Oil and gas equipment and services provider Cameron International Corp. (CAM.DL) reported solid financial results for its third quarter on Oct. 23, but the company's stock price has continued to fall along with oil prices:
The thing is, as an equipment supplier that operates in essentially every oil-producing region in the world, oil prices are only one thing that can affect Cameron's business. With that in mind, here are the four things that -- as taken from the conference call with management following the earnings release -- Cameron's management probably wants you know about.
Diverse exposure a strength against falling oil prices
Millions of words have been written -- here on The Motley Fool and other places -- discussing the implications of falling oil prices on energy companies, consumers, and economies. However, when it comes to a global equipment supplier like Cameron, oil prices are less important than demand. CEO Jack Moore, from the call:
Big picture for Cameron, we expect our operator spending may be challenged given the recent correction in oil prices. ... We have a healthy backlog that positions us well going into 2015. ... We have focused the enterprise on our core oil and gas markets, and the diversity of our platform that touches our customers -- both onshore and offshore -- with a growing aftermarket services base, that is proven to perform well in all cycles.
Yes, oil prices are falling, but it's much more a product of oversupply than falling demand. A weak European economy and slowing growth in Asia are concerns, but the immediate issue is the growth of production in North America, and the fact that someone is going to have to give up market share for oil prices to rebound. In the interim, Cameron's customers are on both sides of the battle, though much of its growth in recent years is due to the expansion in the United States. While the short-term impact is uncertain, as long as global oil demand remains strong, Cameron will have demand for its products and services.
Offshore is likely to remain soft, but OneSubSea is strong
The offshore drilling market is likely to continue shaking out for another year or so. The majority of future work is almost guaranteed to be in deepwater and harsh conditions, but if demand remains stagnant and oil prices low, these are some of the first projects that will be affected by the cost of production. Cameron is directly exposed, as one of the primary suppliers of offshore drilling equipment to rig operators.
However, current offshore projects, and producing sites, will continue producing oil and gas. Cameron will continue supporting these customers, who will need to continue to maintain their equipment. Furthermore, OneSubSea -- Cameron's joint venture with Schlumberger Limited (SLB -2.14%) -- is active in both development of new fields and helping producers lower costs and increase production at existing fields. By locating production and processing equipment on the seafloor, OneSubSea can help producers make more money from assets already producing oil and gas today.
Backlog offers a measure of safety in the current oil market
Cameron management didn't beat around the bush: Even they aren't completely sure what the implications will be on demand from both offshore and North American onshore customers in the short term. These two markets remain the most exposed to contraction if oil prices remain low or fall even further, and many in the industry expect this will be the case, at least into the first quarter of 2015. Any way you slice it, a slower pace of development for Cameron is a risk.
However, the company's current backlog, as management highlighted on the call, is at $10.6 billion, with $3.7 billion of that aftermarket sales tied to current production, and not development of new production. While this isn't a promise that sales won't be affected -- they probably will be to some extent -- it's a reminder that Cameron's business is about supporting existing production as well as selling equipment for new production.
Margin improvement happening and expected to continue
Scott Rowe, a 12-year veteran of the company, was recently named president and chief operating officer, and his job will be largely about driving costs down and efficiencies up. EBITDA margins increased 140 basis points in the quarter, and management wants to continue pushing margins higher. While some of this goal will be the result of cutting costs -- SG&A expense fell 2% in the quarter even as revenues grew 16% -- much of the focus will be on efficiency gains and focus on the core businesses.
With this in mind, the company sold its Centrifugal Compression business, and the deal will close in the fourth quarter. Diversity in business is good, but Cameron's management is inclined to put more emphasis on its core onshore, offshore, and subsea businesses, and this approach is likely to aid in margin improvement over time.
Looking ahead
There's a pretty good chance that North American producers will slow their rate of new development in the short term, especially if oil prices continue to fall. The economics can vary from one producer to another and from one geography to another, so there's not really a "red line" price for oil producers in general. The story is much the same in offshore.
However, Cameron is exposed to many geographies, and demand looks to remain stable. These things bode well for Cameron's long-term outlook. Does that make it a market-beating investment going forward? Frankly, it's too early to tell, but Cameron's management is focused on the long term. And that's good.
