As the recent drilling resurgence in the Gulf of Mexico shows, there’s ample oil and gas waiting below the seabed. However, accessing this bounty is an immensely complicated operation requiring specialized equipment and supreme technological know-how.
That know-how falls to the oil services industry, even though when it comes to exploring for oil offshore, most investor attention is drawn to the drillers. After all, when companies like Noble (NYSE:NE) or SeaDrill (NASDAQ:SDRL) can sign long-term contracts at day rates in excess of $600,000, there’s plenty of profit to be made.
The first offshore rigs were basically modified from land drilling, and it wasn’t until 1947 that the first well was drilled completely out of sight of land. Since then, the industry has expanded significantly, with today’s drilling rigs high-tech and expensive machines. That rising cost of complexity demands huge capital investments, long-term commitments and a growing reliance on technology to reduce uncertainty and boost production.
Today, a host of companies specialize in providing all manner of support to the industry. Everything from remotely operated submersibles (ROVs) to offshore support boats make sure these operations function without a hitch. Although often ignored by both Wall Street and retail investors, these marine services stocks could provide a nice complement to any energy portfolio. Here are some ideas for investing in this group.
The ROV King
When it comes to remotely operated vehicles, Oceaneering International (NYSE:OII) is the king of the sea. The company has evolved from simply being a diving-operation air supplier to one of the largest providers of ROVs and deep-sea equipment. Oceaneering currently has over 250 Work Class ROV systems and employees more than 2,000 ROV offshore personnel worldwide.
That dominance continues to be reflected in the firm’s earnings. Over the last 10 years, profit growth has been consistently above 20% a year, and the company played pivotal role in containing the spill caused by BP’s (NYSE:BP) Deepwater Horizon disaster.
Oceaneering will release earnings later this week, but based on the previous quarter’s report, investors can expect more of the same. Especially since drilling in the Gulf of Mexico — Oceaneering’s prime haunt — has increased tremendously over the last year. OII reported first-quarter 2012 earnings per share of 47 cents versus analyst’s estimates of 46 cents.
The firm expects its second-quarter profit to be between 64 cents and 68 cents a share, making the forward P/E of 15 a good bargain. Additionally, shareholders are paid a nice 1.4% dividend while they wait for deepwater drilling to grow even more.
Strength in Support Vessels
Moving all that equipment and personnel to an offshore drilling platform takes plenty of muscle, and no one does it better than Tidewater (NYSE:TDW). The firm basically created the offshore “work boat” industry back in 1956, when it launched the world’s first vessel tailor-made to support the offshore oil and gas industry.
Today, Tidewater is the largest operator of marine support vessels, commanding a fleet of more than 350 ships. More important, that fleet is global — spread around more than 60 countries.
Higher day rates along with increased drilling activity helped Tidewater nearly triple its profit in its recently reported quarter. The company saw the biggest boost coming from its advanced deepwater vessels in Asia, Africa and Europe. Revenue from these specialized boats increased to $137.6 million, up from $95.9 million a year earlier.
The real drag was activity in the Gulf of Mexico. But with the U.S. drilling moratorium lifted and activity rising, Tidewater should see an increase in Gulf day rates and revenue in the latest earnings report. Shares of Tidewater can currently be had for about $16 below its 52-week high, and its forward P/E is 8.91.
Murky Waters for a Diver
Cal Dive (NYSE:DVR) provides manned diving, undersea pipeline construction, platform installation, decommissioning and salvage services to the offshore industry. However, it’s been a hard couple of quarters for company, with rough weather in the Gulf of Mexico wreaking havoc on revenue and earnings. The latest hit stems from Tropical Storm Debby and the fact that Cal Dive had to remain idle in the latter part of June.
These factors caused shares to virtually implode, and they now sit very close to the 52-week low of $1.50. However, there may be some value for investors or, more important, for a rival oil service firm. Cal Dive currently owns a diversified fleet of 29 vessels, including 10 construction barges capable of operating in water depths of up to 1,000 feet. While most of the attention has been focused on deepwater, permits for shallow water drilling in the Gulf of Mexico have surged as well.
With a market cap of just $150 million, Cal Dive could make an interesting acquisition for a larger firm looking to add more Gulf support to its arsenal.
Overall, these three picks are just some of the various marine oil service support firms available. Investors looking to diversify their offshore holdings shouldn’t ignore the sector’s potential.
As of this writing, Aaron Levitt doesn’t own any securities mentioned here.