Trying To Balance Opportunity And Expectation At Cameron

By Stephen D. Simpson, CFA | April 30, 2012 AAA

It's no great secret that I am a fan of energy equipment companies as a play on energy exploration and production growth. National Oilwell Varco (NYSE:NOV) is an 800-pound gorilla in the space, while Cameron (NYSE:CAM) looks poised to benefit not just from ongoing offshore/subsea growth, but also a switch to a more oil-heavy onshore drilling environment. The trick, though, is finding the right price to buy into what can be highly cyclical and volatile stocks.

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Respectable Results, For What It Matters
At this point in the cycle, it feels almost as though analysts just skim over the reported results to get to the information on orders and backlog. That said, Cameron had an OK quarter.

Revenue rose 20% from 2011, but fell 11% sequentially. Cameron saw 6% higher sales in the valves and measurement business, while drilling and production fell 14% and process & compression fell 23%. Although EBITDA fell 22% sequentially, that was basically in line with most analysts.

SEE: Understanding The Income Statement

Orders Filling Out Nicely
Orders are the big delta for NOV, Cameron, Aker and FMC Technologies (NYSE:FTI), and Cameron came through. Orders jumped 35% sequentially to nearly $2.6 billion, while backlog increased 13% sequentially. Orders were especially strong in the drilling and production division (up 81%), helped by a large tree order from Petrobras (NYSE:PBR). That helps take some of the sting out of a recent decision by Apache (NYSE:APA) to go with General Electric (NYSE:GE) for business that some analysts had pegged for Cameron.

The Land Grab Goes on
There has been a lot of M&A activity in this sector. While GE has been spending left and right for some time in its efforts to build itself into a large equipment player, NOV and Cameron have responded with their own deals. In the case of Cameron, that includes a recent $270 million cash deal for Norway's TTS Energy. This is a good strategic move for the company, adding more drilling products (onshore and offshore) and bringing Cameron very close to offering a full equipment package for floater drilling.

SEE: Analyzing An Acquisition Announcement

The Good, the Bad, and the Alternatives
A lot should be about to go right for Cameron. Offshore rig construction activity is getting stronger, there's still a large retrofit opportunity, and the company is now better-positioned to participate in the FPSO upcycle.

But it's not all perfect. GE has quickly become a big player in the subsea equipment market and FMC seems to be winning more bids than expected. That leaves Cameron facing more competition (or at least more intense competition) than before, while NOV has relatively less risk relative to GE at this point.

The Bottom Line
I want to like Cameron, but National Oilwell Varco seems like the better value today. Given the same forward multiple to 2012 EBITDA, NOV may be 30% cheaper relative to fair value than Cameron. While I advise investors to continue watching this stock carefully, buying the shares today takes a fair bit of confidence in not only the 2012 outlook, but the 2013 outlook as well, as Cameron seems more likely to outgrow NOV over that period.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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