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WIKI ANALYSIS
Cameron Corporation, an oilfield equipment manufacturer, is one of the world's leading suppliers of subsea "Christmas Trees" - valves and fittings that control the flow of fluids from an oil well and prevent their release in to the environment. With oil prices soaring past $100 per barrel in early 2008, oil and gas exploration and production companies are scrambling to increase output by drilling in more remote places.
One major outgrowth of this new demand is the movement of oil exploration into deeper waters, a trend which requires new equipment to be built and old rigs to be refurbished. Subsea equipment is in high demand, and given that the average age of a drilling rig anywhere in the world today is 25 years, the market is ripe for companies who provide the equipment needed for upgrades. Both these trends could potentially benefit Cameron, as the company is a major manufacturer of rig hardware, and recently released a new subsea tree that is functional to any depth.
The company's focus on large, expensive orders, however, means that it is not protected against volatility in any of its markets, like compression or subsea technology. This is a problem when competitors outbid Cameron for new contracts, and a recent example of this surfaced when FMC Technologies received a major contract with Total . Despite the loss of this contract, Cameron's growth over the past year has continued, with revenue rising almost 25% due to rising demand for energy. As long as oil prices stay high, demand for oilfield equipment will continue to drive Cameron's revenues. The company must continue to innovate, however, as competitors like industry giant National-Oilwell Varco and emerging subsea player FMC Technologies threaten its ability to capitalize on the market's growth.
Business & Financials
Houston, Texas-based Cameron International Corporation (CAM), previously known as Cooper Cameron Corporation, is a leading manufacturer of pressure control equipment used in applications for oil and gas drilling, production, and transmission. Upon the change in the corporate name in May 2006, the company also re-branded its three business segments into Drilling & Production Systems (DPS), Valves & Measurement (V&M), and Compression Systems (CS).
| 2007 | 2006 | |
|---|---|---|
| Revenue | 4,666.4 | 3,742.9 |
| Drilling & Production Systems | 2,887.1 | 2,113.1 |
| Valves and Measurements | 1,273.7 | 1,177.9 |
| Compression Systems | 505.6 | 451.9 |
| Backlog | 4,268.3 | 3,531.0 |
| Drilling & Production Systems | 3,203.0 | 2,661.3 |
| Valves and Measurements | 685.2 | 620.8 |
| Compression Systems | 380.1 | 248.9 |
| Net Income | 500.9 | 317.8 |
The DPS segment's products include surface and subsea production systems (so-called "trees"), blowout preventers, and drilling and production control systems. DPS's products are marketed under the brand names CAMERON, W-K-M, MCEVOY and WILLIS. Additionally, DPS manufactures elastomers, which are used in pressure and flow control equipment and other petroleum industry applications, as well as in the petroleum, petrochemical, rubber molding, and plastics industries. Early this year, Cameron acquired DES Operations Limited (DES) for approximately $37.7 million, which enhanced the company s subsea product offerings within the DPS segment. Drilling and Production Systems accounted for 61.9% of company revenue in 2007.
The V&M segment (27.3% of 2007 revenue) provides valves and related systems used in pressure control and flow of oil and gas from the wellhead through pipelines to refineries and petrochemical plants.
The portfolio for the CS segment (10.8%) includes reciprocating and centrifugal compressors used in multiple oil and gas applications, such as production, storage, withdrawal, processing, and transmission.
Contents
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The company saw strong growth from 2006 to 2007 in all three segments, especially Drilling and Production Systems. This can be attributed to rising oil prices increasing overall drilling demand, causing drill contractors to increase capital expenditures in order to stay competitive.
Cameron pursues an active acquisitions strategy. For example, at the end of 2005, the company acquired all the businesses of the Flow Control segment of Dresser Inc., which has been integrated with the V&M segment at a cost of approximately $30 million. Additionally, early this year the company acquired certain assets of Prime Measurement Products, a supplier to the V&M segment, at a cost of approximately $6.3 million.
Trends and Forces
Rising Oil Prices Are Driving Overhauls to the Aging Drill Rig Supply - and Cameron is a Key Renovator
The year 2007, in which oil prices fluctuated erratically but ended up above $90/barrel, was strong overall for Cameron, as orders rose 6% to about $5.4 billion and backlog rose 27% to $4.27 billion[2]. The company's fourth quarter 2007 orders alone rose 20% from the fourth quarter of 2006, to a record $1.49 billion[3] - a record that coincided with record high oil prices. These financials illustrate how the days of free oil, bubbling up through cracks in the Earth to be scooped up by the first lucky man to happen along, are over. Many of the easy access reserves that yielded the black gold so fruitfully over the past century are maturing, especially in high-output regions like the shallow Gulf of Mexico. With global demand for oil rising as emerging markets like China and India enter the world economy, however, oil prices are through the roof, and oil and gas companies are scrambling to increase production and take advantage of potential windfalls. The problem? The average drilling rig found anywhere in the world is about 25 years old[4]; the technology of 25 years ago may have been appropriate for extracting the easy-access oil that was right below the surface, but as these reserves dry up, companies are looking to deeper water and more complicated geology. Rig contractors and exploration companies worldwide are beginning to invest in building new rigs or upgrading old ones, taking advantage of the huge margins caused by the current price level to spend on expensive technology. Cameron, which manufactures rig equipment, is poised to benefit.
