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McDermott (MDR) Lags Q2 Earnings and Revenue, Stock Falls

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Offshore oil and gas-focused engineering and construction firm McDermott International Inc. (MDR - Free Report) reported earnings of 13 cents per share in second-quarter 2017, lower than the Zacks Consensus Estimate of 16 cents. The weaker-than-expected results are mainly attributed to increased costs. However, the bottom line improved from the year-ago quarter’s earnings of 8 cents on strong project execution and increased activity levels.

An earnings miss in this quarter broke the company's impressive track record of beating estimates in each of the last ten quarters.Concurrently, shares declined 3.95% to eventually close at $6.81 on Jul 25, reflecting investors’ disappointment.

McDermott generated revenues of about $788.7 million in the quarter, higher than $706.6 million in the prior-year quarter. Increased fabrication and marine activity levels on Saudi Aramco LTA II, ONGC Vashishta and Saudi Aramco Marjan power system replacement drove revenues. However, the top line was below the Zacks Consensus Estimate of $861 million. Lower revenues are mainly attributed to reduced activities on Ichthys LNG project as it is yet to become operational.

McDermott International, Inc. Price, Consensus and EPS Surprise


Total Expenses

Total costs and expenses increased about 8% from $649.6 million in the year-ago quarter to about $701.5 million. Higher cost of operations and research and development expenses led to increasing costs and expenses.


At the end of the first quarter, McDermott had a backlog of $3.3 billion compared with $4.4 billion a year ago. While 85% of the total backlog is related to offshore operations with Saudi Aramco work accounting for about 67% of backlog, the remaining 15% pertains to subsea operations. Of the total backlog, approximately $1.7 billion is expected to cleared in 2017 and the remaining $1.6 billion in 2018.

Balance Sheet

Capital expenditure for McDermott was about $18 million during the quarter as compared with $139 million in the year-ago quarter. Capex in the quarter was mainly driven by upgrades to the pipelay and construction vessel Ceona Amazon acquired in the prior quarter along with reformation of the Altamira fabrication yard to accommodate larger and heavier structures.

As of Jun 30, 2017, the company had cash and cash equivalents of $393.7 million and long-term debt of approximately $526.7 million. The debt-to-capitalization ratio of the company is about 24.08%.

Updated 2017 Guidance

The company updated its prior guidance to reflect the impact of the closing of its amended and restated credit agreement and repayment of the term loan. The projected gross debt is now likely to total to $550 million at the end of 2017 as against the prior guidance of $770 million. Net debt is estimated to be approximately $235 million at the end of the year.

However, other projected numbers including revenues, income, capex, EPS and free cash flow remain as per the previous guided figures.

Zacks Rank & Key Picks

Incorporated in 1959, Houston, TX-based McDermott is focused on the offshore oil and gas business. The company also provides project management and procurement services. It operates in most of the major offshore oil and gas producing regions under three main reporting segments: Asia Pacific, Americas and Middle East. The company currently carries a Zacks Rank #3 (Hold).

Some better-ranked players from the broader energy space include Braskem S.A. (BAK - Free Report) , Petróleo Brasileiro S.A. or Petrobras (PBR - Free Report) and SeaDrill Limited . While Braskem and Petrobras sport a Zacks Rank #1 (Strong Buy), SeaDrill Limited carries a Zacks Rank #2 (Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

Braskem reported an average positive earnings surprise of 107.79% in the trailing four quarters.

Petrobras delivered an average positive earnings surprise of 59.58% in the last four quarters.

SeaDrill reported an average positive earnings surprise of 97.13% in the last four quarters.

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