Offshore, 'Backlog Is King'

A new report by Cowen and Company’s Scott Kirkwood focuses on the offshore engineering and construction business and what Cowen sees ahead for the segment in coming months. In the report, Cowen discussed its positive outlook for the industry.

NOC/IOC spending
When it comes to offshore engineering and construction companies, the primary demand for services comes from large national oil companies (NOCs) and international oil companies (IOCs). Despite Cowen’s forecast of a 40 percent reduction in E&P capex in 2015, the firm is predicting only a 20 percent reduction in capex for NOCs and IOCs this year.

Backlog is vital
Cowen is expecting project delays and declines in order intake through the remainder of 2015 and into 2016. Therefore, companies with strong backlogs are safer bets for investors at the moment. In addition to a strong backlog, Cowen recommends names with both geographic and customer diversity.

Backlogs due for execution in 2015 currently make up 83 percent of Cowen’s revenue forecasts for the offshore engineering and construction group.

Vertical integration
Cowen names Aker Solutions as a leader when it comes to vertical integration and mentions the company’s subsea tree as something that differentiates it from its competition.

In the report, Cowen praises Technip for its vertical integration as well. “Technip has the most complete offering in our coverage group and the Forsys Subsea JV has merely served to strengthen their position as they can now offer a complete turnkey solution for an offshore project,” Kirkwood explains.

Stock picks
Technip, which is listed on European exchanges, is Cowen’s top stock pick in the space. However, Cowen also has an Outperform rating on McDermott International Inc MDR.