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This Company Rises With Deeper Drilling

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Many investors with a yen for the oil-field services contingent have a soft spot in their hearts for National Oilwell Varco (NYSE: NOV  ) . That's as it should be: The company is perched in a sweet spot that likely will permit it to benefit for about as far as the eye can see from the drilling and development of wells in the world's growing number of offshore oil and gas venues.

For precisely the same reason, however, I'm inclined to present Oceaneering International   (NYSE: OII  ) with my own Rodney-Dangerfield-of-energy-services award. The Houston-based company, which I've watched for longer than I care to admit to, is the unquestioned leader in the provision of subsea products and services -- including its stable of remotely operated vehicles (ROVs). Quite simply, the more the global search for hydrocarbons slips from land to the offshore, the bigger Oceaneering's role and backlog become.

Ten-for-11's even terrific from the free-throw line
To quantify that notion somewhat, it's worth noting that, at the end of the past quarter, there were 95 new floating rigs on order across the industry, 62 of which will head for venues other than Brazil. As Oceaneering CEO Kevin McEvoy noted on his company's most recent post-release conference call, of those 62 rigs, ROV contracts have already been attached to 11, with all but one of the pacts going to his company.

By now I note a quizzical look in your eyes implying a query like: "But what does Oceaneering actually do, David Lee?" For starters, its subsea projects unit operates largely in the Gulf of Mexico, performing a variety of crucial installation, inspection, repair-and-maintenance, and plug-and-abandonment work. Subsea products provides a host of sophisticated equipment worldwide that's vital to offshore drilling and production operations.

Unmatched offerings
For instance the company is the only manufacturer of the full range of crucial -- and costly -- subsea umbilical systems, along with workover and control systems, blowout preventer control systems, and built-to-order subsea hardware. It's asset integrity unit is the industry leader in the provision of operationally and environmentally indispensable inspection and integrity services.

But the figurative cat's pajamas of the company's offerings lies in its range of ROVs. The 285-unit fleet makes the biggest contribution to the company's biggest top line, along with checking in with its heftiest segment margins.

Lest you assume that ROVs are little more than skinny robots capable of keeping their wits about them under 10,000 feet of ocean and amid 5,000 psi of pressure, the units weigh about 8,800 pounds and constitute the key part of a 150,000-pound package. And just as an Oceaneering ROVs played a key role in monitoring and halting BP's (NYSE: BP  ) 4.9 million barrel 2010 Gulf gusher, as drilling moves into deeper waters, ROVs have become indispensable to the process.

A customer's commentary
In fact, on its own website, deepwater driller Diamond Offshore (NYSE: DO  ) includes an article from its company magazine, the Rigamarole -- which, in the interest of full disclosure, I must admit to having initiated some years ago -- an informative piece about the indispensable role Oceaneering ROVs play in deepwater drilling operations. The article describes how the ROV's begin to make themselves useful providing video and sonar to reconnoiter the surrounding sea floor before the drill bit even arrives to begin turning to the right.

Included in the description is a look at the role played by the three-person ROV crew whose members sit perched in an 8-foot by 20-foot computerized control van that sits atop the drilling rig's deck. Without them and their big robot, deepwater operations would shrink to a figment of someone's imagination. Charles Royce, an Oceaneering vice president puts it in perspective: "If you lose the ROV, you can't see, you can't work, and you can't drill."

Oceaneering isn't without competition. For instance, there's London-based Subsea 7 SA (UNKNOWN: SUBC.DL  ) , which performs a range of functions close to those of the Houston company and operates slightly more than half as many ROVs. And then there's Paris-headquartered Technip (NASDAQOTH: TKPPY  ) , which sounds a bit like a treat for the above-mentioned kitty, once it proves itself computer competent. In any event, Technip conducts onshore operations as well and doesn't include ROVs in its repertoire.

Turning to the metrics
As to the financials tied to this range of operations, in its most recently reported quarter, Oceaneering earned $84.4 million, or $0.78 a share, versus the prior year's $78.6 million or $0.72 in third-quarter earnings a year ago. But, it's important to note that the 2011 numbers were boosted by $16.8 million of positive after-tax items.

Looking ahead, the consensus estimate for the just-closed fourth quarter amounts to a third-again higher per-share figure than that of a year ago. The estimate for the just-begun 2013 year for Oceaneering involves a nearly 50% hike in per-share income, versus the 2012 consensus.

McEvoy's optimism regarding fiscal 2013 and subsequent years was palpable on his call:

Looking forward to 2013 and beyond, we remain convinced that our strategy to focus on providing services and products to facilitate deepwater exploration and production remains sound. We believe the oil and gas industry will continue to invest in deepwater, as it remains one of the best frontiers for adding large hydrocarbon reserves with high production flow rates at relatively low finding and development costs.

The Foolish takeaway
Given all this, I'm putting Oceaneering right up there with National Oilwell Varco among the most compelling members of the oil-field services group.

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David Smith

A longtime securities analyst and multiple-term member of The Wall Street Journal's All-Star Research team, Dave specializes in energy and natural resources.

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