These Are The Beneficiaries From The Pipeline Revolution In North America (Part II)

by: Value Digger


The first pipeline build-out in the United States came during World War II when the Government ordered a two-pipeline system, the Big Inch and Little Big Inch, to carry oil and refined products to the Northeast from the Gulf Coast.

The demand for natural gas and oil drove the pipeline construction postwar and some remarkable pipeline projects from the postwar period are the pipelines connecting Gulf Coast refiners to the Northeast market and the Trans-Alaska Pipeline System. Then the pipeline construction slowed dramatically as refinery construction stopped and steady oil production necessitated only incremental improvements in the network. The natural-gas shale frenzy ignited another construction boom for new natural gas pipelines from 2006 until 2009 when the financial crisis and a collapse in prices halted investment. In the first Part of this series, I discussed the industrial companies, which have the potential to be the beneficiaries from the ongoing "Pipeline Revolution" in North America as they are making key pipeline components essential to the efficient operation of these massive pipelines and for maintaining pipeline flow. These components are valves, seals, pumps, fittings and fluid handling products. In this Part, I capture companies from other sectors.

The Companies

1) Bri-Chem Corporation (OTC:BRYFF): This Canadian company has the kind of metrics and fundamentals that is too good to pass up. It is a North American distributor, blender, and manufacturer of drilling fluids and steel pipe for the oil and gas industry in North America. The company operates in three segments: Fluids, Steel Distribution and Steel Manufacturing. Its Fluids segment includes the sale of fluids and chemical additives to the resource and industrial markets. Bri-Chem's Drilling Fluid Division is North America's largest independent wholesale supplier of drilling fluids for the oil and gas industry.

The Steel Distribution segment includes the sale of tubular steel products to the resource, industrial and construction industries.

The Steel Manufacturing segment produces seamless steel pipe through a thermal expansion process for sale to steel pipe distributors in North America. Bri-Chem's Steel Pipe Division is one of only two companies in North America that can manufacture and supply large diameter seamless steel pipe for the energy industry. The revenue from this division rose 2131% to $4,065,418 in Q3 2012. Bri-Chem is the first company to introduce Thermal Pipe Expansion (TPE) in North America.

The company took a series of growth initiatives in 2012. In June 2012, the company expanded its footprint in the USA drilling fluids market by adding its tenth new strategically located storage area for distribution of drilling fluid products and stimulation additives to the USA oil and gas industry. The new location is situated on the southeast side of Belfield, North Dakota, targeting to service the Bakken formation.

In September 2012, it expanded its drilling fluids market in New Mexico and in November 2012, it installed all the major equipment at its large diameter seamless steel pipe manufacturing facility, located in Edmonton, Canada.

Bri-Chem also acquired 2 companies during the last couple of months and initiated a share repurchase program.

The stock trades below its book value (PBV=0,7) with PE=5 and I bought at $1,94 my first shares last week.

It is also worth noting that the privately-held JMC Steel Group acquired in early 2012 Lakeside Steel, Bri-Chem's competitor, which was a publicly traded company at Toronto Stock exchange.

2) Synalloy Corporation (NASDAQ:SYNL): Synalloy is a producer of stainless steel pipe and a fabricator of stainless and carbon steel piping systems among its other products (i.e. specialty chemicals). Its products serve the oil & gas, chemical, pulp and paper, mining, power generation (including nuclear), water and wastewater treatment, brewery, food processing and pharmaceutical industries.

In August 2012, Synalloy acquired Palmer, a manufacturer of liquid storage solutions and separation equipment for the petroleum, municipal water, wastewater, chemical and food industries. Palmer's business has been focused on providing fiberglass and steel tanks to the oil industry. Palmer's facility in Andrews, Texas, is strategically located in the heart of the Permian Basin of west Texas and also serves other liquid rich shale areas including the Anadarko Basin, Eagle Ford Shale and the Barnett Shale. That was a strategic acquisition because each oil well requires one fiberglass tank and two steel tanks. Some of the biggest customers of Synalloy is EOG Resources (NYSE:EOG) and Apache (NYSE:APA).

The stock trades with PBV=1,2 and PE=21 paying dividend of 1,76%. The bank debt grew in H2 2012 to fund Palmer's acquisition. Hopefully, the operating cash flow will return back to positive territory after this acquisition. Although the company has potential, I do not consider Synalloy to be undervalued currently.

My research shows that this is the first article about Bri-Chem Corporation and Synalloy for an online publication and obviously I am glad that I unearthed these two profitable and growing companies. This fact likely reminds my followers of C&C Energia case, another profitable and growing company with very low awareness that was unearthed by my article for SA in August 2012.

C&C Energia was acquired by Pacific Rubiales (OTC:PEGFF) with almost 50% premium three months later. Although it is highly speculative for a reader to assume that Bri-Chem and Synalloy will also be acquired with a significant premium soon, all options are open. However, I want to make it clear that I do not recommend and I do not endorse any purchase on these two companies based solely on an acquisition scenario.

3) Tenaris SA (NYSE:TS): This company engages in the manufacture and sale of steel pipe products, which are suitable for onshore gathering, transportation and distribution of oil & gas. Tenaris also provides a wide range of seamless steel tubes and pipes for refineries, petrochemical and gas-processing plants.

