Why Oceaneering International (OII) Must be in Your Portfolio
Oil/Energy remains the best S&P 500 sector this year, even as fears revolving around high inflation and slowing growth have somewhat clouded its outlook. The space has generated a total return of more than 28% in 2022 compared with the S&P 500’s loss of around 21%.
Apart from a constructive fundamental picture, the sector is enjoying support from geopolitical uncertainty amid Russia’s military operations in Ukraine. In March, crude prices surged to multi-year highs of $130 on concerns about supplies from Russia, which is one of the world's largest producers of the commodity.
Agreed, oil has pulled back from those lofty levels. However, the commodity still has enough reasons to stay elevated in the near-to-medium term, with the conflict showing no sign of a quick resolution, the risk of dwindling inventory and the influential oil exporters’ group OPEC sticking to a conservative production profile.
Naturally, some stocks have been impressive since the start of the year. These also have strong earnings trends to back up their moves.
One such company is Oceaneering International OII. It is one of the leading suppliers of offshore equipment and technology solutions to the energy industry. Headquartered in Houston, TX, the company provides specialized products and services for all phases of the offshore oilfield lifecycle — from exploration to decommissioning — with a focus on deep water.
The company operates in five business segments namely Subsea Robotics, Manufactured Products, Offshore Projects Group, Integrity Management & Digital Solutions and Aerospace and Defense Technologies.
Let’s discuss the reasons that make Oceaneering International an attractive pick:
Solid Rank and VGM Score
Oceaneering is a Zacks Rank #2 (Buy) stock in the Zacks Oil and Gas - Field Services industry, which carries a Zacks Industry Rank #18 — placing it in the top 7% of around 250 Zacks industries. In addition to the favorable rank, OII enjoys a Zacks Value and Momentum Style Scores of B each to help it round out with a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
Estimate-Beating Recent Earnings
OII posted robust Q3 results on Oct 26, with adjusted EPS of 23 cents handily beating the Zacks Consensus Estimate of 13 cents and turning around from the year-earlier loss of a penny. The outperformance could be attributed to improved offshore activity and pricing, especially in the Gulf of Mexico. In particular, Oceaneering’s ‘Subsea Robotics’ and ‘Offshore Projects Group’ segments were the prime beneficiaries of the positive market findamentals.
Current Price Levels a Buying Opportunity
After OII shares bottomed out (around $2) during the start of the pandemic, they have turned it around in style. Oceaneering International peaked in March at over $18 but has fallen slightly to around $16 since then. Despite this drop, the stock is still up 43.4% year to date, while the markets have gone lower. This powerful uptrend during a down market indicates that investors should take advantage of the discounted levels and start looking at the name to see if it’s right for their portfolio. With the company experiencing the best market conditions in years, we believe that the OII stock has enough firepower left to keep chugging along.
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Analyst Estimates Raised
OII’s earnings revisions have also trended in the right direction over the last 60 days, as analysts have consistently taken up their numbers. As a matter of fact, the Zacks Consensus Estimate for Oceaneering’s 2022 bottom line has gone up from a profit of 16 cents to a profit of 31 cents during this timeframe, while next year’s number suggests a rise from a profit of 79 cents per share to 82 cents.
Fundamental Strength
One of the leading suppliers of integrated technology solutions, Oceaneering boasts an impressive portfolio of diversified products and services. It is well positioned to supply equipment for the deep-water projects and is active at all phases of the offshore oilfield lifecycle. Oceaneering owns a geographically diversified asset base spread across the United States and rest of the world. The company's revenue profile is evenly split between its international and domestic operations, lowering Oceaneering’s risk profile.
Oceaneering’s ‘Subsea Robotics’ unit, which provides cutting-edge technology solutions for remote working, performed impressively in the most recent quarter. The unit’s revenues of $169.4 million increased from $143.7 million in the year-ago quarter on the back of solid utilization. The analysts believe that the segment should perform well on growing international activity.
Finally, OII's strong relationships with high-quality customers provide revenue visibility and business certainty. The clients, mostly well-capitalized, blue-chip E&P companies with long-term production growth plans, are likely to be less susceptible to commodity price fluctuations. This should ensure multi-year earnings stability for Oceaneering.
Attractive Valuation
The valuation for this name isn’t low, but there is solid growth. OII has a forward P/E of 20.09, above the industry average of 17.18. However, investors should know that the company is coming off a quarter that saw top-line growth of nearly 20%. Moreover, although expensive, the value is significantly below the 52-week high of 67.93. OII’s P/S of 0.72 is also much lower than the industry’s 1.89.
Bottom Line
Given this backdrop, it should be prudent to consider buying shares of Oceaneering International. While there are some apprehensions that the company may have gotten too far ahead of itself, especially with the prevailing inflationary pressures, the supportive demand/supply fundamentals for its services and robust commodity prices should keep backlog and sales elevated going forward. This suggests strong long-term cash flows that should support higher price points for its shares.
Other Energy Stocks to Buy
Along with Oceaneering International, investors interested in the energy sector might look at Halliburton HAL, Nine Energy Service NINE and Patterson-UTI Energy PTEN, each sporting a Zacks Rank #1, currently.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Halliburton: Halliburton is valued at some $34 billion. The Zacks Consensus Estimate for HAL’s 2022 earnings has been revised 3.4% upward over the past 60 days.
Halliburton, headquartered in Houston, TX, has a trailing four-quarter earnings surprise of roughly 5.5%, on average. HAL shares have gained 68.9% so far this year.
Nine Energy Service: Nine Energy Service is valued at some $350.5 million. The Zacks Consensus Estimate for NINE’s 2022 earnings has been revised 1,325% upward over the past 60 days.
Nine Energy Service, headquartered in Houston, TX, delivered a 137.5% beat in Q3. NINE shares have surged 1,157% year to date.
Patterson-UTI Energy: PTEN beat the Zacks Consensus Estimate for earnings in three of the last four quarters. The company has a trailing four-quarter earnings surprise of roughly 169.2%, on average.
Patterson-UTI is valued at around $3.7 billion. PTEN has seen its shares gain 96.7% in 2022.
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