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Here's Why McDermott International Dropped 11.3% in March

What happened

Shares of McDermott International (NYSE: MDR  ) fell more than 11% last month, as investors looked to lock in gains from recent months and crude oil prices dropped about 6%. The stock began 2016 trading under $3 per share but ended at multi-year highs of roughly $7.40 per share. It climbed even higher to open the current year and touched $8.30 per share -- a level last seen in early 2014 -- before receding to current levels in the mid-$6 range.

The obstacles facing the industry should be familiar to investors by now. Low crude oil prices in recent years crushed the appetite for offshore oil and gas projects, which found it difficult to compete with lower-cost shale projects and were among the first projects to get the ax as producers sought out every possible cost-saving measure possible. The general trend hasn't been kind to McDermott International stock. However, the company found ways to turn in an impressive 2016 campaign despite industry headwinds, mostly thanks to strong performance in the Middle East. In February it even increased the originally issued full-year 2017 guidance.

That said, the economics for offshore projects remain challenging.

An offshore oil platform.

Image source: Getty Images.

So what

Despite the monthly decline in shares, the company appears to be on the right path, as evidenced by impressive full-year 2016 earnings released at the end of February. Revenue declined 14% compared with 2015, but operating income and operating cash flow swelled 29.6% and 222%, respectively (although operating cash flow included delayed payments from 2015). The year-over-year progress was driven by strength in Middle East projects, which generated $166.8 million in operating income to offset a net operating loss of $21 million from all other regions. Even better: Projects in the Middle East currently comprise 72% of the company's backlog. 

MDR Chart

MDR data by YCharts

McDermott International also increased its full-year 2017 guidance -- pretty much across the board. Here are the highlights:

Financial Metric

2017 Guidance

2016 Actual

% Difference

Revenue

$3.2 billion

$2.6 billion

23%

Operating income

$225 million

$142.3 million

58%

Diluted EPS

$0.29

$0.12

142%

Operating cash flow

($15 million)

$178.2 million

N/A

Data source: McDermott International.

The company has adjusted its earlier expectations to include improving oil prices and project cash flows, while the purchase and planned upgrading of a new deepwater vessel, Amazon, will lead to a near doubling of capital expenditures. That will also have the effect of crippling an otherwise strong operating cash flow. It's a risky -- and ambitious -- bet by management on the future of the business. What else should investors expect?

Now what

In light of the big picture and improving long-term trajectory for the stock, investors shouldn't be too worried that shares took a breather for a brief four-week period. McDermott International has a strong balance sheet and management believes the company is finding its groove again after getting caught off guard by the recent global oil glut. If you liked the offshore oil and gas company before March, then nothing that happened last month should change your mind. 

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