Oceaneering International Inc's Financial Results Continue to Sink

By Markets Fool.com

Image source: Getty Images.

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While oil prices have noticeably improved from earlier this year, that hasn't fueled any improvement in Oceaneering International's (NYSE: OII) financial results. Instead, the company's revenue and earnings continued their descent in the third quarter. Unfortunately, the company does not see that tide turning anytime soon.

Oceaneering results: The raw numbers

Metric

Q3 2016 Actuals

Q3 2015 Actuals

Growth (YOY)

Revenue

$549.3 million

$743.6 million

(26%)

Net income

($11.8 million)

$68.5 million

N/A

Adjusted earnings per share

($0.12)

$0.70

N/A

Data source: Oceaneering International. YOY = Year over year.

What happened with Oceaneering this quarter?

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The company did not have too many bright spots.

  • Revenue not only fell sharply year over year, but it was down 12% from the second quarter. Meanwhile, earnings dipped into the red, primarily the result of two impairment charges the company took during the quarter. After adjusting for these charges, which totaled $43.6 million pre-tax, net income was $16.6 million, or $0.17 per share. While that was less than last quarter's adjusted net income of $26.8 million, or $0.27 per share, it was in line with the company's expectations.
  • Driving the decline was the company's remotely operated vehicle segment (ROV), where revenue plunged 36% over the prior year, to $126.5 million, which is also down 9% from last quarter. This decline was due to a 4% reduction in revenue per day-on-hire and 6% fewer days utilized. Overall, utilization was 52% during the quarter, down from 55% last quarter as a result of the continued decline in the offshore rig count. Those weakening market conditions forced the company to reassess its ROV fleet, which led to its retiring 39 ROVs during the quarter and recording a $36 million charge.
  • Oceaneering's subsea products segment was also under pressure, with revenue declining 29% from last year's third quarter and 18% sequentially. Driving this decrease were lower service pricing and shrinking margins as the company processed its backlog. Furthermore, as in the ROV segment, Oceaneering recorded an impairment charge of $8.2 million.
  • Meanwhile, Oceaneering's other three segments held up much better on a sequential basis due to seasonal increases and lower costs from a smaller headcount and contract roll-offs.
  • Oceaneering also announced two separate strategic agreements after the quarter ended. First, it secured a two-year extension of a field support vessels contract with oil giant BP (NYSE: BP) in Angola. That agreement ensures that the company's vessel Ocean Intervention III will remain charted through next April. Additionally, it acquired Blue Ocean Technologies to support new and existing customers in the subsea well intervention market.

What management had to say

In his commentary on the quarter, CEO Kevin McEvoy focused on deepwater activity:

On an adjusted basis, our third quarter operating results were in line with our expectations and the consensus estimate. However, the leading indicator for deepwater activity, contracted floating rigs, continued to decline, as the rate of rigs being idled, either by contract termination or expiration, continued unabated.

While the broader oil market is starting to show signs of life, the offshore market continues to go from bad to worse. Leading offshore driller Transocean (NYSE: RIG), for example, has already retired 28 rigs over the past few years, bringing its fleet down to 58, and it plans to retire another six to 12 rigs in the future. And Transocean is struggling to keep its rigs working. Earlier this month it lost a rig contract with India's Reliance Industries four years early, while the contracts it is winning are for meager dayrates. That slump is the reason Oceaneering needed to make the decision to trim its own ROV fleet to boost utilization and profitability.

Looking forward

Because of the gloomy outlook for the offshore market, Oceaneering's CEO said that "fourth quarter results will be considerably lower than our adjusted third quarter results due to a continuation of weak demand for our services and products, exacerbated by seasonality." Meanwhile, the outlook for 2017 isn't much better. McEvoy said that "with limited visibility, our outlook for 2017 can be characterized as marginally profitable at the operating income level on a consolidated basis." That said, the company fully expects the offshore market to recover; it just doesn't yet have any visibility as to when that might happen.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Oceaneering International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.