Being driven by rising energy costs and the insatiable thirst for energy, FMC Technologies (NYSE:FTI), Cameron International (UNKNOWN:CAM.DL), and General Electric Oil & Gas are oil and gas service companies that have significant deepwater exposure. Since July 2011, many companies that derive much of their revenue from the deepwater market have underperformed the S&P 500. In the article below, I will explore some of the issues regarding their underperformance and estimate what will drive these companies moving forward.
Even though these companies earn a bulk of their revenue outside offshore activities, the deepwater market provides substantial earnings for these companies. So, why the underperformance?
The offshore drilling market has been a double-edged sword for these companies. It has supplied FMC, Cameron, and GE with substantial growth over the past number of years in regards to revenue, earnings, and cash from operations, but the offshore drilling market also comes with substantial associated risks.
An example of the risk associated with offshore drilling came in January of 2014 when the major oil and gas companies stated they were going to reduce spending to focus on margins. This had a direct effect on companies focusing on the offshore drilling industry. In their efforts to refocus, Royal Dutch Shell (NYSE:RDS-A) stated:
We are aiming to continue to balance growth and returns, by focusing sharply on our three key priorities-better financial performance, enhanced capital efficiency, including more selectivity on project choices and $15 billion of divestments in 2014-15, and continuing strong project delivery
When these announcements were made, this took the "wind out of the sails" for companies focused on the deepwater market. Many analysts revised their global offshore capex spending predictions, and as the chart below indicates, 2015 looks to be a weaker year for offshore capex spending.
Finding strength in the deepwater market
Even though the offshore drilling market is currently in a state of malaise, there are pockets of this sector that are showing signs of strength. One pocket that looks to be "bucking the trend" is the Subsea Tree Market.
The reason that the Subsea Tree Market is outpacing other aspects of the market is because of the economical and technological advantages the trees give companies. Both horizontal and vertical subsea trees monitor and control the production of subsea wells. Fixed to the wellhead of a completed well, a subsea tree effectively manages fluids or gas injected into the well. Other applications for a subsea tree are to monitor, measure, and react to sensor outputs as well as act as chemical injection points, well intervention means, pressure relief means and/or as a monitoring point.
A recent article by Quest Offshore stated, "[S]ubsea tree award forecast for the rest of the world (excluding Brazil) reveals double digit growth of 19% compared with 2013" for 2014. The article also reveals that by 2017 it is expected that the market will see orders for more than 3,000 subsea trees.
Confirming the robust growth in the subsea tree market is Douglas-Westwood. The company indicates, after a very weak period of time due to a combination of the financial crisis and the Gulf of Mexico oil spill, growth is expected to outpace the offshore drilling market in the short term.
At this point, the subsea tree market is driven by four main players:
- OneSubsea, which is the 60/40 JV with Cameron International and Schlumberger NV.
- FMC Technologies, which had ~35% market share last year.
- General Electric Oil & Gas, which had ~8% market share last year.
- Aker Solutions, which had ~27% of the subsea tree market share in 2013.
Driven by pressures in the deepwater drilling market, OneSubsea (the JV through Schlumberger and Cameron International), FMC Technologies, and GE Oil & Gas have been hit hard by the lower capex spending. Having stated that, the subsea tree market still is very buoyant. As these companies draw a large part of their revenues from this market, their fundamentals still look strong. As the overall deepwater drilling market is in a state of malaise and capital spending issues from the majors are delaying deepwater growth the catalyst for these companies is still on the horizon.
Having stated that, as oil prices are expected to remain close to or above $100.00 and as global consumption continues to escalate the demand for these reserves is still prevalent. At this point in time, the majors have stated they will wait for the right market conditions to access the energy, and Cameron, FMC, and GE Oil & Gas will be on the front line when the time is right.