnam or Saudi Arabia feels it needs to increase energy production or develop an asset, they just do it.
By spinning off the power and government projects business, McDermott is now a pure-play in a volatile and sometimes crowded field. Larger rivals like Saipem and the combination of Acergy and Subsea 7 have been doing this for a while, as has Technip. Then again, it is not as though McDermott is new to this game, and the company's regional focus should serve it well. (For more, see Oil And Gas Industry Primer.)
Smaller Companies Lack McDermott's Reach
If investors want to cast their nets wider, they can look at a host of smaller companies as well. Helix (NYSE: HLX), Cal Dive (NYSE: DVR), Gulf Island Fabrication (Nasdaq: GIFI), Global Industries (Nasdaq: GLBL) and Oceaneering (NYSE: OII) are all U.S.-based companies with offshore construction and service businesses. But some are quite a bit smaller than the aforementioned giants in terms of their offshore energy businesses. These companies generally lack the reach of a company like McDermott and seldom get assignments for full projects (instead, they often get parts and pieces of larger projects). (For more, see A Primer On Offshore Drilling.)
The Bottom Line
To a certain extent, the decision to buy McDermott stock comes down to an investor's feelings about the energy market. If the assumption is ongoing demand for oil and gas, higher prices and more offshore exploration and development, it is hard to see how the offshore construction industry will not do well. That does not guarantee that McDermott will win the bids or execute them well (and execution matters when the majority of the deals on the books are fixed-price), but it is a precondition for the stock working well.
At today's prices, and with the general expectations for new offshore activity, McDermott shares look like they are worth serious consideration, though this will likely be a stock prone to big waves over a long-term holding period.
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IN PICTURES: 9 Simple Investing Ratios You Need To Know
The First New Quarter In The Books
On the surface, this third quarter was not an auspicious beginning. Revenue dropped 28%, and operating income fell about 14%, though net income from continuing operations was actually up an encouraging 39%. Although there was weak order flow for the quarter, and the company's backlog declined on a sequential and year-over-year basis, McDermott has booked $1.2 billion in new orders for October.
Where To From Here?
There is a recent rule of thumb that major oil companies need to see oil prices in the $70-$80 per barrel range to justify large-scale offshore projects. Today's price of $87-plus per barrel should be encouraging in that respect. What's more, McDermott does a lot of its business with national oil companies, and for better or worse these entities do not always make go/no-go decisions for project-based economic regions. Said differently, if the government of Vietnam or Saudi Arabia feels it needs to increase energy production or develop an asset, they just do it.
By spinning off the power and government projects business, McDermott is now a pure-play in a volatile and sometimes crowded field. Larger rivals like Saipem and the combination of Acergy and Subsea 7 have been doing this for a while, as has Technip. Then again, it is not as though McDermott is new to this game, and the company's regional focus should serve it well. (For more, see Oil And Gas Industry Primer.)
If investors want to cast their nets wider, they can look at a host of smaller companies as well. Helix (NYSE: HLX), Cal Dive (NYSE: DVR), Gulf Island Fabrication (Nasdaq: GIFI), Global Industries (Nasdaq: GLBL) and Oceaneering (NYSE: OII) are all U.S.-based companies with offshore construction and service businesses. But some are quite a bit smaller than the aforementioned giants in terms of their offshore energy businesses. These companies generally lack the reach of a company like McDermott and seldom get assignments for full projects (instead, they often get parts and pieces of larger projects). (For more, see A Primer On Offshore Drilling.)
The Bottom Line
To a certain extent, the decision to buy McDermott stock comes down to an investor's feelings about the energy market. If the assumption is ongoing demand for oil and gas, higher prices and more offshore exploration and development, it is hard to see how the offshore construction industry will not do well. That does not guarantee that McDermott will win the bids or execute them well (and execution matters when the majority of the deals on the books are fixed-price), but it is a precondition for the stock working well.
At today's prices, and with the general expectations for new offshore activity, McDermott shares look like they are worth serious consideration, though this will likely be a stock prone to big waves over a long-term holding period.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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