Oceaneering International, Inc. (NYSE: OII) has reported record fourth quarter and annual earnings for the periods ended December 31, 2013.

For the fourth quarter of 2013, Oceaneering earned net income of $93.4 million, or $0.86 per share, on revenue of $894.8 million. During the corresponding period in 2012, net income was $80.6 million, or $0.74 per share, on revenue of $780.9 million. For the year 2013, Oceaneering reported net income of $371.5 million, or $3.42 per share, on revenue of $3.3 billion. For the year 2012, net income was $289.0 million, or $2.66 per share, on revenue of $2.8 billion.

Fourth quarter 2013 results included a $3.3 million charge to establish an allowance for doubtful accounts related to Remotely Operated Vehicles (ROV) receivables from OGX Petróleo e Gás S.A., which initiated a court-supervised restructuring under Brazilian bankruptcy law during the period. This charge was recorded as an ROV selling, general and administrative expense.

Quarterly EPS increased year over year due to profit improvements by all oilfield business operations, led by ROV and Subsea Products. Subsea Products achieved record quarterly operating income.

Annual EPS increased as all operating segments attained higher income. Four of five segments achieved record operating income. Although not a record, Subsea Projects operating income increased by 48%. Overall operating margin was the second highest in Oceaneering's history.

M. Kevin McEvoy, President and Chief Executive Officer, stated, "Results for the fourth quarter and the year were exemplary as we achieved record EPS in each period. Our ability to produce these exceptional results is largely attributable to our global focus on deepwater and subsea completion activity, the business expansion strategy we have in place, and our solid operational execution.

"We achieved record ROV operating income for the tenth consecutive year on higher global demand to provide drill support and vessel-based services and the expansion of our fleet. We increased our days on hire by more than 9,000, to over 91,000 days for the year. Our fleet utilization rose to 85% from 80% in 2012. During 2013 we put 26 new ROVs into service, retired 10, and transferred 1 system to Advanced Technologies for non-oilfield use. At year end, we had 304 vehicles in our ROV fleet.

For several years we have been voicing our concerns over a tide of issues facing the oil majors; firstly it seems that their oil production has peaked, then one year ago we noted that the spiraling capital expenditure was unsustainable – some will remember that the likelihood of 'Capex Compression' was the subject of our first 'DW Monday'. And it is now happening. Hess's 2014 spend is to be 30% lower than that of two years earlier, Shell is reducing by 20% compared to 2013, BG's is also set to fall and BP's Bob Dudley has stressed the importance of "capital discipline".

The upstream spend of the publicly listed international oil majors totaled about $270bn in 2013, approximately one-third of industry upstream spend. If we project the trajectory of Shell to the other IOCs then we might expect their Capex to fall by 20% over the next two or three years. This would equate to about 7% of the total industry's annual upstream Capex. The brunt is likely to be felt in the high Capex segment, notably in arctic, deepwater and LNG projects, reflected in our forecasts being somewhat more conservative than other firms.

However, there is the other 93% of Capex to go for, possibly in excess of $650bn in 2014. There are two other important groups of players in the game – the highly innovative smaller independent oil companies responsible for the surging onshore production of oil & gas from the US shales and at the other end of the scale the national oil companies such as Saudi Aramco. The NOCs are typically characterised by long-term spending programmes, and commit to long contracts for equipment and services. The NOCs are in the main continuing their spend – as we will show in a later edition, they are having to drill more and more holes for less and less oil. Indeed, in the latest Barclay's Capital industry survey, the NOC's expected their spend to grow at some 11%.

So what of the impact on the oilfield services companies? The cutback in high Capex projects will impact on the unprepared and those who do not have diversified offerings and client base. But all downturns bring major opportunities for well financed companies able to take the long term view – oil & gas is not a short-term business. Indeed, our research in Middle East tells us that the process of becoming an accepted vendor to NOCs such as Saudi Aramco can take several years.

Finally it must be remembered that E&P is not just Capex – the oil and gas must be kept flowing and the associated maintenance, modifications and operations (MMO) spend keeps slowly ramping upwards.

Douglas-Westwood

NYC-based PIRA Energy Group reports that western Canadian and Bakken crude price differentials strengthened in January. On the week, U.S. stocks declined. In Japan, crude and product stocks also drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Western Canadian and Bakken Crude Price Differentials Strengthened

Western Canadian and Bakken crude price differentials strengthened in January, as frigid temperatures in the North slowed production growth, and rail volume continued to rise. Cushing stocks were flat in January, but WTI moved into backwardation in anticipation of large stock draws following the recent startup of TransCanada's Gulf Coast pipeline.

Another U.S. Stock Decline

January has been remarkable with U.S. oil inventories falling over 700 MB/D or some 22 million barrels. This past week contributed 5.3 million barrels of the decline, all of which was in products since crude oil inventories built slightly

Japanese Crude and Product Stocks Draw

Total commercial stocks drew 5.9 MMBbls on the week. Crude runs rose slightly and implied crude imports eased sufficiently to draw crude stocks 2.4 MMBbls. Finished product stocks also drew with declines in kerosene, fuel oil, and a more modest draw on gasoil stocks. Gasoil demand was relatively strong at 960 MB/D. Kerosene demand was surprisingly lower, but a low yield allowed for a strong stock draw rate of 139 MB/D for the week.

Aramco Crude Price Differentials for March

Saudi Arabia's formula prices for March were recently released. Pricing adjustments for the key markers were lowered for Asian destinations on all grades of crude, other than Arab Heavy. The greatest reduction was on the lightest grades, which saw more generous terms by as much as $1.40/Bbl. European pricing differentials were raised across the board, with the greatest increase at the heavy end. Pricing for purchases destined to the U.S. were left unchanged.

U.S. Propane Remains the Market Leader

U.S. propane remains the market leader as low inventories and on-going cold weather provides price support. The economics of moving cargoes from the USGC to either Europe or Asia has turned negative. Indeed, North Sea cargoes are due to arrive in the Northeast, as some U.S. export shipments are also canceled. The redirection of propane to the mid-continent seems to have been effective in taking some of the froth out of the market.

Ethanol Prices Higher

U.S. ethanol prices increased the week ending January 31 as weather-related production problems and rail car shortages persisted. Demand was strong as the manufacture of ethanol-blended gasoline rose to a five-week high, and inventories declined.

Ethanol Output Decreases

U.S. ethanol production declined to a three-week low of 895 MB/D the week ending January 31 from 900 MB/D in the preceding week as brutally cold weather and power shortages limited output. Inventories dropped by 193 thousand barrels to 16.7 million barrels, the largest week-on-week draw since October.

The information above is part of PIRA Energy Group's weekly Energy Market Recap, which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.