Investors Gush Over Cameron

By Stephen D. Simpson, CFA | August 04, 2011 AAA

Although energy prices have stayed pretty healthy in 2011, the energy services and equipment sector has been waiting for big producers to move ahead with new projects. As time has ticked by, analysts and investors have lost some patience and increasingly pushed equipment order announcements into 2012 and beyond. Based on the second quarter, though, it looks like Cameron (NYSE:CAM) is starting to see some of those long-awaited orders hit its books.

TUTORIAL: The Industry Handbook: The Oil Services Industry

Q2 Better on Many Fronts
Cameron reported that revenue rose 16% on a sequential basis, beating the average analyst estimate. The valve and measurement business was strongest in terms of reported growth (up 26% from the first quarter), while the drilling and production business continues to be the largest contributor to sales and profits and saw revenue rise 16% sequentially. The process and compression systems business saw more modest 5% sequential growth.

With better revenue came better margins and profits. Overall company-wide EBITDA rose 30% from the first quarter, with the drilling and production business up a little better at 33% growth. (For more on EBITDA, see A Clear Look At EBITDA.)

Orders Today, More Tomorrow?
As was the case with National Oilwell Varco (NYSE:NOV) earnings, orders were a big positive surprise again. Overall orders rose 57% from the first quarter to about $2.4 billion. That represented a book-to-bill of 1.4, one of the best performances since 2008. Order growth was strongest in drilling and production at 76%, while the company's overall subsea order growth came in at about 33%.

There should be even more leverage to come in order flow. There are still big equipment orders to come from announced projects at Eni (NYSE:E), Chevron (NYSE:CVX), Total (NYSE:TOT), BP (NYSE:BP), Exxon Mobil (NYSE:XOM), and Gazprom (Nasdaq:OGZPY). How these orders break out among Cameron, National Oilwell, FMC Technologies (NYSE:FTI), General Electric (NYSE:GE) and smaller players has yet to be seen, but Cameron seems to be building a little share in subsea trees and still has more than 40% of the market for blowout preventers. (For related reading, see Oil: A Big Investment With Big Tax Breaks.)

Keep in mind, too, that Cameron should still see further momentum from retrofits and upgrades. Cameron may yet have some explaining to do regarding the failures of its blowout preventer in the BP Gulf of Mexico disaster, but it doesn't seem to be leading to significant share loss.

On Land or at Sea
Cameron gets a lot of attention for its subsea business, but that is not all that Cameron is about. Onshore wellheads, valves, and frac equipment are all significant and as companies like Patterson-UTI (Nasdaq:PTEN) see more drilling, that should be a positive for Cameron. It is worth wondering whether the recent move of some energy companies to separate their E&P and refining operations will produce dividends for Cameron - as independent companies, refiners may need to launch a round of capital improvement, and that could feed orders into Cameron's valve and process businesses.

The Bottom Line
I've long been a fan of Cameron, but it does not look like the best value in the sector today. At today's prices, National Oilwell looks like the better bet, though I don't discount the possibility of more upside to order intake and forward estimates at Cameron. If the stock retraces its gap up after earnings or starts to drift down again due to some industry-wide malaise, these shares could quickly move from the watchlist to the active buy list. (For related reading, see Peak Oil: What To Do When The Wells Run Dry.)

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