Cameron International (CAM) is an equipment and service provider for the oil & gas market. The company was incorporated in 1994, and operated as a subsidiary of Cooper Industries until 1995, when it was spun-off as a separate entity. The manufacturer has a large global presence, generating roughly 61% of sales from international oil & gas plays. The company also derives between 40%-45% of revenue from deepwater markets. Cameron reports revenue under three segments; Drilling & Production systems (D&P), Valves & Measurements (V&M), and Process & Compression (P&C).
The D&P division accounted for 64% of 2013 revenue. This business manufactures blowout preventers (BOPs), control systems, drilling risers, drilling pipe, mud pumps, and provides aftermarket services. The demand for highly specialized BOPs should accelerate in the coming years, given the increased regulatory scrutiny following the 2010 Macondo disaster in the Gulf of the Mexico. In fact, backlog in the D&P unit rose to record levels in 2013.
The D&P division also supplies Christmas trees (assembly of valves, spools, and fittings used in an oil well) and wellheads for the onshore and offshore markets. It provides valves, chokes, hydraulic fracturing services, and has one of the largest aftermarket businesses in the industry. We expect Cameron to invest heavily in this division, due to the rising number of newly discovered offshore fields and increased unconventional drilling in North America.
The V&M segment accounted for 21% of 2013 revenue. This business provides a wide variety of valves and measurement systems used to control the flow of oil & gas from well heads to its final destination. Cameron provides highly specialized equipment for engineering & construction companies, oil & gas majors, and pipeline operators, while also offering a portfolio of standardized products.
The P&C division offers packages for the separation and treatment of impurities within the equipment and parts. The customers served are in the chemical, processing, and petrochemical industries. This segment also supplies compressors, separation systems, heaters, and gas engines. Recently, Cameron sold its reciprocating compression business to GE for $550 million and is pursuing the possible sale of the Centrifugal compression unit. The company is attempting to focus on core operations with stronger growth opportunities in the subsea and North American onshore markets.
In 2013, Cameron and Schlumberger (SLB), a leader in the oil & gas equipment/services market, formed a joint venture called OneSubsea, creating one of the largest companies in the subsea market. The entity is designed to offer a full range of products and services through the life span of the well, including subsea production systems, wellheads, control systems, and subsea processing capabilities. Cameron will retain a 60% ownership stake, while Schlumberger will maintain a 40% stake. We believe this joint venture will drive a majority of new bookings, driven by higher drilling activity in the offshore plays in Latin America, Gulf of Mexico, and West Africa in the coming years.
Cameron posted a record year for new bookings in 2013, with orders topping $12 billion. Yet, we foresee a substantial dropoff in orders for 2014, due to reduction in capital spending budgets for many major oil & gas companies and a plethora of delayed offshore projects. In fact, bookings dropped nearly 30% in the first quarter of 2014. That said, we still believe Cameron is well positioned to capitalize on the favorable trends in the deepwater and ultra- deepwater markets over the next decade.
The company struggled on the bottom line in 2013, due to project execution challenges and difficulties related to capacity expansion plans. Management ought to continue to streamline the supply chain, increasing manufacturing capacity, and divest less profitable products and services. We believe these initiatives, coupled with a ramp up in share repurchases, should help offset the aforementioned headwinds. Consequently, we are anticipating double-digit share-net gains over the next two years.
The stock has rebounded in 2014, after trailing the broader market averages last year. Improving investor optimism over rising activity levels in the Gulf of Mexico and North American onshore market has fueled the stock-price surge. We still believe this issue is suitable for long-term investors, given the growth opportunities in the subsea and onshore markets.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.