BKR - Oceaneering International's Expertise Priced Into Its Stock

Summary

• Oceaneering International is a $2.14 billion market cap service company known for its remotely operated vehicles. It does not pay a dividend and has a liability-to-asset ratio of 74%.
• OII stock is not bargain-priced; however, demand is increasing for its services. Half of its operating segment income in 2022 was for subsea robotics.
• Oceaneering’s global scope of operations is a competitive diversification advantage.

Oceaneering International Inc. ( OII ) is one of the world's largest providers of remotely operated vehicle ((ROV)) services. Oceaneering works with companies in:

• aerospace
• entertainment
• material handling
• government and defense
• oil and gas
• renewables
• science and research
• maritime and cargo logistics.

In the energy sector, Oceaneering's expertise is increasingly required by large national and international offshore oil and gas producers like BP ( BP ), Equinor ( EQNR ), and Shell ( SHEL ), as well as US Gulf of Mexico producers. Indeed, in 2022 the company's foreign operations, mainly in Africa, Norway, the United Kingdom, Brazil, Asia and Australia, contributed 53% of revenue, or $1.1 billion.

Multinational US companies also see competitive advantage in big, long-cycle offshore projects. Unlike in short-cycle, fast-decline onshore shale basins, they have fewer competitors.

The bulk of Oceaneering International's operations depend on worldwide offshore oil and gas development. The Russian incursion into Ukraine, sanctions, and subsequent reordering of trade further have highlighted the importance of oil and gas energy security and non-Russian supplies for Europe and the US.

The company's market capitalization is up by +65% (and the stock price a similar +68%) since my last review in June 2022. Because Oceaneering has experienced such a gain, does not pay a dividend, and is near the top of its 52-week range, I have downranked it from "buy" to "hold." I have also sold my shares.

Full Year 2022 Results and Guidance

For 2022, Oceaneering's revenues were $2.07 billion, gross margin was $307 million, income from operations was $111 million, and net income was $25.9 million. Non-GAAP adjusted EBITDA was $233 million which included addbacks of noncash depreciation and amortization of $121 million, interest expense of $32.5 million and provision for income taxes of $53.1 million.

It is worth noting that, unlike in 2021 , in 2022 the company did not have to set aside a $30 million loss provision for Evergrande. These losses were due to terminating several ride entertainment system contracts Oceaneering had with Chinese real estate developer Evergrande.

Oceaneering divides into five operating segments. Full year 2022 operating income by segment is shown below.

The company's full-year 2023 guidance is adjusted EBITDA of $280-$310 million and free cash flow of $75-$125 million.

In its fourth quarter investor call, executives identified the strategic focus for 2023 as repricing, increasing margins, meeting contracts-including adapting to supply chain slowdowns-and updating equipment.

Macro

While sanctioned, Russian oil and distillate continues to flow to non-European markets like India and China.

However, an RBN Energy blog makes a compelling case, as US energy executives have earlier, that without western maintenance Russian oil production and refining equipment is likely to degrade. Long-term, Russia may not be as large an oil and distillate supplier as it has been.

OPEC+ countries thus have even more reason to ramp up drilling. And US companies are likely to do their larger and more capital-intensive projects, like offshore drilling, outside the US.

All speak to continued demand for Oceaneering International's services.

Oil and Gas Prices

Oceaneering's revenues depend primarily on activity level among national and international oil companies that in turn is prompted-to some extent--by oil and gas prices.

In Oceaneering's case, international prices are as relevant as US prices. The March 1, 2023, futures Brent oil price for May 2023 delivery was $84.40/barrel. The Dutch Title Transfer Facility ((TTF)) or European liquefied natural gas reference price was $14.55/MMBTU for April 2023 delivery, well below the near-$100/MMBTU prices reached in recent months.

For context, the West Texas Intermediate-Cushing ((WTI)) oil price was $77.73/barrel for April 2023 delivery and the Henry Hub natural gas price was $2.81/MMBTU.

The EIA's 5-95 confidence interval from February 2023 for future WTI prices is shown below. In addition to the interval, note the downward trend of the linear projection.

It is also important to note natural gas prices have fallen so dramatically that gas is much less of a drilling target than it was several months ago.

Competitors

Oceaneering International provides engineered services and robotic solutions to offshore energy, defense, aerospace, and manufacturing industries. It is headquartered in Houston, Texas.

The company has many general and specialized competitors offering offshore energy services, some of whom could also be customers. These include large companies with bundled services such as Schlumberger ( SLB ), Baker Hughes ( BKR ), and Halliburton ( HAL ). Smaller competitors are Diamond Offshore Drilling ( DO ), Dril-Quip ( DRQ ), Helix Energy Solutions ( HLX ), TechnipFMC ( FTI ), Transocean ( RIG ), and Valaris, Ltd. ( VAL ).

