Cameron And National Oilwell Looking For A Busier 2011

By Stephen D. Simpson, CFA | February 07, 2011 AAA

While the oil spill in the Gulf of Mexico in the summer of 2010 may have pressed the pause button on offshore energy development for the United States, the rest of the world continues to move forward. That, in turn, means more business opportunities for key equipment suppliers like Cameron (NYSE:CAM) and National Oilwell Varco (NYSE:NOV). With rig construction picking up and major projects about to get underway in Asia, Africa and South America, investors may have reason to expect still more pop in these leading energy service stocks.

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Solid Ends To 2010
Neither Cameron nor National Oilwell capped 2010 with a blowout quarter, but both companies delivered acceptably solid results.

Cameron saw revenue increase 18% on a sequential basis, with the drilling/production and process/compression units leading the way at 25% and 31%, respectively. Margins were not quite as strong, though, and EBITDA increased 9% on a sequential basis. Integration expenses related to a merger and legal costs related to the Deepwater Horizon hit margins this quarter, but it does not look like there is any structural problem with the company's business.

For National Oilwell, this quarter was more sedate. Revenue climbed 5% from the third quarter, led by the Rig Technology group's 6% sequential growth. Profitability was also better on a relative basis, as NOV saw EBITDA rise 4% and operating income rise 5% from the third quarter. If investors want to get really picky, it is true that NOV saw about 20 basis points of margin shrinkage. (For more, see Zooming In On Operating Income.)

The Look Ahead
Cameron and National Oilwell both saw strong ordering patterns in the fourth quarter. NOV posted new orders in excess of $1.4 billion (more than doubling the third quarter result) and the capital equipment backlog ticked up over $5 billion. For Cameron, the order growth was a little less impressive, up a low teens percentage on a sequential basis but still solid at $1.7 billion and leaving the company with a backlog of over $4.8 billion heading into 2011. (For more, see Oil Services Earnings Hint At Recovery.)

For Cameron, there is a lot of reason to be optimistic about the next few years. Rig-building activity has really picked up in shipyards around the world. Putting a finer point on it, major energy companies like Eni (NYSE:E), Exxon Mobil (NYSE:XOM), BP (NYSE:BP) and Total (NYSE:TOT) are all moving forward with major projects and Cameron stands to win some sizable orders. Investors should note that Cameron has historically done quite well with BP and Petrobras (NYSE:PBR) and should do well against rivals like NOV, General Electric (NYSE:GE) and FMC Technologies (NYSE:FTI). (For more, see CAM-Do.)

Though National Oilwell and Cameron compete for some business, they're not straight one-to-one rivals in all markets. Accordingly, NOV can be thought of as perhaps a broader play on the offshore rig construction cycle, particularly with its commanding market share for the rig packages that go onto jackups. Said differently, if offshore rigs are being built and deployed in the field, National Oilwell should do well.

The Bottom Line
Plenty of investors have flocked to these stocks as part of the overall boom in commodity-related plays. Accordingly, neither is especially cheap. Equipment providers like Cameron and National Oilwell often trade at forward EV/EBITDA multiples of around 10 times, though the spread is very wide both to the upside and downside. With both companies apparently building towards a peak earnings cycle in a few years, there could be more room for those multiples to expand, but investors should remember that this is a sector with above-average volatility. (For more, see Oil And Gas Industry Primer.)

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