Falling oil prices didn't impact oil and gas equipment and services provider Cameron International Corporation (CAM.DL) last quarter, or so it appears based on the just-released fourth-quarter earnings report.
While revenue missed very slightly, earnings per share from continuing operations (meaning adjusted for one-time item) beat the analyst projection by 11%. Cash from operations climbed almost 50% in the quarter, and the $1.2 billion operational cash flow for the full year was a record level. Even with the strong cash-generating results, the stock is still well off its high in September 2014:
Let's take a closer look at the earnings numbers. Cameron management continues to do a solid job, but 2015 looks uncertain right now.
Operational improvements
Cameron International has made some big changes in its business, including selling off its compression business to General Electric and Ingersoll-Rand in 2014, after the game-changing formation of OneSubsea in 2013 with Schlumberger.
While recasting its business into new operating segments had a small negative impact on costs last quarter, management expects this leaner and more refined operation will lead to reduced operational expenses going forward. That's a positive, especially as the oil industry deals with a serious oversupply problem.
Uncertainty heading into 2015
Cameron's business is based on supplying equipment to oil and gas producers, both on- and offshore, and too much drilling activity is happening right now -- which is not ideal in a low oil price environment. While plenty of people are pointing fingers at OPEC, the situation is largely due to U.S. oil production growth over the past few years -- American oil production growth since 2011 is the equivalent of Iraq, Kuwait, or Mexico's entire annual production.
Cameron International benefited significantly from that growth, which sent the stock up more than 130% from mid-2010 through mid-2014:
However, capital expenditures for new production are expected to fall significantly in 2015. While Cameron has a solid backlog, the backlog is already declining. As CEO Jack Moore stated in the company's earnings release:
Our backlog provides us with good visibility into a portion of Cameron's 2015 business. However, the surprising speed of the cyclical downturn has created significant uncertainty regarding the anticipated spending levels of our customers, especially in relation to our shorter-cycle businesses, which account for a meaningful portion of our revenues and operating profit.
The key here is that only a portion of the company's business shows up in its backlog, and a meaningful portion comes from shorter-cycle business such as replacement parts for the equipment that Cameron makes and sells.
Looking ahead
In the long term, Cameron is probably in a pretty good position, but questions regarding oil and gas production growth in the short-term creates significant uncertainty. While this uncertainty plays out, Cameron's management is focusing on costs and efficiency, while also spending excess cash to repurchase shares while they are beaten down. Since 2010, the company has bought up more than 16% of its shares.
I like the company and what management is doing, but it's probably a good idea to see how the production story plays out over the next quarter before investing in Cameron. The headwinds in the short term cloud the long-term outlook, so even with the stock well off the 2014 high, the time might not be right yet for picking up this stock.
