Energy Business

Will Insider Buying Really Help Oil Field Construction Firm? (MDR, HLX, CBI, FWLT, PXJ)

Shares of heavy construction firm McDermott International Inc. (NYSE: MDR) are getting a nice boost following open market stock purchases worth about $3 million from 4 different insiders. The firm, which specializes in engineering, procurement, construction, and installation of offshore oil projects has seen its stock price drop nearly -45% over the past 12 months.

That’s the worst performance among peers and related firms like Helix Energy Solutions Group Inc. (NYSE: HLX), Chicago Bridge & Iron Co. B.V. (NYSE: CBI), and Foster Wheeler AG (NASDAQ: FWLT). When McDermott reported earnings in early May, the company noted a first quarter backlog of projects worth $5.8 billion. However the company’s backlog for 2013 is below $1 billion and that could put the company’s earnings forecast at risk for next year.

McDermott beat EPS expectations of $0.15 in the first quarter by a full dime. But that followed three consecutive quarters of missed expectations. Revenues for the 2012 fiscal year are currently expected to be nearly flat with last year, with an 8% boost expected in 2013. Unless McDermott’s 2013 order book begins to fill up, that growth is definitely suspect.

Assuming that insiders buy shares of their company on the open market only because they believe the stock price will rise would indicate that McDermott’s executives and directors are making progress toward beefing up their backlog. But that’s a risky thing to bet on, especially with Brent prices at around $100/barrel. If prices fall further, say to $85-$90/barrel, production costs can eat up a lot of a producer’s profits. That means less cash flow and less capital investment. And that means less work for McDermott and the rest.

McDermott’s share price is up more than 10.5% today at $10.79 in a 52-week range of $9.04-$21.69. Nearly 6 million shares have traded as of mid-afternoon. The PowerShares Dynamic Oil and Gas Services ETF (AMEX: PXJ) is trading up 1.2% at $18.02 in a 52-week range of $17.73-$26.61. McDermott comprises 2.65% of the ETF’s holdings.

Paul Ausick