"We see smooth seas ahead for deepsea driller Oceaneering International (NYSE: OII)," says Richard Moroney.
The editor of the blue chip advisory, Dow Theory Forecasts, explains, "Most of the world's untapped oil reserves lie under the ocean floor, and oil producers are spending an increasing portion of their capital budgets on deepwater drilling."
"While oil prices don't directly affect Oceaneering International's profits and cash flows, they do move the stock. Oil prices fell by two-thirds in the second half of 2008, pushing Oceaneering shares under $20 for the first time since July 2005.
"This year, oil prices have risen and the shares have gained 22%. Any sustained rally in energy prices should boost Oceaneering.
"Oceaneering's most profitable segment (32% of revenue, 47% of profits) operates a fleet of 227 remote operating vehicles (ROVs) that support drilling and production activities at depths up to 10,000 feet.
"Operating income from ROVs surged 32% last year, and growth should continue this year as new rigs come online. Oceaneering controls 35% of the ROV market, with a fleet twice the size of its largest competitor.
"Subsea products (33% of revenue, 24% of profits) grew earnings 3% in 2008. This unit sells cables, deep-water hoses, and umbilicals (tubes used to pump oil).
"While industry demand fell 10% last year, Oceaneering grabbed market share, capturing 30% of new orders for umbilicals, up from a 21% share in 2007.
"In February, Oceaneering said it expects per-share pro?ts between $3.00 and $3.60 this year. The guidance implies earnings will be ?at to down 16%, numbers the company should be able to top if conditions improve.
"The company has secured remote operating vehicle (ROV) contracts on 14 of the 21 floating rigs it expects to enter service this year and is competing for five more rigs. Oceaneering expects to expand its fleet by 24 to 30 vehicles this year, with 22 of these new ROVs already under contract.
"Although some of the larger energy companies plan to boost spending despite the downturn, many producers are slashing their budgets, potentially delaying new projects.
"Management believes deepwater markets are less vulnerable to spending cuts because of projects' size and long lead times. Oceaneering expects at least $290 million in cash flow this year, enough to cover all capital investments and repay all debt coming due for the year.
"At 10 times trailing earnings, Oceaneering shares look cheap considering the company's long-term growth outlook and near-term ability to top conservative profit targets. The stock remains a 'focus list' buy."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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