The oilfield services market has benefited immensely from the rising demand for oil and the shale boom in the U.S. However, this was not quite reflected in the performance of Cameron International (CAM.DL) shares last year. The stock struggled as Cameron consistently missed earnings estimates despite generating record revenue. Cameron's bottom-line misses last year can be blamed on weaker margins. But, the company's recently released fourth-quarter results gave investors something to cheer about. The key question is whether Cameron can finally deliver on its promise in 2014.
A disappointing year
2013 was a disappointing year for Cameron as the company missed earnings estimates for three straight quarters. This even as it posted record revenue. The story behind the earnings misses has been Cameron's weak margins, which have remained under pressure as it fails to add capacity.
Cameron entered 2013 with a record backlog, however the company failed to ramp up capacity last year, forcing it to outsource in order to meet growing demand in its drilling segment. Not surprisingly, this led to higher costs and hurt the bottom line, leading to the profit misses. Cameron shares have also struggled as a result. Although Cameron shares ended in the green last year, the gains were significantly below those registered by the S&P 500, and those of its rivals FMC Technologies (FTI -0.19%) and National Oilwell Varco (NOV 1.59%).
In 2013, Cameron posted a gain of 9.87%, compared to a gain of 31.80% for the S&P 500, 27.92% for FMC Technologies and 20.71% for National Oilwell Varco.
Q4 and outlook encouraging
Cameron finally managed to beat earnings estimates in the fourth quarter of 2013. The company posted adjusted earnings of $1 per share for the fourth quarter, beating consensus forecast of $0.04. Its revenue for the quarter rose 18% on a sequential basis and 21% on a year-over-year basis. The company's backlog at the end of the quarter stood at $11.5 billion, up 34% from the same period in the previous year.
While the fourth-quarter earnings beat boosted Cameron shares, it was the company's outlook that really pleased investors. Jack B. Moore, CEO of Cameron, said in a conference call shortly after the earnings release two weeks ago that the company has seen good progress with the capacity additions in its Berwick operations. According to Moore, this will be crucial in stabilizing and improving business performance in 2014. While EBITDA margins in the drilling and production systems (DPS) group, which includes the drilling segment, were flat on a sequential basis in the fourth quarter of 2013, the company expects them to improve slightly in 2014 and then grow to 20% in 2015.
Focusing on core markets and share repurchases
Cameron has also announced plans to focus on its core oil and gas markets, and as part of this strategy, the company recently announced the sale of its reciprocating compression business unit to General Electric (GE 0.57%) for $550 million. In addition, the company is exploring strategic alternatives for its centrifugal compression business.
The sale of the business will not only enable Cameron to focus on its core markets but it will also provide the company with the balance sheet strength needed to continue with share repurchases. In 2013, Cameron repurchased 27 million shares at a cost of $1.5 billion. At the end of 2013, the company still had an authorization to repurchase $843 million worth of shares.
The big question
Jana Partners LLC, an activist hedge fund, has been pushing Cameron to speed up asset sales and buy back shares, according to a Bloomberg report. The company has certainly shown intent to enhance value for its shareholders. However, the big question right now is whether Cameron can add capacity and improve its margins in the drilling segment going forward. Given that the company is now pruning non-core businesses, it will be more focused on boosting capacity at its facility in Berwick. There is a strong possibility that Cameron will finally be able to deliver this year. Even if there is a slight delay in boosting capacity, I think Cameron's risk/reward profile is favorable.