Tom Petty may have been onto something when he said that the waiting is the hardest part. Nobody seems to doubt that major oil companies will continue to invest billions of dollars into offshore oil and gas exploration and production, or that Cameron (NYSE:CAM) will get it's share. The question, though, is how much of that business arrives in 2012 and 2013 and whether Cameron can regain its former position in its core markets.
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A Pretty Solid Fourth Quarter
Historical numbers have only limited significance in oil service and equipment companies, so Cameron's strong fourth quarter results don't matter all that much. Revenue did rise from 12% last year and 21% from the prior quarter, with strong growth in Drilling and Production and Process and Compression.
Margins are an issue now with the Cameron story and fourth quarter results show this. EBITDA rose about 5% sequentially, and although Cameron's margins weren't bad relative to expectations, the company still saw meaningful margin erosion due in part to the LeTourneau acquisition. (For related reading, see EBITDA: Challenging The Calculation.)
Is Q1 Guidance a Blip or a Warning?
Cameron's guidance for the first quarter of 2012 was not especially strong. Lower margins in the DPS and Valves and Measurement business are definitely a big part of that. Again, LeTourneau is part of the problem, but so too is the outlook for lower subsea revenue. Although Cameron has a pretty healthy backlog, the company won't be realizing so much of that in the first quarter and they won't be able to offset their costs.
Will the Future Resemble the Past?
Awards for subsea trees were relatively soft in 2011, but a curious thing happened. Cameron's rival FMC Technologies (NYSE:FTI) saw strong award activity and seemed to get more than half of the awards out there. By comparison, Cameron and General Electric (NYSE:GE) both got less than 20% share of the market.
A lot of this has to do with geographical coverage, as Cameron is strongest in the so-called "Golden Triangle" of Brazil, Western Africa and the Gulf of Mexico, but it's not a threat that Cameron longs can completely dismiss. There's widespread expectation of over 400 tree awards on the way in 2012 and for Cameron to get a more customary share of these (one-third or more), but we won't know until the awards are public.
In particular, Cameron has a very strong relationship with Brazil's energy giant Petrobras (NYSE:PBR) and many more tree orders could be coming from this client, though FMC may get a piece of the business as well.
The Bottom Line
Settling with BP (NYSE:BP) for $250 million over the Macondo dispute was probably a good move in the long term, as BP is a major offshore player and there's no reason for Cameron to alienate a potentially significant client. Also looking out for the long term, Cameron has interested growth opportunities in areas like subsea separation and FPSOs.
In the near term, though, the outlook on these shares is a bit mixed. Cameron doesn't have quite the same exposure to weak North American gas as major service companies like Halliburton (NYSE:HAL) or Schlumberger (NYSE:SLB), but it's not like servicing the offshore market is all sunshine and daisies. Cameron shares are definitely not dirt-cheap today, but on a two-year outlook these shares are still very much worth owning. (For related reading, see A Guide To Investing In Oil Markets.)
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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.