When Schlumberger (SLB -1.17%) and Cameron International (CAM.DL) formed the OneSubsea venture last November, investors in FMC Technologies (FTI 0.24%) must have felt their guts tighten just a bit. After all, Schlumberger and Cameron are international heavyweights in their respective markets, Schlumberger being a global provider of oil and gas services, with a unique advantage in reservoir description and subsea processing, and Cameron operating as a leader in subsea equipment design and manufacturing. With its recent earnings release, FMC Tech's management offered a dose or two of virtual antacids to investors to ease their indigestion.
One of the first lines that investors' eyes dart to, typically because companies highlight it if it's bearing good news, is the profit line. A 23% jump here in the company's fourth quarter must have pleased shareholders and prodded them to dive deeper. Thankfully, for investors, as you begin to reach the depths of margins and specific segment results, the water remains warm and inviting.
About those antacids ...
What should you be excited about, besides the bottom line? Well, aside from a higher interest expense because of debt issued for its acquisition of Pure Energy Services in October and a North American land market that has plagued the entire services industry, quite a bit. For starters, the company's largest division, and that with which OneSubsea is in direct competition, Subsea Technologies, grew revenues by 28% over the same quarter in 2011. Looking for a one-two punch in this segment? EBIT margins leapt more than 69% in the quarter, leading to a 117% increase in overall operating profit for this segment. Even factoring in all of this growth, there is still a sizable runway for the next few years because of Subsea Tech's $4.6 billion backlog.
One of the key takeaways from early on in the conference call was that the company increased its market share of the Subsea tree market to 40% in 2012. After the Macondo spill, equipment performance and safety were placed at the top of the value chain, especially in the North American market. This emphasis should allow FMC Tech to cement these share gains as long as its equipment lives up to its current, respected billing.
An anchor in the Western Hemisphere holding FMC Tech back
What once was a productive well of business for equipment and service providers to oil and gas companies seemingly dried up in 2012. That well is the North American land market, which bestowed profits on myriad energy companies over the past several years. Unfortunately, because of the reduced price of natural gas, many exploration and production companies have cut back on their drilling activities for the time being. This has created pricing pressures and limited sources for revenue.
Baker Hughes (BHI) regularly publishes its rig count, and the North American market has seen its fair share of declines. If you look at the latest report from Feb. 8, the United States land market is currently operating with 244 fewer rigs in operation than at that time in 2011. This disparity has led to lower North American revenues for all parties involved.
Despite all of this, FMC Technologies acquired Pure Energy Services, in an apparent contrarian move. You see, Pure Energy's business is solely focused on the North American land market, and with so many signs pointing to an eventual recovery here, this move looks to be a promising one. Through the first six months of a troubling 2012 for the North American market, Pure earned C$7.9 million, which was nearly double that of 1H 2011.
As I mentioned, net interest expense did bump up because of its October acquisition, from $2.2 million in the fourth quarter of 2011 to $10.7 million in the most recent quarter. Fret not, though, because the investment appears to be well worth it thus far. According to Bob Potter, FMC Technologies' president, synergies are already being established in multiple areas of operation. He is also hopeful that it will be able to leverage Pure's strengths in markets outside its wheelhouse, which just so happens to include the prolific Bakken formation.
Foolish thoughts on the Future
What this report shows is that the strengths Fool co-founder David Gardner saw in the stock when he recommended it are continuing to grow. The Pure Energy Services acquisition further supplements an already strong business model, especially given the geographies in which Pure has built its core competencies. Technology and experience developed in the Bakken and the Canadian geographies are likely to be leveraged in both moving forward, along with other similar plays that have yet to be tapped. Couple this with FMC Technologies' bread-and-butter Subsea Technology segment, and a global energy equipment and services powerhouse could emerge over the next few years. Keep an eye on this growth story before it's too late.
