Among the several consequences resulting from the Deepwater Horizon, first, one finds a slowdown of offshore exploration. Changing regulation and tighter government regulation comes in second place, a tendency that found greater support after the Keystone and Kalamazoo River spills in the US. Third, public activism concentrated on blocking expansion projects, while demanding great compensatory sums. Fourth, and the most important consequence, new depths and unconventional wells demand technological improvements. Last, equipment developers for the oil & gas industry found themselves with an opportunity to place their latest inventions. And once activities in the industry ebbed, companies like FMC Technologies (FTI) were able to find a market demand for the latest product introduction.
Absorbing market synergies
During April, six financial institutions have reported on FMC Technologies, and all boosted their target price above the $60 mark. Three of them, Howard Weil, FBR Capital Markets and Cowen & Co. rated the stock “Outperform,” while Zacks has been the only one sustaining its previous “Hold” rating. However, rating reiteration did not stop the institution from boosting target price as well. The consensus over target price makes evident the uptrend seen in the market, where stock face value has been on the rise since February.
For fiscal year 2013, FMC Technologies reported solid financial performance reaching record revenues and inbound orders, reaching the twelfth consecutive year of earnings growth. Compared year-over-year the gains are not miniscule, with a 16% increment in revenue, a $0.32 rise in diluted earnings per share, and a 30% growth of backlog. Overall performance expansion has been recorded for all segments, with the greatest improvements in the subsea technologies segment.
Recent news continues to indicate further growth for FMC Technologies. During the first quarter of 2014, "As a result of strong orders in the quarter, Subsea Technologies achieved record backlog," said John Gremp, Chairman, President and CEO of FMC Technologies. Declarations are backed by an order from BP (BP) to supply subsea systems with estimated value of $322 million in revenue. Another contract to supply subsea trees, manifolds, jumpers and connection systems, umbilicals, tooling and associated topside and subsea controls systems to eni's Jangkrik Project in Indonesia are underway.
Small effort for great gains
Trading at 27.5 times its trailing earnings, FMC Technologies carries a 4% premium to the industry average. Barely overpriced, the stock offers an above average return on invested capital and equity. With an impressive revenue growth throughout the last three years, debt reduction measures continue to improve debt-to-cash and free cash volume. Operating margin has also shown strong signs of recovery, and reverted last year’s decline as it closes in to 2011’s mark. All of this has given Frank Sands (Trades, Portfolio) sufficient reason to continue increasing his long-term position.
Looking forward, FMC Technologies announced the divestiture of its material handling products business to Syntron Material Handling LLC. The operation is expected to be completed during the second quarter of 2014, in order to concentrate in the engineering, procurement, and construction systems part of the business. The decision will allow the company to remain the dominant player in the subsea equipment market, where historically achieved 40% market share of global subsea tree orders.
Additional upsides to FMC Technologies are found a diversified product portfolio, specialty service capabilities and proprietary technological expertise. Moreover, long-term contracts have been signed with industry giants like Royal Dutch Shell (RDS.A), Petroleo Brasileiro (PBR), StatoilHydro (STO) and Total (TOT). Contracts with major oil producers now stand at roughly $7 billion and have secured an important international presences to the firm. Most importantly, the Gulf of Mexico oil spill continues to benefit the company as requirements for better offshore safety equipment and stricter regulations on drilling have translated into enhanced opportunities for subsea equipment suppliers. All this secures rewards for prospect long-term investments.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.