Oceaneering International, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Oceaneering International, Inc. is a global technology company specializing in engineered services and products, primarily serving the offshore energy, defense, aerospace, manufacturing, and entertainment industries, including robotics for offshore environments.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Oceaneering International, Inc. (OII) operates as a global provider of engineered services and products, with a distinct emphasis on the subsea market. The company provides a diverse range of services and products.

  • Subsea Robotics: This segment focuses on remotely operated vehicles (ROVs), tooling, and related services, which support subsea infrastructure projects, exploration, and maintenance activities.
  • Manufactured Products: This area is responsible for manufacturing of specialty components and equipment for the offshore energy industry. It focuses on umbilical production control systems and pipeline connections.
  • Offshore Projects Group: This segment offers integrated project capabilities and solutions to assist customers with offshore construction and installation. It includes things like project management, engineering, and umbilicals.
  • Integrity Management & Digital Solutions: This segment specializes in technology solutions for asset integrity management and non-destructive testing as well as software and analytics.
  • Aerospace and Defense Technologies: This segment provides engineering and manufacturing services for government agencies and prime contractors

Revenue Distribution:

Oceaneering’s revenue is distributed geographically, with a significant concentration in the U.S. and the Gulf of Mexico.

  • Energy: 73% of the revenue, a large chunk of the revenue is obtained from Subsea Robotics and Offshore Projects segments
  • Manufactured Products: 17% of the revenue
  • Integrity Management & Digital Solutions: 13% of the revenue

  • Aerospace and Defense Technologies: 6% of the revenue

  • The company generates substantial revenue from its services provided to oil and gas exploration and production companies.
  • A growing portion of revenues is generated by renewable energy projects and defense contracts, showcasing the company’s efforts to diversify its revenue streams.

Industry Trends:

  • The offshore oil and gas sector is historically cyclical, significantly impacting OII’s revenues.
  • Increased focus on renewable energy and the energy transition may lead to a need for increased offshore wind and wave installations, offering a new avenue for OII’s operations.
  • The demand for subsea intervention and asset maintenance is expected to increase, driving up the need for OII’s robotics and other services.
  • A rising focus on automation and digitalization within industrial processes will boost the demand for OII’s solutions.

Competitive Landscape:

  • OII operates in highly competitive sectors and is vulnerable to competition with multiple players for every business segment.
  • Competitors range from smaller, specialized firms to larger, well-established engineering conglomerates.
  • In Energy and Offshore Projects, some of its competitors are Saipem, TechnipFMC, Subsea 7, and Schlumberger.
  • In subsea robotics, some of its competitors are DOF Subsea and Helix Energy Solutions Group.
  • In manufacturing, some of its competitors are TechnipFMC, Dril-Quip, and Oceaneering’s own clients, among others.
  • In Integrity Management and Digital Solutions, some of its competitors are large companies such as Siemens, GE, and Emerson.
  • In Aerospace and Defense Technologies, OII competes with defense and aerospace companies.

What Makes OII Different:

OII differentiates itself through its integrated solutions and capabilities across multiple areas, as well as decades of experience.

  • OII offers services across different sectors, from energy to defense, meaning that changes in one industry will not make the company unviable.
  • Its in-house technology development and manufacturing capabilities give them more operational efficiency.
  • They also have a strong presence and historical experience in some of the most difficult and complex projects in the world.

Financials

Operating Income:

  • The total segment operating income for Q1 2024 was $31.17 million, up by 164% from Q4 2023 and down by 3.7% from Q1 2023.
    • Energy: Total operating loss of $5.356 million. Decreased by 79.1% q/q and by 478% y/y.
    • Manufactured Products: Operating income of $8.097 million. Increased by 23.1% q/q and by 15.7% y/y
    • Offshore Projects Group: Operating income of $7.88 million. Increased by 138.3% q/q and decreased by 8.9% y/y.
    • Integrity Management & Digital Solutions: Operating income of $14.461 million. Decreased by 13.9% q/q and increased by 48.9% y/y.
    • Aerospace and Defense Technologies: Operating income of $6.103 million. Increased by 86.1% q/q and by 38.5% y/y.
  • The company’s financial performance is highly dependent on the energy sector, which causes cyclicality in revenues.
  • In previous years they experienced a lot of net losses because of goodwill impairments
  • OII’s profit margins can vary significantly depending on factors like contract pricing, utilization rates, and project complexities, which is reflected in the wide variations of margins for segments

Cash Flow:

  • Cash used for operations was $29.516 million in Q1 2024, compared to $197.118 million used in Q4 2023, and generated $17.584 million in Q1 2023
  • Net cash used in investing activities was $10.205 million in Q1 2024, compared to $42.401 million and $31.019 million in the previous quarters
  • Net cash provided by financing activities was $122.752 million in Q1 2024, compared to $21.958 million and -$12.306 million in the previous quarters. This is mainly driven by notes offering.
  • The liquidity and capital resources of OII are primarily funded from operations and existing cash on hand, but recently they also used capital markets.

