Oceaneering Sinks on Stellar Quarter

On the surface, it looked like the same old song and dance for OceaneeringInternational (NYSE: OII  ) . For several quarters in a row, the advanced engineering services company has announced record results, posted huge earnings gains, and revised its forward guidance higher. The song of positive news would send shares dancing higher and higher -- to the tune of a 100% gain in the past year. This quarter, the song sounds the same, but shares are looking like they may have danced their final number.

The song
Earnings increased by 100% over the second quarter of 2005, driven by a 32% increase in revenue and increased margins. For the year, the company increased their projected earnings to a range of $2 to $2.10 per share, from a previous range of $1.80 to $1.95 -- a 9% increase of the midrange value.

ROV (Remotely Operated Vehicles), Subsea Projects, and Subsea Products continue to be the key business segments for Oceaneering. The company ROV fleet appears to be firing on all cylinders. There are more vehicles in service, utilization increased to 85% from 81% a year ago, and average revenue per day on hire (price) increased by 16% over the same quarter a year ago.

Subsea Project activity strength continued due to ongoing hurricane repair damage. Hurricanes Katrina and Rita destroyed 115 offshore platforms, compared to seven platforms destroyed by Ivan in 2004. Even now, close to 12% of oil production and 9% of natural gas production remain offline, with tangled webs of wrecked rigging restricting access to the well heads. Activity here should remain strong through 2008, as several large reconstruction projects are only now becoming active.

Even with problems at its Panama City manufacturing facility, Subsea Products delivered 67% revenue growth. During the conference call, management provided a conservative production estimate for the second half of the year, as it appears it will take longer than expected to bring the plant into full production. This will be an important issue to watch in coming quarters. Subsea Products is a key growth segment, with a current order backlog 219% greater than a year ago.

The dance
What is the normal market response when a company delivers stellar results and increases guidance? In the case of Oceaneering, a 5% drop in share price. The problem with high growth and the associated high expectations is that shares become overpriced. Even an excellent quarter becomes a reason to sell.

Looking forward a couple of quarters, the problem becomes clear.

Quarter

EPS 2006

EPS 2005

EPS Growth

2nd Quarter

$0.56

$0.28

100%

3rd Quarter*

$0.57

$0.33

73%

4th Quarter*

$0.47

$0.37

27%

*EPS estimates for 2006 are the mid-range of guidance given by Oceaneering management during conference call.

In other words, based on management's own estimates, the high-growth phase appears to be ending. Using analyst estimates for 2007, we can expect a more earthly growth rate of 20%.

Time to say goodnight?
I think it's crucial to understand why earnings growth will slow in the coming quarters. If the oil boom is over, I think we can say good night to Oceaneering, along with the other folks providing services to the offshore drilling sector, like Helix Energy Solutions (NYSE: HLX  ) and Global Industries (Nasdaq: GLBL  ) . For Oceaneering, the growth drivers appear to be in place for at least a few more years: hurricane repair work will continue at least through 2008, the Panama City manufacturing facility will continue to increase production and earnings, and the ROV fleet is increasing pricing and utilization.

Therefore, the real reason for the "slowdown" is that the comparable numbers going forward are higher than they were a year ago. So, while the glory days of disco may have ended for Oceaneering, I seriously doubt they will fall flat.

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Fool contributor Robert Aronen owns shares of Oceaneering International. The Fool has an ironclad disclosure policy.


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