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On Aug 7, Zacks Investment Research downgraded energy-focused engineering and construction firm McDermott International (MDR - Analyst Report) to a Zacks Rank #5 (Strong Sell) following its dismal second quarter showing and several near-term challenges.

Why the Downgrade?

On Aug 5, McDermott reported weak Jun quarter results, owing to lower activities in the Middle East and Asia Pacific regions. Loss per share came in at 56 cents, against the Zacks Consensus Estimate of a profit of 3 cents. In the year-ago quarter, McDermott reported earnings of 22 cents per share. The company generated revenues of $647.3 million in the quarter, down 27.2% from the second quarter of 2012 and also failed to beat the Zacks Consensus Estimate of $758.0 million.

McDermott has hinted towards revenue of $3 billion in 2013, lower than the $3.6 billion it generated in 2012, mainly due to uncertainty around the timing of some the company’s bigger awards. Additionally, McDermott sees the large Papa Terra project in Brazil contribute to its earnings only in late 2013, as against the previous assumption of an earlier timeframe.

The offshore oilfield service provider is also struggling with cost overruns in its Malaysia and Saudi Arabia developments, which may lead to lower returns going forward. The financial picture has been further aggravated by deteriorating operating margins in its shallow water projects, with the company trying hard to expand into high margin deepwater projects.

As a result of these bearish factors, the tendency for a downward estimate revision has been more obvious in recent times. In fact, the Zacks Consensus Estimate for the third quarter has nosedived 9 cents (or 128%) to a loss of 2 cents per share over the last 7 days. The Zacks Consensus Estimate for the full year is a loss of 15 cents, down 58 cents (or 135%) in the same timeframe.

Stocks that Warrant a Look

While we expect McDermott to perform below its peers and industry levels in the coming months and see little reason for investors to own the stock, one can look at Range Resources Corp. (RRC - Analyst Report), Cabot Oil & Gas Corp. (COG - Analyst Report) and Clayton Williams Energy Inc. (CWEI - Snapshot Report) as a good buying opportunity. These North American energy explorers – sporting a Zacks Rank #1 (Strong Buy) – offer tremendous value and are worth buying now.
 

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