The oil and liquids boom has created a huge need for new infrastructure which is critical to ease the current bottleneck in Oklahoma and North Dakota pushing the black gold and the liquids and the natural gas around USA and Canada. The necessary grid is being built and the ongoing pipeline projects are going to be the lifeblood of economic growth for the US. These big projects add a backlog of work to the construction companies reinvigorating the economy and boosting employment as well. The jobless claims did not drop accidentally once again last week.
Once the readers check my comments for all the five following companies, they may wonder why I do not consider any of them as a big buying opportunity at the current levels. 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 fundamental 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 (ZPTAF.PK) and some undervalued Argentinean stocks in late November 2012 that have already yielded from 10%-70% in just two months. Additionally, among all the stocks mentioned in this series, I select Bri-Chem Corporation (GM:BRYFF) which I bought at $1.94 a few days ago.
Despite my investing strategy, all the following companies may look good for the momentum traders who can buy at their own risk:
1) Fluor Corporation (FLR): For more than 85 years, Fluor has provided engineering, procurement, construction, maintenance and project management services for onshore and subsea pipeline projects worldwide. The company has designed and built pipelines in challenging and remote locations including Africa, Alaska, Ecuador and Russia.
Fluor has also extensive experience in heavy oil upgrading and oil-sands projects ranging from processing refinery residual oil streams to upgrading well-head bitumen and heavy oil-sands feedstock. This is why the company has cooperated with all the major oil sands producers in Canada. As of Q3 2012, Fluor had a backlog of $41 billion and 50% of this backlog was associated with the oil and gas segment. For the first nine months of 2012, the company's oil and gas segment contributed 34% of the total revenue while the "industrial and infrastructure" segment contributed 41% of the total revenue. It is also important to note some major projects that prove the company's experience in the pipeline sector:
A) In Ecuador, Fluor provided engineering, procurement, survey, construction and maintenance services to ARCO/AGIP for the development of the Villano field in a virgin Ecuadorian rain forest. The project involved production facilities and an export pipeline for 30,000 bopd crude oil development. This project received ARCO's Environmental Achievement Award and was cited as an outstanding success by the Ecuadorian government.
B) In Argentina and Chile, Fluor provided conceptual studies, route selection, and design and construction consulting services to YPF S.A. (YPF) and Empresa Nacional del Petroleo, for the 265-mile Trans-Andean oil pipeline.
C) In Alaska, Fluor completed engineering, procurement and construction services for the Trans-Alaska pipeline, the largest pipeline in the world.
D) In Chad and Cameroon, Fluor worked with Exxon Mobil (XOM) and constructed a 30-inch, 1,000-mile pipeline to transport Chad's oil across international boundaries to the west coast of Cameroon.
E) In Russia, Fluor provided engineering, procurement and construction for a crude oil and petroleum products terminal.
I like that Fluor is rich in cash and it has low debt. I do not like that it trades well above its intrinsic value (PBV=3), it has a relatively high PE and its net profit margin is only 2-2,5%. The dividend yield is negligible at the current levels. All in all, the company is not undervalued in my opinion. Based on the recent stock performance, the momentum traders will also like Fluor and they may want to join the ride as long as the party goes on. The company has been very active with its share repurchase program and the number of outstanding shares has dropped from 183.5 million in 2008 to 166.5 million currently. Chairman and Chief Executive Officer David Seaton said recently: "Although we see growth in 2013, the anticipated resurgence in oil and gas is not expected to fully benefit financial results until 2014."
2) URS Corporation (URS): URS has been serving the oil and gas industry for more than 100 years. It is a leading provider of design, construction and production services across the upstream, midstream and downstream supply chain and the company's expertise encompasses conventional applications and emerging unconventional plays, such as the shales, tight oil and oil sands.
URS has significantly expanded its oil and gas capabilities with the recent acquisition of Flint Energy Services, an oilfield services company from Canada. The Canadian drillers and oilfield services companies are acquisition targets lately as FMC Technologies (FTI) also acquired Canadian Pure Energy Services in Oct 2012.
The deal with Flint highlights the growing global interest in Canada's oil sands and it comes as Canada's oil sands face a period of extraordinary growth that will see a constant flow of billions of dollars push production from 1.6 million bopd today to three million by 2020.
Some of the company's major pipeline projects are:
A) In Eurasia, URS designed and constructed the 1,100-mile-long Baku-Tbilisi-Ceyhan crude oil pipeline that spans three countries, Azerbaijan, Georgia and Turkey, ending at the Mediterranean Sea. It also constructed the 430-mile-long South Caucasus natural gas pipeline that runs through Azerbaijan and Georgia, ending in Turkey.
B) URS constructed the 3,056-kilometer Bolivia-Brazil Natural Gas Pipeline.
C) In Canada, URS installed the 24 inch steel pipeline within the city limits of Lloydminster, Alberta.
D) In Canada, it installed a 60 kilometers for a major oil sands producer near Bonnyville, Alberta.
E) In Australia, URS has been involved with the development of a $900 million, 1,000 kilometer natural gas pipeline from Wallumbilla, Queensland, to Newcastle, in the Hunter Region, New South Wales.
