London-based oilfield contractor Acergy S.A. (ACGY) reported marginally weaker-than-expected second-quarter (ending May 31, 2010) results, reflecting weak margins and higher expenses. These factors were partially offset by good project execution skills and solid activity levels.

Earnings per ADR from continuing operations came in at 25 cents, just shy of the Zacks Consensus Estimate of 26 cents and below the prior-year profit of 40 cents.

Revenue & Operating Performance

Revenue for the quarter increased 10.5% year-over-year to $580.9 million, primarily due to robust exploration and production activity levels in West Africa and Asia Pacific, partially offset by weak contributions from the North Sea, Brazil and Gulf of Mexico. Compared to the second quarter of 2009, gross profit was up 27.7%, reflecting good project execution, particularly in West Africa and Asia Pacific.

Operating income from continuing operations was up 15.7% year-over-year, mainly due to higher sales, partly offset by higher expenses and lower contribution from associates and joint ventures. Adjusted EBITDA from continuing operations for the quarter was $121.4 million, up 7.2% year-over-year. However, EBITDA margin fell 60 basis points from the prior-year period to 20.9%.

Backlog

Acergy’s order backlog, as of May 31, 2010, stood at $2.3 billion, below the previous quarter level of $2.5 billion and also lower than the year-ago backlog of $2.4 billion. The sequential as well as the year-over-year decline reflects a relatively low order intake in the quarter. Of the $2.3 billion total backlog position, $900 million is likely to be executed in fiscal year 2010.

Capital Expenditure & Balance Sheet

Acergy’s capital expenditures for the quarter were $34.2 million. At the end of May 2010, the company had cash on hand of $631.2 million, down from $667.1 million in the prior quarter.

Outlook

Management indicated that the medium-term business environment remain strong, underpinned by a more stable oil price.

The company anticipates more activity in the conventional West African market during the next few months. Acergy believes its substantial local presence will act as a competitive strength in the region.

In particular, Acergy is encouraged that some of the company’s relatively high-margin Sub-sea construction, Umbilicals, Risers, and Flowlines (SURF) activities in West Africa and Australia, which were delayed during 2009 due to macroeconomic concerns, are expected to come to market. However, given the size and complexity of these new major SURF projects, offshore installation is not expected to commence before 2011.

Acergy sees limited visibility in the North Sea, where projects are slow to come to award. Pricing environment for shorter-term work in the region also remains very competitive. In the Gulf of Mexico, following the tragic oil spill incident and the deepwater drilling ban invoked in the aftermath, projects that were expected to be awarded over next 12 months are likely to be delayed until 2011 or possibly later. However, Acergy has very limited exposure to the region and as such there is unlikely to be direct impact on its financial performance in short or medium-term.

Acergy reiterated that it expects revenue for fiscal year 2010 to be in line with 2009, while EBITDA margin is likely to be slightly lower.

Remains an Attractive Investment

Acergy is currently rated as Zacks #2 Rank (Buy), implying that the stock is expected to do better than the broader U.S. equity market over the next one to three months. This is supported by our long-term Outperform recommendation (6+ months time period). With a healthy backlog, high-quality client base, significant cash balances, and no near-term refinancing requirements, we view Acergy ADRs as an attractive investment.
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