They are taking advantage of available opportunities to increase liquidity.

Balance Sheet:

  • Assets are $2.557 billion and liabilities are $1.972 billion which makes for total equity of $585 million
  • They have some substantial assets such as PP&E ($1.469 billion) and goodwill ($317 million).
  • The long term debt is $703 million which is significantly higher than the $188 million in cash on hand.
  • While they have an ok working capital of $392 million (assets) and $177 million (liabilities), there has been a lot of fluctuations in this which raises a red flag.

Recent Concerns/Problems:

The company has faced issues related to debt and financing obligations. A significant portion of its debt is due in the near future. A debt rating downgrade from Moody’s to BAA2 has raised some concerns regarding OII’s long-term solvency. OII’s stock price fell by about 20% after they released their recent 10-K because they did not provide a timeline for debt reduction and have increased their RCV costs in Q1. They have also stated that they expect to sell non-core assets in the near future. It seems management is facing some trouble with profitability and increasing operating cash flow.

Moat Rating: 2 / 5

OII possesses a narrow moat due to a combination of factors, but lacks the strong, durable advantages of a wide moat.

  • Specialized Capabilities: The company has expertise in its niche, with technological capabilities and strong relationships that contribute to high switching costs, especially in the more technological parts of their business.
  • Long Term Contracts: Long-term contracts with customers can be considered as a form of switching costs, as the products and service are customized for their unique client needs and take long time to deploy and get working
  • Barriers to Entry: There are high barriers to entry in the subsea market. The capital-intensive nature and specialized technology make it challenging for new competitors to emerge and compete effectively.
  • Brand Recognition: OII enjoys strong brand recognition, particularly in the subsea market. They have several unique technologies that are difficult to copy.
  • High Client Retention: They retain customers very well, as the industry is relatively small, and there is a level of trust built up over the years.

However, these advantages are vulnerable to threats from competition, changes in technology, and the cyclical nature of the energy market and their balance sheet.

Overall, while OII has some competitive advantages, they do not make them strong enough to earn a high moat rating.

Legitimate Moat Risks

  • Industry Cyclicality: The offshore oil and gas industry is highly cyclical, and OII’s business is directly correlated to spending in this market. Economic downturns or decreased energy demand could lead to significantly reduced capital expenditure by their customers, hurting OII’s business.
  • Technological Disruption: New technologies or innovations by competitors, particularly in the robotics and data analysis space, could quickly render OII’s current products and services obsolete.
  • Competitive Pressures: Intense competition in the oil and gas sector, as well as competition from small tech companies who are trying to take advantage of the digitalization and automation trends could negatively impact margins.
  • High Debt Burden: High levels of debt that have become apparent after recent earnings reports and downgrades, combined with the cyclicality of the business creates significant financial risk for the firm.
  • Loss of Clients: Any significant loss of clients and contracts would hurt the revenue and cash flows. The concentration of clients is an area of concern.
  • Operational Issues The complexity of managing multinational and technology-focused operations also creates operational risk.

Business Resilience

OII’s resilience is mixed. It has some strengths:

  • Diversification: Its operations and clients are diversified across multiple industries, such as offshore energy, defense, aerospace, manufacturing, and entertainment, as well as across geographies.
  • Customer Relationships: OII has a history of long-standing relationships with key clients. This allows them to maintain predictable revenue streams.
  • Large Scale: OII is a large company, with a large amount of infrastructure and personnel, which allows them to operate in many areas and pursue multiple projects at once.

However, the high debt levels and cyclicality leave it open to risk:

  • Highly Leveraged: The level of debt means that if the company’s revenue drops, or interest rate rises, it might not be able to service the debt. This will hurt their ability to reinvest and grow in the future, and might even mean they will fall into bankruptcy.

Overall, I believe OII is not a resilient business because the strengths do not fully make up for the weaknesses. The company has very cyclical revenues, which are tied to oil and gas, and have to be taken in tandem with a weak balance sheet, with many obligations for the next few years. So I give it a rating of 2 / 5 on resilience. If they successfully managed to reduce their debt in the near future I would rate this aspect higher

Understandability: 3 / 5

OII’s business model is fairly understandable at a basic level. However, deeper aspects such as the intricacies of their projects, contracts, and technological development can make it difficult to understand fully. The integration of specialized services and manufacturing makes it more complicated. There also is some confusion about the revenue distribution and the relative importance of each of their segments. Therefore, a rating of 3 is fair.

Balance Sheet Health: 3 / 5

OII’s balance sheet reflects an average financial position with high long-term debt and significant variability in their short term assets and liabilities. The debt needs to be managed properly to give stability to the business.

  • Assets: The company has a good amount of property, plant, and equipment. Additionally, OII’s investments are diversified.
  • Liabilities: OII has a sizable debt burden with short and long term commitments, a potential source of vulnerability.
  • Equity: The company’s total equity is not as high as we would prefer given the large amounts of debt.

Overall, I believe OII’s balance sheet needs improvement and to reduce their debt, and therefore I give it a 3 / 5 on balance sheet health.