McDermott Tumbles 10% on Stock Offering - Analyst Blog

Offshore oil and gas-focused engineering and construction firm McDermott International Inc.'s MDR share price plummeted 10.1% after the company declared its intention to offer around 10,000,000 stocks at $25.00 per unit. This offering will result in share dilution, implying that the proportional ownership of the existing investors will be lowered. Hence, the investors will lose a portion of their voting rights. Additionally, the company's plan for utilizing the offering's net proceeds on normal corporate activities is also a matter of concern.

Separately, McDermott declared that its first-quarter 2014 results might be worse than its recent expectation. Moreover, the company apprehends that its profit margin, from the operation of backlog projects, will not be able to cover its fixed expenses − direct operating costs and general and administrative expenses – and restructuring costs. Both factors have also led to the decline in share price, in our view.

Houston, Texas-based McDermott primarily serves the worldwide offshore oil and gas field developments, including the front-end design and detailed engineering, fabrication and installation of offshore drilling and production facilities.

The company reported weak bottom-line results in 2013, missing the Zacks Consensus Estimate in all the four quarters. For the most recently reported quarter, McDermott reported a loss of 80 cents, which compared unfavorably with the Zacks Consensus Estimate of earnings of 16 cents. Things do not look favorable for the company in the near term as well.

Thus, McDermott has a Zacks Rank #4 (Sell), implying that it is expected to underperform the broader U.S. equity market over the next one to three months.

Meanwhile, one can consider better-ranked players in the energy sector like Valero Energy Corp. VLO, Helmerich & Payne Inc. HP and Patterson-UTI Energy Inc. PTEN. All these stocks sport a Zacks Rank #1 (Strong Buy).