It is indisputable that the shale oil revolution in North America has unleashed a burst in production during the last years, and it shows no signs of abating. This unanticipated surge in inland oil and liquids production has created a substantial need for pipelines, which were the central topic of my recent articles.
The readers welcomed that series of articles and then asked me for additional information about other pipelines-related companies, which could benefit from the infrastructure boom. I decided to make a research first to check whether such a series already exists in the online financial websites but I did not find any. I expected it because the North American "Pipeline Revolution" is still at its infancy. Most of the projects will be completed in 2014, and some of them will be done by 2016. So the gap of information was apparent. All this being said, my research showed that the following companies will be the primary beneficiaries from the ongoing pipeline projects of North America:
1) SPX Corporation (SPW): One of SPX divisions is M&J Valve, which is a leading valve maker for liquids pipelines. In late 2011, SPX acquired ClydeUnion Pumps, a British pump maker whose primary products include centrifugal pumps and reciprocating pumps that are utilized in oil and gas processing among other industrial applications.
It seems that SPX has identified strong demand for pumps and it was also interested recently in acquiring Gardner Denver (GDI), another major pump maker. However, the company decided to walk away from the deal finally, maybe because it has accepted severe criticism for its acquisition strategy.
Valves and pumps make up part of SPX's fast-growing global flow technology business that the company has said it expects overall to contribute $1 billion to sales this year. Additionally, SPX makes transformers targeting the power generation customers and also serves the sanitary food/beverage business as part of its flow technology. It is also worth noting that the company recently completed the $350 million share repurchase plan it entered into in early 2012.
The stock has a positive momentum lately and the momentum investors will like it. Fundamentally speaking, SPX's meager dividend is combined with high PE, high PBV along with negative net tangible assets and this mix of metrics is not attractive to me.
2) Flowserve Corporation (FLS): The ongoing pipeline projects is a tailwind for Flowserve too. This company designs, manufactures, distributes and services the pumps, seals and valves necessary to operate pipelines, refineries and wells. 40% percent of Flowserve's 2011 revenue came from the energy sector. Dallas-based Flowserve has said U.S. and Canadian unconventional resources, such as shale and tight oil and gas production, have led to "significant project activity" in its North American oil and gas, chemical and power markets.
Flowserve's products also cover several other infrastructure related industrial segments like the power generation, water management and the healthcare industry.
Flowserve has been lacking of significant growth on its top line during the last three years but on the positive side, the company has been consistently profitable with stable margins. It also pays a meager dividend. However, it trades with a very high PBV=4 and the stock has risen a lot lately, which is not the performance that allures me to become a buyer currently.
3) MRC Global (MRC): MRC debuted in an IPO in April 2012 and it is the largest pipe, valves and fittings distributor in the world. Goldman Sachs (GS) has 10% of the company. In June 2012, MRC expanded its business by acquiring the assets of Chaparral Supply LLC, a subsidiary of SandRidge Energy (SD). Chaparral Supply was providing pipe, valve and fitting products and oilfield supplies to its parent organization, SandRidge Energy. MRC merged Chaparral with the company's existing Alva, Oklahoma, service location. Additionally, as part of the acquisition, MRC and SandRidge Energy agreed to enter into a supply agreement whereby MRC would serve as the primary pipe, valve and fitting product and oilfield supply distributor to SandRidge's operations in Oklahoma, and Kansas. In Jan 2013, MRC completed a second acquisition in its history as a publicly traded company. It bought Production Specialty Services, which supplies pipe, valves and fittings to the oil and gas industry. It is worth noting that MRC Global recorded a $46.5 million writedown in 2009 on an overhang of unused inventory as customers dried up. That was when the pipeline projects to handle the natural gas frenzy were completed and the financial crisis halted further investments in many sectors. It is clear that the company has an aggressive acquisition strategy. In addition, the stock has a positive momentum and the readers who are momentum traders will definitely like it. From a fundamentals perspective, MRC has high PE, high PBV along with negative net tangible assets and eventually "this is not my cup of tea."
4) Colfax Corporation (CFX): Colfax is a diversified global manufacturing and engineering company that designs, manufactures, and distributes gas- and fluid-handling and fabrication technology products and services worldwide. These products help extract, transfer, refine and store crude oil reliably and efficiently among their diverse applications.
However, Colfax trades well above its book value, it has a scary (Total Liabilities)/(Equity) ratio and the net tangible assets are negative. In addition, the impressive growth of its top line is not coupled with a growth at the bottom line and this concerns me too. All in all, I do not recommend Colfax at the current levels.
5) IDEX Corporation (IEX): IDEX has precision engineered pumps, meters and systems that move, measure and dispense high value liquids, gases and solids. 23% of IDEX's 2011 fluids and metering revenue came from energy, and over 50% of that came from international markets. For the fourth quarter of 2012, the company's Fluid & Metering Technologies division contributed 43% of sales and 43% of operating income. It is worth mentioning that the company completed the repurchase of 2.2 million shares of common stock for $90 million in 2012. My comments for IDEX's stock are similar to the ones above for SPX and MRC.
In the next two Parts of this series, I will provide the readers with more picks that look more undervalued than the ones above. So folks stay tuned because more critical information for your investment decisions is coming.