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CAM Stock – Cameron International Gets Focused

For the energy sector, the mantra over the last year or so has certainly been to get leaner and meaner. We’ve already seen variety of firms in the upstream and downstream segments of the industry shed assets and focus on core assets, reversing decades of conglomerate building.

cameron international, ingersoll-randAnd now we’re finally beginning to see that in the oil services sector — with industry leader Cameron International (CAM) taking the clipping shears to its asset base.

Perhaps bowing to activist pressures, CAM is selling a big, yet non-core division to industrial giant Ingersoll-Rand (IR). That’ll give IR a real foothold into the oil & gas sector. However, CAM investors could get an even bigger deal. The sale means that Cameron International is getting focused on its core markets in the offshore energy market.

For investors, CAM’s decision to sell a non-core business division could be the best sign that it’s serious about delivering value over the long haul.

Subsea Over Compression Units at CAM

On the surface, the deal seems pretty basic, although it is Ingersoll-Rand’s largest since buying Trane back in 2007. For $850 million, Cameron will part with its centrifugal compression unit. The unit, which generated sales of about $400 million last year and has 850 employees, provides compression equipment in order to process and transport natural gas through pipelines.

Compression is a great business to be in as the fracking revolution continues to unearth more and more natural gas within our nation’s borders. The centrifugal compression unit will make a great tuck-in acquisition for Ingersoll-Rand and will be almost instantly accreditive to IR stock earnings.

And yet, for Cameron International, dumping the unit could be the best long-term decision. Why? Because Cameron is quickly becoming a subsea and offshore champion.

CAM provides subsea and offshore drilling equipment, which means the firm’s bread-and-butter lies upon the ocean’s fertile and potentially oily floor. As we’ve continued to drill deeper and deeper, the technical challenges of getting that oil out of the ground and up to the surface are getting harder to deal with. It takes a whole ecosystem of complex subsea equipment — operating at depths of 7,000 feet or more — in order to make offshore drilling even possible.

And while deepwater “Christmas trees,” high pressure wellheads and umbilical pipeline connectors aren’t the sexiest products in the world, they are expensive. That fact is driving record spending by energy producers on subsea and deepwater equipment, much of which is going right into CAM’s pocket.

Buy shedding the compression division, Cameron will only have a small handful of onshore operations — most of which are offshoots of it deepwater products, such as Christmas trees. That means it can focus on its more profitable deepwater offerings through its partnership with Schlumberger (SLB).

Dubbed One Subsea, the partnership continues to provide huge benefits for CAM as E&P firms are able to tap one company for their entire deepwater and subsea drilling needs — from SLB’s wellbore technologies and Cameron’s expertise in flow control. And as we’ve said before, subsea is a very profitable business to be in.

CAM’s drilling and production businesses saw 32% revenue growth year over year and 28% increase in profits. By comparison, the recently sold compression business saw revenues and profits both decline in the latest quarter by double-digit amounts.

Clearly, CAM is focusing on where the money is.

Cutting the fat has another potential benefit for CAM stock holders as well: Cameron becomes a buyout target in its own right. By simply being a deepwater and subsea player, it makes it very easy for a larger firm looking to get into the oil & gas game — say Siemens (SIEGY) — to make an offer.

A firm with many complex and moving parts isn’t easy to swallow. But one focused on a single industry or product line is.

Make A Play For CAM Stock

At 14 times forward earnings, CAM stock is pretty cheap.

It’s especially cheap when you consider its potential as a pure-subsea and deepwater competitor. Rivals like FMC Technologies (FTI) — which is already more of a pure player in subsea — currently trades at a forward P/E of around 18. As Cameron gets its act together and sheds more of these land-based businesses, it could mean some pretty nice profits expansion and a hefty share price increase for investors.

Already, CAM has shown its potential on that front. The firm continues to up its earnings estimates and guidance with every conference call. With a declining business division now gone from its ranks, its overall profit margins should rise. That should make the street very happy in upcoming quarters.

And investors should be there to take that ride.

Overall, Cameron and CAM stock is quickly becoming the deepwater and offshore player. Snag shares of the firm now, before everyone else does.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/08/cameron-international-ingersoll-rand/.

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