Cameron's Subsea Business Could Benefit from Deepwater Oil Exploration
Cameron is one of a few companies that specialize in the development of subsea "Christmas trees" - complex pipe structures that connect to an undersea well and control the flow of oil and gas out of the reserve. Cameron recently developed a fully electric subsea tree, designed to operate at "virtually limitless water depths"[5] while cutting costs on maintenance and fluids and increasing control efficiency and distance - all by eliminating the hydraulics needed to operate older trees. With a growing market for deepwater oil exploration, oil and gas exploration companies and drilling contractors are going to need trees that will work well at incredible depths. Also, as oil prices push drilling dayrates through the roof, these companies will want to cut operating costs where possible in order to maximize margins and compensate for the high costs of drilling technology. This would seem to create an ideal market for Cameron's product, and indeed the company has landed some lucrative new deals, like a $190 million contract with Petroleos De Venezuela SA to provide the company with ten new trees[6].
Cameron's Business Tends to Receive a Few Large Orders, Rather than Many Small Ones, Increasing its Risk
As the oilfield services sector heats up, demand for new equipment has caused competitive pressure to increase. FMC Technologies (FTI) and National-Oilwell Varco (NOV) are Cameron's two main competitors, and recently they have been taking major equipment deals that could potentially have gone to Cameron. For example, at the same time as Cameron made its $190 million deal with PDVSA, FMC Technologies made a $980 million deal to supply 49 deepwater tree systems to TotalFinaElf, S.A. (TOT)[7]. Cameron makes big money by selling a few, extremely expensive systems (like subsea trees); the company is not nearly as diversified as larger equipment companies like National-Oilwell Varco, making the implications of the loss of any major customer or potential customer much heavier. For this reason, Cameron must spend more on designing and marketing highly competitive products.
Renewable Energy Could Impact Cameron in the Long-Term
Whether it’s because of climate change fears, the rising price of oil, or the desire to separate energy needs from terrorist regimes, people are slowly becoming disillusioned by the world's dependence on oil and gas. Many developed, politically-progressive regions like Europe are beginning to transition away from these sources of energy, and towards renewable energy. In emerging markets like China and India, however, the drive for economic growth supersedes environmental concerns, and oil, despite being about $100/bbl, is still less expensive than most renewables. Since emerging markets are where many of the future opportunities in the global economy lay, oilfield services companies like Cameron, who are intimately tied to the overall success of the oil and gas industry, could continue to grow in conjunction with a growing renewables industry.
Competition
- National-Oilwell Varco - the 800-pound gorilla of the oilfield equipment industry, NOV has pursued an active acquisitions strategy since the post-Oil Crisis collapse of the oilfield equipment industry in the 70s. Because of this, over 90% of the world's drilling rigs have some NOV part[8], making the company difficult to match in ubiquity.
- FMC Technologies (FTI) - With 47% of its revenue coming from subsea production systems (like Christmas Trees)[9], FMC Technologies represents the largest direct threat to Cameron, especially when considering that the company just made a $980 million deal to supply 49 deepwater tree systems to TotalFinaElf, S.A. (TOT)[10].
| 2007 Revenue | 2007 Net Income | 2006 Revenue | 2006 Net Income | |
|---|---|---|---|---|
| National-Oilwell Varco[11] | 5,744.7 | 1,337.1 | 3,584.9 | 684.0 |
| FMC Technologies[12] | 4,615.4 | 302.8 | 3,755.6 | 276.3 |
| Cameron Corporation[13] | 4,666.4 | 500.9 | 3,742.9 | 317.8 |
Notes
- ↑ Cameron: News Releases, "CAMERON FOURTH QUARTER EARNINGS TOTAL $0.54 PER SHARE; REVENUES UP 25 PERCENT, ORDERS AND BACKLOG REACH NEW HIGHS"
- ↑ Cameron International Corp. Q4 2007 Earnings Call Transcript, Page 1, January 31st 2008
- ↑ Cameron: News Releases, "CAMERON FOURTH QUARTER EARNINGS TOTAL $0.54 PER SHARE; REVENUES UP 25 PERCENT, ORDERS AND BACKLOG REACH NEW HIGHS"
- ↑ "Maersk plans major drilling fleet expansion", February 1st, 2008
- ↑ Subsea Oil and Gas Directory, "CameronDC System Spotlight"
- ↑ [http://seekingalpha.com/article/59002-just-missed-the-boat-on-fmc-tech-s-contract "Just Missed the Boat on FMC Tech's Contract", January 3rd, 2008
- ↑ [http://seekingalpha.com/article/59002-just-missed-the-boat-on-fmc-tech-s-contract "Just Missed the Boat on FMC Tech's Contract", January 3rd, 2008
- ↑ Morningstar Analysis, National-Oilwell Varco, January 10th, 2008
- ↑ Reuters.com, Full Description: FMC Technologies, Inc
- ↑ "Just Missed the Boat on FMC Tech's Contract", January 3rd, 2008
- ↑ "National Oilwell Varco Announces Fourth Quarter and 2007 Earnings"
- ↑ "FMC Technologies Reports Fourth Quarter Diluted Earnings per Share from Continuing Operations of $0.70, up 49 Percent"
- ↑ Cameron: News Releases, "CAMERON FOURTH QUARTER EARNINGS TOTAL $0.54 PER SHARE; REVENUES UP 25 PERCENT, ORDERS AND BACKLOG REACH NEW HIGHS"
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Energy Companies Anadarko Petroleum • BP • ChevronTexaco • Arch Coal • Cameco • ConocoPhillips • Enbridge • Consolidated Edison • Entergy • Exelon • Exxon Mobil • Frontier Oil • GE • Halliburton • Philips • Massey Energy • Occidental Petroleum • PG&E • Peabody Energy • Shell • Sasol • Schlumberger • Sinopec • Suncor • Sunoco • SunPower • Suntech • Suzlon • Toshiba • Valero • Xcel |
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