Oceans of Money

Hurricane Katrina devastated the Gulf of Mexico's oil and gas infrastructure, requiring unprecedented repair work. Deepwater drilling creates one of the most promising areas for increased oil production. These two factors drove record first-quarter results at the advanced subsea contractor and engineering company, Oceaneering International (NYSE: OII  ) .

Results
Oceaneering International's first-quarter earnings surged to $0.93 per share, a 140% increase over the first quarter of 2005 and $0.21 above analyst estimates. Breaking the revenue down by segment, the growth segments become evident.

Segment

% of Total Revenue

Q1 2006 vs. Q1 2005

Remotely Operated Vehicles (ROV)

31%

31%

Subsea Products

29%

108%

Subsea Projects

14%

68%

Mobile Offshore Production (MOPS)

4.6%

18%

Inspection

11%

(9%)

Advanced Technology

9.7%

(5%)

The top three segments, which account for 74% of revenue, generated $82 million in revenue growth. The other three segments were basically flat, generating $3 million less revenue than in 2005. While MOPS, Inspection, and Advanced Technology are part of the total service, for now we will focus on the growth drivers of the business.

Growth segments
The ROV segment uses unmanned vehicles to complete subsea construction and repairs. As offshore development moves into deeper water, additional engineering expertise is needed, providing an advantage for Oceaneering. Revenue is driven by dayrates -- the industry term for a daily rental contract price. Heavy demand is driving dayrates upward, leading to higher profits. Furthermore, ROV utilization increased from 77% in 2005 to a current level of 85%, with management indicating during the conference call that utilization could rise to 90% by the end of the year. More vehicles in service + higher rates = huge profits.

The Subsea Products segment manufactures offshore connection systems for subsea production systems. As oil production moves into deeper water, these piping and cabling systems become highly engineered units, resulting in higher prices and likely higher-margin business.

The Subsea Projects segment brings together the engineering capabilities, products, software, and hardware that Oceaneering has through the six operating segments, to perform offshore repairs, develop oil fields, and build offshore production facilities. Project revenue is driven by a combination of dayrates for the equipment used, along with either daily or hourly contract rates on the personnel involved. Again, pricing is on the rise.

Competition
Oceaneering does face competition in their various markets; however, it is difficult to make a direct comparison. Global Industries (Nasdaq: GLBL  ) and Helix Energy Solutions (Nasdaq: HELX  ) are involved in a wide variety of offshore construction work, but only overlap with Oceaneering in certain segments. Global Industries primarily uses surface vessels and diving services for offshore construction. Helix Energy Solutions (formerly Cal Dive) applies surface vessels, ROV, and barges in their services division, which is combined with an oil and gas production business.

Final thoughts
With their combination of services focusing on the highly engineered segment of the offshore construction and repair business, Oceaneering has positioned their company for solid growth. Repair work will continue, since 25% of the Gulf of Mexico oil and gas production remains offline thanks to last year's hurricanes, and the 2006 season is starting shortly. Even without hurricanes, deepwater drilling dives directly into the expertise of Oceaneering International, and will remain the core growth driver going forward.

Because of the improvement in their business, management increased the 2006 earnings estimate by 25%, to a new range of $3.60 to $3.90 per share. During the conference call, management also said they expect additional earnings growth in 2007, but provided no estimate. Therefore, even though shares have doubled in the past year, I will continue to hold (and consider adding to my position if I see any volatility in the oil patch).

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Robert Aronen owns shares of Oceaneering International.


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