McDermott International: A Strong Sell

Zacks

On Jan 21, Zacks Investment Research downgraded energy-focused engineering and construction firm McDermott International Inc. (MDR) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

We remain bearish about the firm’s near-term prospects, based on its steep operating costs, an erratic earnings trend over the last few quarters and lack of clarity about some of the big projects.

Detailed Analysis

McDermott’s operating results over the past few quarters have been highly unpredictable, as it had to deal with steep operating costs, competitive pressure and project implementation issues.

McDermott has hinted toward revenue of $3 billion in 2013, lower than the $3.6 billion it generated in 2012, mainly due to uncertainty around the timing of some the company’s bigger awards. Additionally, McDermott sees the large Papa Terra project in Brazil contribute to its earnings only in the last quarter of 2013, as against the previous assumption of an earlier timeframe.   

The offshore oilfield service provider is also struggling with cost overruns in its Malaysia and Saudi Arabia developments, which may lead to lower returns going forward. The financial picture has been further aggravated by deteriorating operating margins in its shallow water projects, with the company trying hard to expand into high margin deepwater projects.   

Stocks That Warrant a Look

While we expect McDermott to perform below its peers and industry levels in the coming months and see little reason for investors to own the stock, one can look at Athlon Energy Inc. (ATHL), Linn Co. LLC (LNCO) and Warren Resources Inc. (WRES). These U.S. upstream energy operators – sporting a Zacks Rank #1 (Strong Buy) – have recorded solid growth and have the potential to rise significantly from the current levels.

Read the Full Research Report on MDR
Read the Full Research Report on LNCO
Read the Full Research Report on WRES
Read the Full Research Report on ATHL


Zacks Investment Research

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