The company had significant losses in 2011 but it seems it has returned back to profits in 2012 although its net profit margin is very low (2%-3%). It trades below its book value with a decent PE, and the low dividend yield of 1.9% has the potential to rise as the payout ratio is as low as 22% currently. The company is a new entrant into the dividend world as it started paying quarterly dividends in early 2012. The stock has also positive momentum and the company is one of billionaire D. E. Shaw's choices. However, URS is not on the top of my choices currently. Is this why I am not a billionaire?
3) Quanta Services (PWR): Quanta is a provider of specialized contracting services, delivering infrastructure solutions to the electric power and natural gas and pipeline industries. The company provides a comprehensive range of services, including the design, installation, maintenance and repair of virtually every type of infrastructure. The company has expertise in natural gas pipeline transmission and distribution as well as petroleum pipeline maintenance and construction. Although most of the company's revenue (66%) came from the electric power projects, natural gas and pipeline revenue held a significant 22% of the total revenue in 2011. It is also interesting that no single customer has accounted for more than 10% of revenues in 2012.
Quanta reported a $4.17 billion order backlog and the CEO expects a further improvement for its natural gas and pipeline segment.
In Dec 2012, Quanta sold its domestic telecommunications infrastructure services operations to focus on energy infrastructure markets, establishing offices in the Bakken, Eagle Ford, Marcellus and Permian regions.
The stock has positive momentum. The company is also consistently profitable although the operating cash flow has not stabilized at the positive territory yet. Another good thing is that Quanta has very low debt in comparison to the equity. However, PE is as high as 22 and PBV=1.7. All in all, it is an interesting play but it is not undervalued currently. According to my strategy mentioned above, I like buying undervalued stocks and thus I would like it to correct first before I dip my buying toes into it.
4) MasTec (MTZ): MasTec is another infrastructure construction company that engages in engineering, building, installing, maintaining and upgrading energy, communication and utility infrastructure in North America. The company has several core areas with the electrical grid space to hold the biggest part of its revenue.
It is worth noting that MasTec has a continuing revenue and backlog growth during the last 6 years. The company's oil and gas construction segment had an explosive growth in 2011 and the trend in 2012 remained upwards. This segment does gathering lines, mid-stream, long haul interstate pipeline and related facilities, having a strong presence in all major shale basins with the ability to perform work throughout North America. It is clear that the growth at the top and the bottom line propels this stock.
According to the corporate presentation, big companies like Enbridge (ENB), DCP Midstream Partners (DPM) and Chesapeake Energy (CHK) have cooperated with MasTec for their pipeline projects. To name a few:
A) Enbridge awarded MasTec the Southern Access Oil Pipeline Project that includes the installation of 45 miles of 42" oil pipeline and 165 miles of 20" oil pipeline.
B) Petrohawk awarded MasTec the installation of 30 miles of 16" steel natural gas pipeline in Cotulla, Texas.
C) El Paso Energy picked MasTec to construct almost half of the Ruby Project which was a 256 miles of 42" natural gas pipeline in Nevada.
D) The company constructed Anadarko's oil pipeline in Encinal, Texas.
However, it is important to note that several insiders sold big chunks of shares recently.
This is another stock with strong momentum. From a fundamentals perspective, the company is consistently profitable but it has a high PE and it trades well above its book value. This definitely concerns the value-driven investors, me included, who will wait for a significant correction to get on board.
5) Matrix Service Company (MTRX): One of Matrix's core areas is to provide safe, high quality construction, repair and maintenance services to North American oil producers, refiners and downstream distributors. Backlog at December 31, 2012, totaled $605.1 million, an increase of $107.6 million, or 21.6%, compared to the backlog at June 30, 2012, of $497.5 million and increased $70.5 million, or 13.2%, compared to the September 30, 2012 backlog of $534.6 million.
Matrix also raised its fiscal 2013 revenue guidance to between $840 million and $890 million, maintaining earnings per fully diluted share guidance of between $0.83 and $0.98.
Like all the other companies above, this company has not attracted any interest from the other contributors of SA either and the articles about Matrix are scarce despite the fact that the stock has strong momentum currently. I like that the company has negligible debt and the D/Equity ratio is one of the highest ones in the sector. However, it concerns me that A/R (Accounts Receivables) start to increase. PE=25 and PBV=2 and obviously none of them is low. The net profit margin is also as low as 2,5%. The operating cash flow for the six months of FY 2013 is also slightly positive. This is why I do not find Matrix to be undervalued although the current positive momentum can drive the stock higher.
I know that I may disappoint some folks who did not read in this series anything about the firms they own. I would like to clarify that I selected the firms mentioned in the three Parts of this series carefully and I did not intentionally include the companies whose core area is not the onshore pipelines of North America. For instance, McDermott International (MDR) primarily serves the worldwide offshore oil and gas field development activities (marine pipelines and subsea production systems) while Chicago Bridge & Iron (CBI) has designed pipelines for transporting crude oil and natural gas primarily in Africa, the Middle East, Russia, FSU (Former Soviet Union) countries, and the Caspian and Black Sea regions. This is why neither McDermott nor Chicago was included in this series.
After all this being said, I would like to thank the readers and let them know that I plan to release one more series with a topic that has not been covered so far by any online publication. So stay tuned, more critical information for your investments is coming.
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.