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Cameron Analysis

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By TMFKitKat
September 9, 2009

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Cameron has three segments, including

  • Drilling and Production Systems (DPS)
  • Valves and Measurement (V&M)
  • Compression Systems (CS)


Drilling and Production Systems Segment

DPS production products are used to control pressures, direct flows of oil and gas wells and separate oil and gas from impurities. It has a presence onshore and offshore and can provide deep-water sub-sea and harsh climate trees, manifolds etc.

DPS supplies integrated drilling systems for land, offshore, platform and sub-sea applications worldwide.

Valves & Measurement Segment

V&M provides valves and measurement systems to control, direct and measure oil and gas as they are moved from individual wellheads through flow lines, gathering lines and transmission systems to refineries, petrochemical plants and industrial centers for processing.

Compression Systems Segment

CS provides centrifugal compression equipment and aftermarket parts and services.

Acquisitions

In 2008, the company acquired seven new businesses, including the Surface Safety Systems business that was previously part of the Baker Hughes International Oil Tools division, SBS Oilfield Equipment GmbH, Jiskoot Holdings, Limited, Dyna-Torque, Inc, Guiberson Well Service Systems, KB Industries and Paramount Pumps and Supplies, Inc.

[See Post for Table]

CAM creates value with a WACC of 10.8% and ROIC of 14.5%
I like the fact they can make acquisitions comfortably out of cash flow and still have room to create positive FCFE.

ROIC and ROE are relatively good

Debt to capital is 34.7%
Interest coverage is 11X

Debt structure is comfortable and most is due anywhere from 8 to 28 years out. The convertibles offer a very low rate. I tend to like some convertibles in the mix in spite of potential dilution.

[See Post for Table]

backlog


Overall backlog sits at just over 5 billion at the end of Q2. the outlook for orders is cautious and may be several Qs before key deep-water projects unlock.

They expect to see some large orders booked in the second half of '09

Unless the rig count in North America takes another downward step, guidance should hold at 42.15-$2.25 and approximately 60% of the backlog will ship in 12 months

They did not have many cancellations during the quarter -- only 19 million.

Revenues for the quarter finished at 1,270 billion which is down 14% versus our Q2 of '08; however EBITDA was down only 4% versus last year, again a great achievement by everyone on our team given the current market conditions that we are in.

Q2

We can expect some pressure on margins as price concessions yielded over the past three quarters will be reflected in future revenue streams. It has been clear that as rig counts drop and projects get pushed out the competition for business was going to take a bite out of the pricing power oil services had in 2007-2008.

Cameron has been reducing costs faster than the pricing pressure in the market. The margins have held but will come under pressure in the back half of 2009

Revenues for the quarter finished at 1,270 billion -- down 14% versus our Q2 of '08; however EBITDA was down only 4% versus last year.

DPS reported revenues of 872 million in the quarter, which is down 8% versus Q2 of '08 but is up 8% sequentially. Sequential revenue gains were realized in Subsea and Drilling Systems Business units and there was slightly lower revenues in our surface systems.

DPS posted 22% EBITDA margins led by Subsea and Drilling Systems business units.

Valves and Measurement revenues came in at 272 million which was 25% lower than Q2 of '08 and 12% lower sequentially. This drop in revenue reflects a substantial decline in activity in the short cycle businesses tied to North America.

Compression group had revenues of 136 million -- down 16% versus the prior year quarter, but flat sequentially. And again, as with DPS and D&M, compressions margins came in stronger than expected at 19.3% and this is 7% above last year's quarter and 17% better sequentially.

Cameron booked over 900 million in the second quarter; the majority of these bookings were in sub-sea and increased backlog. A total of 18 trees were booked. With the exception of the Nobel Tomar project in Israel for five trees all of these tree bookings were associated with ongoing projects.

Petrobras has frame agreement for trees and manifold awards will be big news and meaningful to those who win them. Only a few systems projects will be awarded before year-end. This sets up 2010 to potentially be a better prospect with respect to systems awards as none of these projects tracked have been canceled.
New orders for deep-water drilling stacks will be for the most part focused toward Brazil.

As far as short cycle businesses that depend on North America markets, business depends heavily on U.S. gas markets. Specifically, how much will supply contract and how fast can industrial and power generation demand recover? Cameron is not optimistic that they will see any meaningful correction until 2010.

Other business segments like pipeline valves and compression are beginning to see a trickle of orders indicating the bottom may have been reached.

Overall sub-sea remains the primary growth vehicle for companies that have both surface and sub-sea business. With gas storage at 18% above the 5-year average and big producers like CHK estimating they will increase production 8-9% in 2009 in spite of storage capacity, it looks unlikely that surface gas will recover this year. Oil has staged a better recovery and prices are stabilizing in a range where production is profitable including sub-sea. Brazil and Petrobas are of course the big story. The Brazilian government is looking to become a partner with Petrobras and legislate production guidelines. While this is bad news for major E&P looking for profits in the Brazilian offshore field, it may not be bad news for oil services. There will be a certain amount of job awards to local business but sub-sea companies like CAM and FMC should benefit. The government is expect to invest up to $50 billion in the PBR fields and some of that may find its way to CAM.They will be bidding for the job.

Guidance

CAM guidance for the year is now $2.15 to $2.25 per share, up from the previous guidance of $1.85 to $2 per share excluding any unusual items. The increase in guidance reflects the strength of second quarter, the ongoing cost-cutting retaining margins, more efficient completion of backlog, and the lower effective tax rate.

Pent up demand?

