Finance & Investment ClubIndustrials SectorFall 2012

Senior Analyst: Jake Siegel

Junior Analysts: Payal Patel Vincent Liao, Valentina Delgado, Robert Maghielse, Soosok Kim, Shane Byrnes, Tinna Zhang, Daniel Krieger, Ruby Lin, James Yu

Oil and Gas Pipeline Construction

 

2

Industry Definition – Oil and Gas Pipeline Construction

Firms in this industry derive the majority of their revenue from the design, engineering and construction of pipelines used in the procurement, production and transfer of oil and other natural gases. These products primarily service a wide range of various U.S government agencies in addition to both domestic and international private clients who are in the business of the production, procurement and transfer of oil.

Fluor Corporation (NYSE: FLR)

Jacobs Engineering Group, Inc. (NYSE: JEC)

Quanta Services, Inc.NYSE: PWR

KBR, Inc. (NYSE: KBR)

McDermott International (NYSE: MDR)

MasTec, Inc.(NYSE: MTZ)

WillBros Group, Inc.(NYSE: WG)

 

3

Industry Breakdown and Summary

Industrial Goods$ 48387B

Heavy Construction970B (2.01 %)

Industry Breakdown By Market Cap ($BLN) Sub-Sector Breakdown by 2011 Revenue ($M)

42%

19%

8%

17%

6%

5% 3%

 

4

Revenue Generation and Industry Model

Design Pipeline System

Raw Materials(Iron Ore)

Build Pipeline System

Bid For Contract

 

5

Revenue Generation By Operating Segments

Collection58%

Construction

Services60%

Engineering Services

30%

Operation

s and Maintenance 10%• Provide traditional

field construction services to private and public sector clients

• Employ engineering, architectural and design related disciplines necessary to build transportation system

• Repair and replacement of pumps, piping, heat exchangers, and other equipment

Private and Government Clients

 

6

Presentation Overview

Oil and Natural Gas Pipeline Construction

Demand in Aerospace

Increased electronic demand and usage in China

Key Industry Drivers/Trends

Oil and Natural Gas Pipeline Construction Industry Rating:

POSITIVE

Growing Crude Oil Outputs

Decreasing Iron Ore Prices

Increasing Demand from U.S. Government

 

7

Trends

Growing Crude Oil Outputs

Decreasing Iron Ore Prices

Increasing Demand from U.S

Government

 

8

Trend I: Revenue Expectations from Growing Crude Oil Outputs

Sep-20

06

Jan-20

07

May-20

07

Sep-20

07

Jan-20

08

May-20

08

Sep-20

08

Jan-20

09

May-20

09

Sep-20

09

Jan-20

10

May-20

10

Sep-20

10

Jan-20

11

May-20

11

Sep-20

11

Jan-20

12

May-20

12-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

% Change in Global Crude Oil Output

21% Decrease inMay 2008

Sep-06

Dec-06

Mar-07Jun

-07

Sep-07

Dec-07

Mar-08Jun

-08

Sep-08

Dec-08

Mar-09Jun

-09

Sep-09

Dec-09

Mar-10Jun

-10

Sep-10

Dec-10

Mar-11Jun

-11

Sep-11

Dec-11

Mar-12Jun

-12

Sep-12

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

% Change in Total Industry Revenue

20% Decrease from May 2008-May

2009

7% Increase inJan. 2012

Projected 7% Increase in

Jan. 2013 Revenue that is Attributable

to Crude Oil Outputs

• A relationship exists between total revenue of the Oil & NG Pipeline Construction Industry and Global Crude Oil Output

• There is an apparent one year lag between increases in Crude Oil Output and increases to industry revenue

 

9

Trends

Growing Crude Oil Outputs

Decreasing Iron Ore Prices

Increasing Demand from

U.S. Government

 

