You’ve probably never heard of Oceaneering International (OII), but it’s on its way to becoming a household name – at least in the world of deep-sea drilling.
Since 2003, the stock has soared from $5 a share to its current price of about $62. Indeed, Oceaneering has marched steadily higher over the past decade – regardless of what oil prices have done in that time.
The sole exception to that remarkable trend was the 2008 financial crisis and market crash. And since then, OII has doubled in value – dwarfing the returns of much larger competitors like Halliburton (HAL) and Schlumberger (SLB). Heck, Halliburton is up only 12% since 2008, while Schlumberger has actually lost 10% of its market value.
So where did Oceaneering come from and what does it do?
Well, it’s based out of Houston, and it provides products and services to deepwater drillers. And the key to the company’s success has been its fleet of remotely operated vehicles (ROVs). Controlled by human operators onboard a floating rig, ROVs use sonar and video to relay data back up to the crew. Many ROVs are also equipped with arms or even saws to perform inspections and repairs.
With a world-leading fleet that now numbers 289 vehicles, Oceaneering is the dominant player in the ROV segment. With respect to ROVs used to support drilling, the company has an estimated market share of 56% – more than twice that of the second-largest supplier.
Oceaneering’s ROV operating income rose for the ninth consecutive year in 2012, due to higher demand off the coast of Africa and in the Gulf of Mexico. And that trend is poised to continue as more and more deepwater drilling rigs come into the fold.
Indeed, drilling demand remains robust with oil prices in excess of $90 a barrel. And deepwater drilling is far more profitable than other unconventional sources, like shale. That is, deepwater drilling becomes profitable at prices of $65 a barrel, compared to $80 or even $90 a barrel for shale.
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For that reason, at least 90 deepwater drilling rigs are expected to become operational over the next few years. And ROVs will be a fixture on every new rig entering service.
And that’s not all.
In addition to ROVs, there’s also growing demand for Oceaneering’s Subsea Products unit, which constructs built-to-order specialty hardware. That includes underwater umbilicals, which use thermoplastic hoses, steel tubes and other tools for underwater inspection, repair and maintenance activities.
In fact, three large umbilical contracts signed last year added nearly $245 million to Oceaneering’s Subsea Products backlog. In total, that backlog reached $681 million in 2012, up 78% from $382 million at the end of 2011.
This segment should continue to see growth, as well, since new regulations stemming from the Deepwater Horizon oil spill will force drillers to maintain a higher standard of safety.
All in all, Oceaneering has been able to grow its earnings at an annual rate of 20% over the past decade – a rate the company expects to maintain for at least the next three years.
So it comes as no surprise that 2012 was a record earnings year for Oceaneering, which saw earnings per share surge 23% to $2.66. Better still, the company expects 2013 to be even better, having reaffirmed its guidance range of $3 to $3.25 per share.
Given its consistency and the rapid pace of growth, Oceaneering is more than likely to reach levels of $75 a share by the end of the year. That would be a 21% increase from its current levels – and that’s just in the short term.
With demand for its products and services steadily increasing, and its reputation among investors growing, Oceaneering is poised for even bigger gains down the road.
And “the chase” continues,