British Petroleum (BP) and Transocean (RIG) are the visible face of the Deepwater Horizon incident that occurred in April 2010, in the Gulf of Mexico. The first it because it was the operator of the platform at the moment of the explosion. The second company provided the platform used for the extraction of oil. However, oil and gas production involves the participation of many more businesses sharing responsibility for one single operation. More often than not, one oil and gas site will involve the participation of an exploration and production, a drilling, and equipment and services firm. And a good relationship between the three is a must for a successful production. That is what seems to have been absent at Deepwater Horizon, as BP and Transocean bore most responsibility, with both claiming Cameron International (CAM) escaped much of the public criticism.
Moderate Market Expectations
Societe Generale and SusquehannaThis April boosted the target price for Cameron International above $70 per share. The figure is $10 above the value pushed by other important financial institutions that have forwarded a “Neutral” rating, like Goldman Sachs and Zacks, during the previous month. Moreover, no institution has given the stock a “Buy” rating since the first week of January. Most recently, market performance entered a downtrend last Friday ending a month of growth.
Cameron International, in January, announced that it has entered into a definitive agreement under which it will sell its Reciprocating Compression business to GE (GE) for cash consideration of approximately $550 million. Jack Moore, Cameron chairman, president and chief executive officer stated, "Exploring strategic alternatives for the Centrifugal Compression business is part of our ongoing effort to optimize our asset base with a focus on our core markets.” The sale will streamline operations and is consistent with a strategy to build upon strong sales and order momentum in core markets.
A few days later, Cameron International announced the Board of Directors approved an increase in the company's share repurchase authorization by an additional $500 million. The news made clear that management is set on continuing a policy of share value creation. A policy backed by an increasing backlog, evidenced by Freeport-McMoRan Oil & Gas order of a 13-5/8" 25,000 psi blowout preventer. This product is the only one of its kind, was first introduced by the firm in 2011, and four units have been sold so far.
Favorable Context and Strong Backlog
Cameron International is currently trading at 22.3 times its trailing earnings, and carries a 5% discount to the industry average. The firm has also reported revenue and net income increases since 2009. And although cash flow has been overtaken by debt levels in 2011, it represents no trouble for the business level. Most important, free cash returned to positive and remained so for the second year in a row, aided by a stable operating margin.
The upside to Cameron International is the strong order flow and backlog of around $11.5 billion for subsea products and services. BP, Petroleo Brasileiro (PBR), StatoilHydro (STO) and Chevron (CVX) have all made orders. Another good characteristic is the geographical diversity of the orders: North America, Latin America, Asia/Pacific and Middle East. Most importantly, the Deepwater Horizon incident elicited a higher safety standard creating a favorable context for equipment developers and providers like Cameron International.
The strong moment of Cameron International is confirmed by the growing guru positions throughout 2013. Manning & Napier Advisors, Andreas Halvorsen (Trades, Portfolio), and Lee Ainslie (Trades, Portfolio) increased their positions by over 100% in that year. It is recommended to wait just a few more days before entering a long-term position, as the stock's face value is expected to drop a bit further.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.