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Can New Production Practices Break Traditional Business Models?

October 23, 2013 | About:
No matter how big an oil or gas company may be, it will always need some support from other industry peers. In other words, the oil and gas giants possess the know-how needed for exploration and production, but do not produce the tools required for those tasks. With the goal of filling that gap, Cameron International (CAM) and FMC Technologies (FTI) have come to existence. As fracking and deepwater become standard production practices and the first LNG vessel is under construction, future prospects for the mentioned companies deserve a review.

Favored by Changing Preferences at the Oil Industry

Cameron International is a leading manufacturer of pressure control equipment used in onshore, offshore and subsea applications for oil and gas drilling, production and transmission. Its competitive characteristics are: a wide product portfolio, specialty service capabilities, proprietary technological knowledge and strong backlog position coupled with growing international operations and offshore production. Although the business is divided into three segments, the drilling and production systems is the most important.

Amid great uncertainty concerning the future of the oil and gas industry related to the political instability reigning in the Middle East, oil giants have preferred to search for opportunities at other geographies. Cameron International has benefited since its most important geography is North America, and E&P activities have notably increased around the Mexican Gulf. Market synergies have in turned allowed the firm to sign additional contracts with industry giants BP, Petrobras, Statoil and Chevron who want quality products and service infrastructure.

In addition to the industry’s focus relocation, Cameron International has seen an important raise in order of deepwater equipment. Thus, the increasing demand of deepwater equipment offers the company an interesting opportunity to take part in large projects, intensive employment of human capital, the application of top-of-the-line equipment, and the necessary push to introduce new technology. Additionally, the oil and gas industry has returned to original equipment manufacturers after the recent disasters, giving the firm’s aftermarket orders a great push, doubling revenues.

Financially, Cameron International is moderate due to a rising debt, which has recently surpassed cash flow levels. Currently trading at 22.1 times its trailing earnings, the stock carries a 7% discount to the industry average. Manning & Napier Advisors Inc. the largest guru holding a position in the company has recently increased his share, and I share his optimism. Beside the small discount, important changes in the oil and gas industry offer great growth opportunities. Also, major industry giants like BP, Petrobras, Statoil and Chevron have already place their orders for new equipment.

Passed the Entry Point

FMC Technologies builds subsea and surface trees that control and regulate the flow of oil and gas from a well. In consequence, the firm is expected to benefit from changing preferences in the oil and gas industry. A wide product portfolio, specialty service capabilities, proprietary technological knowledge and strong backlog position coupled with growing international operations and offshore production also characterized this company. Hence, the most important difference with Cameron International is its valuation.

Through the past few years, FMC Technologies have seen its deepwater segment lag behind due to a lack of demand. Its luck changed through 2012 when the firm won several important contracts and since then, the firm started to increase human capital in order to meet future compromises. Acquisitions have also been completed, strengthening its robotics capabilities, control and automation technologies. The last acquisition expanded capabilities in the fracturing flowback market. Last, a partnership has been initiated to improve pumping speed, power and efficiency.

Another similarity with Cameron International is its customers. In FMC International´s order backlog one can find Royal Dutch Shell, Petrobras, Statoil and Total. Although some differences exist the model works the same way. Producers sign a five-year contract with the equipment firm for the development of new technology. Such contracts give equipment developers an important degree of forward security. At the same time, it provides the advantage of installing leading equipment that if successful can become standard for the industry as a whole.

Financially, FMC Technologies is not in tis hey-day, because debt has notably risen with acquisitions. Currently trading at 32.3 its trailing earnings, the stock is packing a 35% premium to the industry average. Hence, it is not surprising that gurus have stood by since June 2013. I understand the entry point has passed, and prefer to stand by amid my optimism about the company´s prospects.

Valuation Makes a Difference

I feel optimistic about both stocks, but prefer Cameron International to FMC Technologies. Valuation makes an important difference in this case because the companies are very similar. Both companies are hard to set apart when looking at their portfolios and services, and the opportunities offered by changing trends at the oil and gas industry. Additionally, debt level is another point of contrast where Cameron International offers a comparative advantage.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanin Aegea
A fundamental analyst at Lone Tree Analytics

Visit Vanin Aegea's Website


Rating: 4.0/5 (1 vote)

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