Is Cameron International's Sell-Off Overdone?

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You could be mistaken in thinking that Cameron International (UNKNOWN: CAM.DL  )  put out a profit warning when it reported its third quarter results at the end of October. At one point after the release, the company's shares were down nearly 20%, but despite this decline I have failed to find anything worth worrying about within the company's report.

True, Cameron reported a lower income than was expected by analysts and a 15% year-on-year decline in net income. However, the rest of the report showed phenomenal strength.

Indeed, quarterly revenues hit a record of $2.5 billion, up 13% year over year, led by double-digit gains in the company's drilling and production systems segments. What's more, the value of orders for equipment expanded 32% year over year, hitting a record of $3 billion for the quarter. This took the company's total order backlog to $11.2 billion, up from $8.6 billion at the beginning of the year and $7.6 billion from the same period last year.

A backlog of $11.2 billion locks in around four-and-a-half quarters of revenue at current rates.

Not over yet
Cameron is not going to see a reduction in demand for its products and services anytime soon as capital spending within the oil and gas sector is set to rapidly expand during the next few years. Indeed, it is estimated that the number of rigs operating in the Gulf will nearly double from 35 now to 60 by the end of 2015. This is going to keep oil service companies busy as production facilities work flat out to keep up with demand.

All in all, global oil and gas capex is expected to grow 15.9% for full-year 2013, reaching a total of $1,201 billion globally for the full year. During 2012, capex totaled $1,036 billion. More than $1 trillion of capex spending is going to mean that all oil and gas service companies like Cameron, National Oilwell Varco (NYSE: NOV  ) , and Baker Hughes (NYSE: BHI  ) are likely to see a tidal wave of orders for the next few years.

A special set of skills
Of course, each company is a specialist in its own field. Cameron for example, is a leading provider of flow equipment products, working with drilling contractors, oil and gas producers, pipeline operators, refiners, and other process owners to control, direct, adjust, process, measure, and compress pressures and flows. National Oilwell Varco is a provider of major mechanical components as well as servicing and drilling equipment. The company also operates somewhat of an oil and gas services supermarket through its distribution network. Meanwhile, Baker Hughes provides a range of services, from drilling to maintenance and production supervision.

With each company offering a unique take on its own section of the market, there is plenty of room for the trio to expand without stepping on each other's toes.

But Cameron is special
As I have said, each oil services company is specialist within its own field, and each company is set for rapid growth over the next few years as oil and gas industry capex explodes. So why should you choose Cameron?

Well, the company is doing something that the majority of its peers are not, creating shareholder value through stock repurchases, supported by its free cash flow.

So far this year, Cameron has returned $558 million to shareholders by buying back stock. Additionally, at its October meeting, Cameron's management approved another $1 billion for share repurchases.

Leveraging its free cash flow in this way provides a great return for Cameron's shareholders, as right now, with the global explosion in oil and gas exploration and production activity, it is likely that any acquisitions Cameron undertook would be overpriced. Furthermore, Cameron only has $2 billion in debt, around 15% of assets, so the company has plenty of head room for borrowing. A $1 billion stock repurchase should let the company acquire 8% of its issued share capital.

Foolish summary
Cameron's fiscal third quarter results may have missed estimates, but they highlighted the true strength of the company. Cameron's order backlog stands at a record level, and the company's stock repurchases should boost earnings per share by 8% during the next two years.

What's more, the high level of capex spending within the oil and gas sector should catapult Cameron's earnings and revenue much higher in the future.

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