Oil services have advanced fast off the lows even in the face of delayed projects and slowing orders. But the sluggish pipeline for projects that are mainly being delayed and not canceled may create some pent up demand for product and services once the market for energy begins to go up. Oil prices have been holding their increases fairly well off the $30 lows. Natural gas is still a disaster at a bit over $2 and seven year lows. There may be a longer recovery for natgas business. CAM does both and though the compressor/valve/measurement may continue to be flat or declining, the big ticket items like sub-sea trees and manifolds my begin to help revenue growth [if CAM can compete for bids]

Jeff Tillery -- Tudor, Pickering & Holt

Jack, I wondered if you could talk just a little bit more about your commentary on the order front, little bit more optimism about sub-sea and valves in the second half of the year. On the sub-sea side, is that more one-off type awards kind of now get what you had most in the first half of the year or do you see any larger projects other than the Petrobras award shaking those?


Jack Moore

Well, I think we said from the very beginning in the year that we just felt our customers were going to sit on hold for a while, just because of oil price uncertainty, falling service costs, I think that a lot of our customers felt that the longer they wait, the better value they could extract out of the supply chain, and that would push us into the second half of the year to see some of these awards.

We saw just recently because on the sea, satellites, it looks as though Vetco has been awarded that. That was a large project and I think it's important to see some of these projects we get let whether you win them or not, because I think it underscores the conviction that we all have that our servicing this deep-water market into the long-term outlook that we're so positive about.

Second half, we felt that there is several projects out there, the Chevron Jacksey [ph] model project is still out there, up for grabs, that could happen this year. The Petrobras orders as I said, they are going to be meaningful and they're big. Now they are not systems orders but they are big numbers and they will make a big impact on the backlog of those who book them, so there is the club project for Total [ph] it looks like it's moved into 2010 now.

I mean there's a ton of projects that we track and all of them for the most part have moved to the right, even the Petrobras orders have moved to the right. I think they are taking a little longer to put in to the net than we all thought. But we're all still very optimistic at Cameron about the general direction of where the sub-sea markets going to take us.

Note* moved to the right means delayed

The big problem with a fast recovery is the cost cutting and layoffs the companies do to survive the downturn. Cost efficiencies are good and CAM has worked on those with a billion dollar investment in plants and infrastructure, but lay offs of key personnel with experience is a big problem and they have been "right" sizing. Bringing a big knowledgeable work force back on board to handle increased orders cannot happen overnight and the smaller companies suffer more. CAM is in the middle somewhere and may have some trouble filling a lot of orders well if they can't get the workers up to speed fast. I did not see any questions on this by analysts so have no direct info how far CAM has cut.

One final acquisition

Natco acquisition

From the Fool-a very good article [Toby Shute is definitely one of their best writers]:

In a bid to ramp up its oil-processing business, Cameron International(CAM Quote) announced a deal today to acquire NATCO Group(NTG Quote) in an all-stock transaction.

The deal, valued at $780 million, will give NATCO shareholders 24 million shares of Cameron common stock. That will give NATCO shareholders 10% of Cameron's outstanding shares.

As expected, NATCO volumes skyrocketed and shares were changing hands up 15%, or $4.70, after the announcement this morning. Cameron shares were trading in the red, down $1.70 to $30.75.

A release about the transaction, which will add 2,400 employees to the Cameron fold, said the deal is expected to close in the third quarter.
The release also noted that NATCO will help grow Houston-based Cameron's processing systems in emerging markets, including Southeast Asia, West Africa, the Middle East and Brazil. On top of increasing the number of processing products, the combination will also add a manufacturing capacity to Cameron's portfolio: something the company didn't have before.

"In combination with our Petreco Process Systems division, this will solidify Cameron's position as a leading supplier of separation and processing solutions worldwide," Cameron CEO Jack Moore said in the release. "In addition, NATCO's ongoing research and development activities relating to the emerging area of sub-sea processing will further advance Cameron's capabilities in this field."

Since Precision Drilling Trust (NYSE: PDS) landed its prey back in August, we haven't seen much in the way of energy services M&A. Cameron (NYSE: CAM) has finally ended the dry spell with an offer for separation specialist NATCO Group (NYSE: NTG). The all-stock deal, which has received NATCO's blessing, valued the firm at around $780 million at the time of the offer.

Looking back on our past coverage of NATCO, we've really had nothing but nice things to say about the Houston shop.

I personally took a shine to the firm in 2007, when I noticed the management eating its own cooking. The board instituted some stock ownership rules that I only wish suboptimally governed firms like Acergy would adopt.

By the fall of 2008, even though NATCO's bookings were still looking strong, the shares were absolutely crushed. I highlighted the firm as a potential takeover target for oilfield services sponge National Oilwell Varco (NYSE: NOV), but it turns out Cameron was keener on this hydrocarbon stream cleaner.

The pairing makes for a strong strategic fit. Cameron already works in the separation area, thanks to its acquisition of Petreco back in 2004. The firm mostly outsources its equipment needs, so picking up NATCO will help to fill in its supply chain, and ought to enhance project delivery and service quality for its separation customers. Further, control of this leading-edge membrane separation technology should help Cameron pull ahead of the pack and win some handsome contracts, such as the $87 million award NATCO scored from Malaysia's Petronas a few months back.


The price is 11X EBITDA and while not a fire sale it's not scary high. Generally like to see 8-10X so this is not bad
Natcos financial are good.

The company makes a profit and has positive free cash flow.
It has no debt

Operating margins are lower; may be some room for improvement. CAM lumps separation in with DPS so we don't know the actual margins on their separation business.

CAM margin

Natco margins

[See Post for Table]

A DCF gives a value of a bit over $59. The discount is 11% with a CAGR of 11% and terminal rate of 3%

A bit better deal than FMC but I believe the market thinks FMC has the inside track on the PBR deals.