Oceaneering International (OII) – Moving The Needle
Oceaneering International (OII) delivers engineered services, products, and robotic solutions to the offshore energy, defense, aerospace, and manufacturing industries. Within its Energy business, there are four segments: Subsea Robotics, Manufactured Products, Offshore Projects Group, and Integrity Management & Digital Solutions. And within its Non-Energy business, there is the Aerospace and Defense Technologies segment. Per the company’s 10-K filing, here is the breakdown of revenue:
Subsea Robotics – 30% of Total Revenue
Manufactured Products – 19% of Total Revenue
Offshore Projects Group – 24% of Total Revenue
Integrity Management & Digital Solutions – 11% of Total Revenue
Aerospace & Defense Technologies – 16% of Total Revenue
On July 26th, shares fell by over 10% following its Q2 earnings that did miss on both EPS ($0.18 vs $0.29 estimate) and Revenue ($598M vs $601.64M estimate). However, when you start diving into management commentary, you start to wonder if this was an overreaction.
On a consolidated basis, OII said it produced operating income of $49.2M, their highest quarterly operating income since 2015. For the first half of 2023, its energy segments generated an 18% increase in revenue and nearly a 100% increase in operating income as compared with the first half of 2022. In addition, their near-term rolling sales funnel at the end of June was more than 35% greater than at the same time last year. And inbound orders YTD vs 2022 are up over 20%. CEO Roderick Larson said, “We expect strong offshore market dynamics to continue for the foreseeable future with robust bidding activity supporting our expectation for growing backlog and increasing activity in our energy segments.” Turning to its business segments:
Subsea Robotics – Revenue increased by over 10% with healthy demand for ROVs** and tooling services being slightly offset by some project delays and related vessel preparation costs in their survey business. ROV days on hire were sequentially higher by 13% with 16,032 in the second quarter as compared to 14,228 during the first quarter of 2023. There were increases for both drill support and vessel-based services.
**ROVs are tethered submersible vehicles remotely operated from the surface. They perform a variety of underwater tasks, including drill support, vessel-based IMR, installation and construction support, pipeline inspection and surveys, and subsea production facility operation and maintenance.
Manufactured Products – This segment generated operating income of $10.6M on an 11% sequential increase in revenue. Revenue increased primarily due to the receipt of certain umbilical materials that did not contribute to current quarter operating results. Their book-to-bill ratio was 0.79 for the 6 months ended June 30th, and 1.19 for the trailing 12 months and is expected to be in the range of 1.2 to 1.4 for the full year of 2023.
Offshore Projects Group – Revenue and operating income increased significantly compared to the first quarter of 2023, primarily due to greater activity and utilization across all geographic regions and partially offset by certain planned installation work in the Gulf of Mexico shifting into the third quarter of 2023.
Integrity Management and Digital Solutions – Operating income was higher on a 5% increase in revenue as compared to the previous quarter. An increase in scope on several international projects contributed to the revenue increase.
Aerospace & Defense Technologies – Operating income increased as compared to the first quarter of 2023 on a 3% increase in revenue.
Going back to the company’s book-to-bill ratio, Barclays analyst Edward Kim would ask during the Q&A session: “You did around 0.8x book-to-bill in the first half to maintain a full year book-to-bill guide of 1.2 to 1.4x. So on our math, that would require — it looks like a near doubling of your order inbound in the second half just to meet the low end of that guide. So first, did I get that right? And if so, could you talk about the confidence level you have in the big step-up in second half orders coming through?”
CFO Alan Curtis would respond, “One of the things we look at is in that side of the business, there tends to be larger-scale kind of episodic awards from time to time. And that’s what we’re seeing is we have several — visibility into several awards here in the back half of the year that will move the needle for us. So it was a timing kind of matter with the customer FIDs needing to be achieved and then when they will actually place the order. So we do feel good about it. We do have a pretty strong pipeline of projects and bids outstanding that we think will support that.”
Similarly, Benchmark analyst Kurt Hallead would come back to a prior question about manufacturing products. “It looks like you’re going to have an acceleration in orders in the back half of the year. We’ve had other companies that participate in subsea like FTI talk about significant order bookings out through 2025 and increasing visibility out beyond that. You guys — the biggest business in Manufactured Products, if I’m not mistaken, is umbilicals, which kind of ties into subsea infrastructure. So I was wondering if you look at the dynamics right now, the backlog coming in, how do you feel about the margins and backlog that you’re going to book from this point forward?”
CEO Alan Curtis would say, “Kurt, if you look at how we are viewing that today, certainly, the contracts we’re bidding at current are better margins than what we did last year. So we are seeing improvement in pricing currently that would start to impact, as you indicated, kind of the back half of ’24 and more in ’25 even and then some of them are going into ’26. So we are starting to see a — this is that long cycle business that we have that benefits from these contracts. I mean, long lead materials that we’re ordering are 12 months out on some of these contracts. So we will start to take revenue recognition on these until we get all the parts in, for the most part, and can start to assemble the umbilical.”
Finally, in a note on August 11th, Citigroup said they believe cash flow growth prospects remain bright. Specifically, Subsea Robotics margins have languished approximately 30% over the past few years but appear set to rise into the mid-30% over the next 2 years as pricing improves. In Manufactured Products, management is still calling for a 1.2-1.4x book-to-bill ratio despite delivering ~0.8x in 1H given line of sight to major awards in 2H. Offshore Project revenue should improve as installation activity rises. Thus, they forecast EBITDA expanding from $300M in 2023 to $381M in 2024 with FCF more than doubling from $94M to $197M.
