Offshore drilling has been a hot topic for some time now. As the discovery of newer onshore resources dwindles, oil exploration and production companies are turning to more challenging regions in search of black gold.
These companies are shifting their focus to regions that weren't being widely considered until a just few years back. But offshore drilling has since become more competitive, with drillers venturing into deeper waters and ultra-deep shelves and achieving outstanding results. Looking ahead, the prospects of ultra-deepwater drilling look promising, as potentially recoverable oil is on the order of billions of barrels.
A sector that hasn't attracted attention
While most of us are aware of drilling contractors and production companies such as SeaDrill (NYSE: SDRL ) and Petrobras (NYSE: PBR ) , the engineering, construction, procurement and installation (ECPI) segment, too, happens to be a vital cog in the wheel. Deepwater drilling is made possible by companies that design, construct, and install the complex equipment used for the purpose, and investors should take a look at these companies as well. McDermott International (NYSE: MDR ) is one that holds a lot of promise.
McDermott provides offshore drilling solutions from start to finish, including sophisticated production facilities -- both fixed and floating -- along with other subsea systems. With drillers and E&P companies ready to go to the ends of the earth to dig out oil, production infrastructure systems won't go out of style anytime soon. To the contrary, with the technological advancements taking place, demand for these systems will only shoot up. The numbers bear it out.
The next 10 years hold the key
Total backlog for McDermott at the end of the first quarter stood at $5.8 billion, a solid 50% jump from $3.9 billion at the end of 2011. The Asia-Pacific segment looks especially lucrative, where backlog doubled to $3.7 billion in the same period. That's no surprise given the focus on offshore drilling in Australia, Indonesia, Vietnam, Malaysia, and Thailand. Independent research data indicates that EPCI capital expenditures are forecasted to be around $450 billion between 2011 and 2016.
From a financial standpoint, margins did shrink over the past five years. But I think that has more to do with restructuring and the overall increase in costs in the industry. After all, these technologically complex systems don't come cheap. I'm betting on prolonged demand for these facilities. Projects in India and the Asia-Pacific region are picking up, and so are backlog orders. McDermott's cash position looks attractive as well. Unlevered free cash flow turned positive after the first quarter, to the tune of $241 million for the trailing-12-month period. Again, this is not a surprise to me.
Foolish bottom line
In the past 12 months, the market has beaten down this stock by 42% as the company divested unwanted assets. Now if you go through its financial statements and operations, a promising picture emerges. McDermott has been turning around since the turn of the year, and investors should keep an eye on it. To help you stay up to speed on the top news and analysis on McDermott International, add the company to your free personalized Watchlist. And if you're looking for more ideas, The Motley Fool has created a new special oil report titled "3 Stocks for $100 Oil," which you can download today, absolutely free.