Shares in energy-focused engineering services and subsea robotics company Oceaneering International (OII -3.10%) fell nearly 10% in the week to Friday morning. The move came after investors took a dim view of the company's first-quarter earnings release.
It's not that there was anything wrong with the earnings report itself, but instead that it was not good enough to justify the optimism the market had built into the stock previously. Oceaneering generates roughly 75% of its earnings from the energy industry (subsea robotics, remotely controlled vehicles for offshore projects, robotic inspection of energy assets) with the rest coming from robotics and automation in aerospace and defense, entertainment systems (theme parks, airports), and industrial applications.
The stock's prospects receive a boost when the outlook improves for energy-related spending, particularly for offshore oil and gas spending. In this context, it's not hard to see why investors have crowded into the stock in 2022. With the price of oil rising to above $100 a barrel and oil market dislocations occurring due to the war in Ukraine, energy companies are under pressure to increase capital spending.
Indeed, oil services giant Halliburton recently upgraded its expectations for customer spending in North America in 2022.
In this environment, investors probably expected a bit more from Oceaneering than merely maintaining full-year earnings and free cash flow guidance. For reference, management continues to guide toward consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) of $225 million to $275 million and free cash flow (FCF) of $75 million to $125 million.
CEO Roderick Larson says that "market conditions continue to be supportive of a robust ramp-up in activity and pricing improvements beginning in the second quarter and continuing for the remainder of the year." However, it's not enough to lead management to increase its earnings guidance
While investors didn't get the guidance hike they were hoping for, it's worth noting that the midpoint of the guidance puts Oceaneering stock on a forward enterprise value (market cap plus net debt) to EBITDA multiple of 5.2 times and a price to FCF of 11.6 times. Those are very attractive multiples if you believe in the company's long-term growth prospects.