Auriga Reiterates a 'Buy' on McDermott International (MDR); Upstream/Government Story Trumps Quarterly Noise

November 23, 2009 12:02 PM EST

Auriga reiterates a 'Buy' on McDermott International (NYSE: MDR), price target $30.

Auriga analyst says, "We believe the upstream/offshore cycle has more legs than other energy infrastructure opportunities. The quarter-to-quarter noise around 3-month awards has trumped this in the short-run. However, we recommend investors with longer-term time horizons take a look at McDermott through the framework of a healthy cycle and Government growth that is not discounted in the stock, in our view...We believe the upstream/offshore cycle will be the longest-tailed of the energy infrastructure themes. McDermott's EPIC capabilities are not appreciated by investors narrowly dialed into sequential bookings trends. Furthermore, McDermott's Government segment would garner a very healthy valuation on a stand-alone basis that is not reflected in the stock due to the concentration of Oil & Gas focused investors."

"The segment generates healthy cash and margins and limits cyclicality. We believe proposed legislation in Congress to support smaller nuclear reactor designs, McDermott's nuclear fabrication and fuel services, and TVA's early endorsement for the B&W mPower design offer longer-term value potential for shareholders. The recent trading action in McDermott's stock is not reflective of the improved drilling environment, which is supported by stable oil prices above $60. We also believe McDermott's recent foray into Brazil is under-appreciated, as are the quantity of APAC bidding opportunities and the general push to drill in deeper waters where fabrication and installation requirements limit the competitive field. We believe investors will wake up to the Gulf of Mexico opportunity over the coming quarters as large projects begin to move forward. Given the weak dollar and limited playing field in the Gulf for fabrication/EPIC services (Kiewit, Gulf Island, McDermott), we believe there is a scenario developing that could have McDermott firing on multiple geographical cylinders simultaneously."

To see all the upgrades/downgrades on shares of MDR, visit our Analyst Ratings page.

McDermott International, Inc., through its subsidiaries, operates as an engineering and construction company worldwide. It operates in three segments: Offshore Oil and Gas Construction, Government Operations, and Power Generation Systems.

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