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Oceaneering Falls 40% in 6 Months: Dismal Run to Continue?

Zacks Equity Research

Oceaneering International, Inc.’s OII shares have been weak, both in absolute and relative terms, over a period of six months. The stock price of the oilfield services provider has dipped 40% in the past six months, wider the than 24% cumulative decline of the stocks that belong to the industry.

Factors Plaguing Oceaneering

Volatility in the crude market, softer 2018 guidance along with challenging offshore view for 2019 are affecting Oceaneering’s performance.  

As we know, 2018 had been a tumultuous year for the Energy sector, with most of the oil and gas companies taking a beating amid commodity price volatility, supply glut, U.S.-China trade tussle, weakening demand outlook and economic headwinds. West Texas Intermediate (WTI) started the year just above $60 per barrel of oil and touched multi-year highs of more than $76 in early October. However, the rally was pretty short-lived, with the commodity plunging close to 30% since then.

Despite crude being on an upward trajectory for most part of 2018, the picture for the oilfield service providers has been quite lackluster amid contraction of activities and revenues, canceled or renegotiated contracts at lower day rates, along with massive layoffs.

Notably, Oceaneering ‘s fourth-quarter performance is likely to take a beating due to low utilization rates and seasonal disruptions. In fact, management expects soft fourth-quarter results compared with the third quarter, in each of its segments apart from advanced technology.

As it is, the trimmed guidance for the full year of 2018 has dampened investors' confidence. The company now expects its adjusted EBITDA toward the lower end of the previously announced guidance range of $140-$160 million. At the midpoint of this range, the EBITDA is likely to represent a 43.3% decline from the 2017 level. Oceaneering also anticipates capex within $100-$140 million versus prior guided range of $80-$100 million. The increased capex is likely to put further pressure on its cash flow, which is already weak. Notably, Oceaneering’s negative free cash flow in the fourth quarter of 2017 prompted it to suspend dividends.

The market for offshore equipment and services will take time to recover. As it is, the offshore drilling markets, which are bearing the brunt of reduced spending and delays in project awards, are likely to remain challenging with reduced day rates, diminishing backlogs and volatility in the commodity price environment.

In terms of enterprise multiple or EV/EBITDA ratio, which is one of the best multiples for assessing oil and gas companies as energy firms usually have a large amount of debt, Oceaneering seems significantly overvalued. The company currently has average trailing 12-month EV/EBITDA ratio of 39.75, much higher than its industry’s 5.85.

Struggle to Sustain?

Analysts have been growing bearish on the stock, currently carrying a Zacks Rank #4 (Sell), as evidenced by the downward revision of the company’s fourth-quarter 2018 and full-year 2019 estimates. Its fourth-quarter 2018 loss estimates widened by a penny to 24 cents in the past 60 days. Further, the company's full-year 2019 loss estimates have widened by 8 cents to 52 cents. On a further discouraging note, its long-term EPS growth rate is projected at 13%, way lower than the industry’s 21.3%.

Notably, management has already warned that the struggles in the offshore energy market are likely to persist in 2019, which are likely to impact the performance of the company. Also, the company does not plan to resume its dividend payout anytime soon, unless the macro environment improves sufficiently to drive its earnings and free cash flow.  

The overall scenario does not look very encouraging for Zacks Oil and Gas - Field Services industry as of now. In fact, the industry currently carries a Zacks Industry Rank #238, which places it in the bottom 8% of more than 250 Zacks industries. Even with the spike in oil prices, the improving landscape is not likely to filter down to oilfield services soon, as the upstream players are benefiting from discounted dayrates.

Hence, we suggest investors looking at this specific industry to broaden their search and consider the top-ranked players in the overall energy space. Investors can opt for Bellatrix Exploration Ltd BXE, TransCanada Corporation TRP and RGC Resources Inc. RGCO, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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