10

Trend II: Cost Benefits of Decreasing Iron Ore Prices% Change in Iron Ore Prices

Sep-09

Mar-10

Jun-10

Sep-10

Mar-11

Jun-11

Sep-11

Mar-12

Jun-12

Sep-12

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

% Change in Iron Ore Prices

Sep-

09Mar

-10

Jun-

10Se

p-10

Mar-1

1Ju

n-11

Sep-

11Mar

-12

Jun-

12Se

p-12

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

% Change in Industry COGS/Sales

3.5% Decrease inMarch 2012

• Iron Ore represents 50-70% of industry COGS

• We expect Iron Ore prices to drop even further in the next year which will continue to provide the industry with this cost advantage

• Current Iron Ore stockpiles at Chinese ports are at a record high 97.43M metric tons

• India has instituted a 2-year ban on distribution of 120M metric ton supply of iron ore

 

11

Trends

Growing Crude Oil Outputs

Decreasing Iron Ore Prices

Increasing Demand from U.S.

Government

 

12

Trend III: Increasing Demand from U.S. Government

Projected .75% Increase toIndustry Revenue

• 2009 and 2010 PHMSA regulations mandated pipeline maintenance and repair throughout the U.S.

• Contracts with PHMSA effective in 2013 and 2014 will grow revenue by a projected $250m

2009 2010 2013E 2014E$0.00

$50,000,000.00

$100,000,000.00

$150,000,000.00

$200,000,000.00

$250,000,000.00

$300,000,000.00

Net Revenue Growth Attributable to PHMSA

.65% Increase toIndustry Revenue

 

13

Risks

The industry is subject to risk associated with commodity price volatility

• With iron ore accounting for between 50-70% of COGS, hikes in the price of iron ore can force constituent firms to incur more costs and a shrink to margins.

Global crude oil output sets the level of demand for industry services

• If crude oil output experiences a large falloff, industry revenues may start to decrease as pipeline transportation capacity demand will fall.

Operations include construction and maintenance site that are inherently dangerous workplaces

• Failure to maintain safe work sites can expose companies to significant financial loses and potential civil and criminal liability.

Firms in this industry run the risk of entering into bidding wars

• Firms in the industry enter silent bids for news contracts and run the risk of pricing themselves too low in order to acquire the most business

 

14

Key FinancialsCompany Market

Cap. 5-Year Revenue Growth (%) LTM ROI or ROE LTM EBITDA Growth(%) EV/EBITDA P/E

Fluor 8.4 10.68 17.23 60.55 5.32 15.30Jacobs 5.2 5.15 10.77 6.67 6.97 14.07Quanta 5.7 16.76 3.93 9.58 9.18 19.59

KBR 4.1 1.01 20.25 3.11 5.48 20.43

McDermott 2.4 -3.52 8.93 -20.43 4.92 14.54

MasTec 1.74 26.19 14.48 4.93 7.78 21.46Willbros 0.246 24.35 -7.06 1.32 25.00 12.03

High 8.4 26.19 20.25 60.55 25 21.46Low 0.246 -3.52 -7.06 -20.43 4.92 12.03

Median 4.1 10.68 10.77 4.93 6.97 15.3Mean 3.97 11.52 9.79 9.39 9.24 16.77

 

15

Presentation Overview

Demand in Aerospace

Increased electronic demand and usage in China

Key Industry Drivers/Trends

Oil and Natural Gas Pipeline Construction Industry Rating:

POSITIVE

• Projected 7% increase to revenue due to growing crude oil output

• Projected 3.5% decrease to COGS/Sales due to decreasing iron ore prices

• Projected .75% increase to revenue in both 2013 and 2014 due to Pipeline and Hazardous Materials Safety Administration regulations

 

16

Thank You & Slide Matrix

• Industry Definition• Industry Breakdown and Summary• Revenue Generation Model I• Revenue Generation Model II• Presentation Overview• Revenue Expectations from Crude Oil Outputs• Decreasing Iron Ore Prices• PHMSA Regulation• Risks• Key Financials• Conclusion

Thank You For Your Time

We Welcome Any Questions You May Have