Jefferies On Oil Services & Equipment Group: Upgrades Oceaneering, FMC Tech Shares

In a report published Thursday, Jefferies analyst Brad Handler upgraded the ratings on Overweight ratings on FMC Technologies, Inc. FTI and Oceaneering International OII from Underperform to Hold.

Analyst Brad Handler said that subsea shares were discounting a “muted” deepwater recovery and that broad OFS weakness left “onshore names far more attractive to us.”

In the report Jefferies cited the reasons for the upgrades as:

1. Share price weakness
2. Some “optimistic signs” from FMC Technologies regarding "normalcy" in Subsea orders
3. Street estimates being conservative regarding margins
4. “At least some expected valuation support from M&A potential/relative earnings resiliency”

“We have grown more comfortable with Subsea revenue resilience for FTI—we acknowledge FTI's track record in its order forecasting and we note the 2Q15 pickup in "smaller" awards as well as the long lead item orders on two larger projects,” Handler wrote.

The order estimate for 2015 has been raised from $3.0B to $3.46B. The price target has been reduced from $33 to $32 to reflect “modestly lower earnings outlook and D&A/CF generation.”

Handler said that Oceaneering’s shares reflected “softer recovery and mid-cycle earnings power.” While keeping the EPS estimate for 2016 unchanged, the segment level EPS estimates were reduced by about $0.25 due to “(1) ROV revenues and margins to better align with our floater rig count forecast, as well as more marginally on softer (2) Subsea Products and (3) Asset Integrity.”

The normalized EPS estimate has been reduced from $3.50 to $3.10. The price target has been cut from $46 to $38 mostly to reflect “weaker out year assumptions.”