This Luxembourg-based company announced in June 2012 that it plans to expand its U.S. operations targeting the development of unconventional shale (oil and gas) reserves and the resumption of deepwater drilling activity in the Gulf of Mexico. The plan includes the installation of a pipe mill, heat treatment and threading facilities with an estimated investment of $1.5 billion. The new mill, which is expected to begin operations in 2016, will have an annual production capacity of 650,000 tons of seamless pipes and will be fully integrated with the rest of Tenaris' U.S. manufacturing and service operations.

I like that the company has a satisfactory net profit margin of 16%-17% and low long-term bank debt along with a decent growth at the bottom line. It trades with PBV=2 and a relatively low PE. However, the income investors will not like the meager dividend of 1.3%.

4) Primoris Services Corporation (NASDAQ:PRIM): It is a specialty contractor that provides a wide array of services. Primoris, through the subsidiaries ARB and Rockford, installs and maintains transmission and distribution pipelines of natural gas, crude oil, petrochemical and refined petroleum product. The company also provides construction services pertaining to all aspects of pipeline installation, replacement, and rehabilitation.

In January 2013, Rockford was awarded contracts for new natural gas pipeline and gathering systems totaling approximately $22.6 million. The new contracts represent additional work in the Marcellus Shale region of Pennsylvania. All of this work should be completed by the third quarter of 2013.

In December 2012, Rockford was awarded a new contract for Segment 2 of the Appalachia-to-Texas (ATEX Express) pipeline project. The overall 1,230 pipeline project is designed to transport natural gas liquids from the Marcellus-Utica Shale region of Pennsylvania, West Virginia, and Ohio, to the Texas Gulf Coast near Houston. Segment 2 consists of 118 miles of 20" pipeline running from near Newark, Ohio, to southeast of Dayton, Ohio.

In November 2012, Primoris acquired Q3 Contracting Inc., which specializes in small diameter pipeline and gas distribution construction.

The stock has risen a lot lately and the momentum investors will find it interesting. However, Primoris trades well above its book value (PBV=3) with a high PE ratio currently. The company's top and bottom lines grew much from 2009 until 2011 but the growth slowed down in 2012. The company has a net profit margin of 4%.

5) Michael Baker Corporation (NYSEMKT:BKR): Baker provides engineering, design, planning and construction services in several business areas like architecture, aviation, defense, environmental, geospatial, homeland security, municipal & civil, oil & gas, rail & transit, telecommunications & utilities, transportation, urban development and water. Past projects for the company include the Trans-Alaska Pipeline. Today, Baker is still involved in pipeline projects to move gas from Alaska's North Slope and in meeting the complete engineering and construction services needs of producers and midstream operators in the Lower-48 shale basins, particularly the Marcellus Shale region.

It is said lately that Baker will receive a takeover offer. Due to these acquisition rumors, the stock rose a lot and it does not trade with a discount to the peers currently. PBV and PE are 1,1 and 25 respectively. The company is debt free but the net profit margin is as low as 1%-1,5%.

6) United States Steel Corporation (NYSE:X): This company is one of North America's largest integrated steelmakers and the continent's largest producer of energy tubular products. U.S. Steel has provided solutions to the energy industry for well over a century- from supplying pipe for some of the earliest pipelines in the U.S., to developing specialty steels and tools vital to today's shale plays. It introduced the first seamless drill pipe to the oil and gas industry before World War I.

U.S. Steel operates in three segments: Flat-rolled Products (Flat-rolled), U. S. Steel Europe (USSE), and Tubular Products (Tubular). The company has several headwinds to face currently (i.e. high levels of inventories, high raw material costs, tough competition) but it seems that it is recovering at a snail's pace.

The top line has been growing for four years now and the bottom line has slowly improved returning back to profits in Q2 2012. U.S. Steel will most likely be break-even for 2012 after the losses of Q1 2012. The operating cash flow has also been in positive territory during all the quarters of 2012. However, I think this company is not undervalued currently.

Investment Opportunities

When the readers check my comments for the aforementioned companies, they may wonder what I consider as a buying opportunity. Well, I feel very responsible for my publicly available stock picks and I want the readers and primarily my followers to hit above-average returns in case they buy these picks. I have been a fundamentalist investor for 23 years now and eventually I put stringent criteria for my stock picks to pass. My investing strategy is to buy grossly undervalued (i.e. the Canadian driller Tuscany International Drilling) or undervalued companies (i.e. Rock Energy) with significant growth potential that can be sold at fair or overvalued valuations in 1-2 years. I do not buy grossly overvalued (i.e. Halcon Resources) or overvalued companies even if they are likely to go higher. I do this because I want to play it safe and protect my own and my followers' portfolio. Buying undervalued companies with growth potential is the biggest safety cushion for me.

For instance, I recommended recently Surge Energy (OTCPK:ZPTAF) and some undervalued Argentinean stocks in late November 2012 that have already yielded from 10%-70% in just two months.

All this being said, I currently recommend Bri-Chem which is a buying opportunity in my opinion.


The third Part of this series will cover the remaining companies that are the primary beneficiaries from the ongoing "Pipeline Revolution" in North America. I think that most readers will find it interesting. Thank you very much for reading and more stock picks will come soon.

Disclosure: I am long OTC:BRYFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This is not a buy recommendation and investors should not rely solely on the information presented. Rather, investors should use the information provided as a starting point for doing additional independent research and conducting their own due diligence in order to form their own independent opinion.