Governance

At February 28, 2023, Institutional Shareholder Services ranked Oceaneering's overall governance as a 3, with sub-scores of audit (3), board (2), shareholder rights (7), and compensation (1). On the ISS scale, 1 represents lower governance risk and 10 represents higher governance risk.

Insiders own 2.14% of shares. On January 31, 2023, shares shorted as a percentage of float was 5.7%.

The company's beta is 2.86, so its volatility is far higher than that of the overall market, as would be expected of a small company dependent on changeable oil prices and offshore activity worldwide.

At December 30, 2022, the six largest institutional stockholders, some of which represent index fund investments that match the overall market, were Blackrock (17.8%), Vanguard (11.8%), Earnest Partners (4.9%), State Street (4.4%), Fidelity/FMR (4.0%), and Brown Advisory (3.6%).

BlackRock, State Street, and Brown Advisory are signatories to the Net Zero Asset Managers, a group that as of December 31, 2022, manages $59 trillion in assets in assets worldwide and which (despite less energy supply due to reduced Russian exports to Europe) limits hydrocarbon investment via its commitment to achieve net zero alignment by 2050 or sooner.

The company's current board chair, T. Jay Collins, is retiring after the 2023 annual meeting. He will be replaced by M. Kevin McEvoy. Both have previously served as CEOs for Oceaneering.

Oceaneering Financial and Stock Highlights

Oceaneering's market capitalization is $2.14 billion at a March 1, 2023, closing price of $21.34/share. The 52-week stock price range is $7.25-$21.96/share, so this closing price is 97% of the 52-week high.

Enterprise value is $2.35 billion.

Trailing twelve months' earnings per share ((EPS)) is $0.25 for a current price/earnings ratio of 82. The averages of analysts' 2023 and 2024 EPS are $0.91 and $1.33, respectively, for a forward price/earnings ratio range of 16.0 to 23.5.

Returns on assets and equity are 3.5% and 5.0%, respectively.

Trailing twelve-month operating and levered free cash flows are $121 million and $96 million.

Oceaneering does not pay a dividend.

At December 31, 2022, the company had $1.50 billion in liabilities and $2.03 billion in assets giving Oceaneering a challenging liability-to-asset ratio of 74%. Of the $1.5 billion in liabilities, long-term debt was $700 million, long-term operating lease liabilities were $152 million, and other long-term liabilities were $85 million.

Of the long-term debt, $300 million is due in 2024-2025 and the rest is due after 2027.

The company's mean analyst rating is a 3.0, or "hold," from twenty-four analysts.

Notes on Valuation

Oceaneering's book value per share is $5.18, well below the market price, indicating positive investor sentiment. The low book value is also a reference for prior write-downs.

The company's enterprise value ((EV)) divided by EBITDA of $232 million is 10.1, just above the ratio 10.0 or less that suggests a bargain.

The ratio of levered free cash flow to equity is 4.5%.

Positive and Negative Risks

Oceaneering's major exposure is the volatile, derivative level of offshore activity. In the energy sector, this depends on oil (and gas) price risk.

It is exposed to inflation in terms of higher labor, equipment and financing costs.

A challenge of relying on large national and international oil companies like BP, Shell, and Petrobras is that budgets and operations can be heavily influenced by the government for political or non-economic reasons.

However, Oceaneering International is diversified across global producing basins, which may offset political risk from-for instance-the US Gulf of Mexico given the Biden administration's anti-hydrocarbon policies and similar policies among some European countries.

While big wind projects are progressing offshore Europe, concerns about whale kills may ultimately stall them offshore US.

Recommendations for Oceaneering International

Oceaneering International has good governance scores and is making a solid recovery as offshore activity picks up. The company is diversified across regions and somewhat across industrial sectors, an advantage.

Mainly, as its stock price recovery shows, it is righting itself as have most other oilfield services companies.

Oceaneering does not pay a dividend, nor does it have a share repurchase program and so is not recommended to dividend hunters.

It has substantial long-term debt in its capital structure.

While operations are solid, the recovery appears already embedded in the company's now-higher stock price, which registered a nearly 70% gain in the last ten months. Other companies in the oilfield services sector like giant SLB-formerly called Schlumberger-have seen similar appreciation.

Additional financial metrics do not suggest a bargain or the potential for more outsized appreciation.

I recommend Oceaneering International as a hold. I have sold my shares.

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