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MRC Global Inc., (NYSE:MRC)

Q4 2013 Earnings Conference Call

February 21, 2014 10:00 ET

Executives

Monica Schafer - Vice President, Investor Relations

Andrew Lane - Chairman, President, Chief Executive Officer

Jim Braun - Chief Financial Officer, Executive Vice President

Analysts

Matt Duncan - Stephens

William Bremer - Maxim

Sean Meakim - Barclays

Jeff Hammond - KeyBanc Capital Markets

David Manthey - Robert W. Baird

Allison Poliniak - Wells Fargo

Sam Darkatsh - Raymond James

Mark Douglas - Longbow Research

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to MRC Global's Fourth Quarter Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, February 21, 2014.

I would now like to turn the call over to Monica Schafer, Vice President of Investor Relations. Please go ahead.

Monica Schafer

Thank you, George, and good morning, everyone. Welcome to the MRC Global Fourth Quarter and Full Year 2013 Earnings Conference Call and Webcast. We appreciate you joining us. On the call today, we have Andrew Lane, Chairman, President and CEO; and Jim Braun, Executive Vice President and CFO.

Before I turn the call over to Andrew, I have a couple of items to cover. There will be a replay of today's call available by webcast on our website, mrcglobal.com, as well as by phone, until March 8, 2014. The dial-in information is in yesterday's release. Later today, we expect to file the 2013 Form 10-K, and it will also be available on our website. Please note that the information reported on this call speaks only as of today, February 21, 2014. And therefore, you're advised that information may no longer be accurate as of the time of this replay.

In addition, the comments made by the management of MRC during this call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of the management team of MRC. However, various risks, uncertainties and contingencies could cause MRC's actual results to differ materially from those expressed by management. You are encouraged to read the company's annual report on Form 10-K, its quarterly reports on Form 10-Q and current reports on Form 8-K to understand those risks, uncertainties and contingencies.

And now, I'd like to turn the call over to our CEO, Mr. Andrew Lane.

Andrew Lane

Thanks Monica. Good morning and thank you all for joining us today on our fourth quarter and our full year 2013 earnings call as well as for your interest in MRC Global.

Before turning the call over to our CFO, Jim Braun, for a detailed review of the financial results, let me begin with some highlights from the quarter and the year. Following Jim's comments, I will finish with a discussion on the outlook for our business and introduce our 2014 guidance.

I will start with a couple of noteworthy events this quarter. First, we took the final step in becoming a full publicly-traded company when our private equity sponsor sold its remaining shares of MRC stock in the secondary offering this past November. With that milestone, we made other governance changes such as changes to the company's Board of Directors and bylaws. Our two private equity directors resigned when the secondary was completed and Rhys Best was appointed Lead Director.

We repriced and upsized our Term Loan B in November, which gave us more flexibility to make acquisitions and allowed us to take advantage of lower interest rate. We also generated $82 million of cash from operations during the fourth quarter and $324 million for the year, which helped to fund our acquisitions.

As you saw on our release yesterday sales results were in line with our expectations as we came in at $5.23 billion for the year and $1.34 billion for the fourth quarter. Revenues for the fourth quarter were up 3% from the same quarter of last year and up 2% from the previous quarter. Last quarter we guided that we would be up sequentially and despite inclement weather and holiday headwinds we met our guidance.

Gross margins were down 300 basis points this quarter from the same quarter last year due to the impact of LIFO, deflationary pressures on line pipe and a higher mix of low margin carbon pipe sales.

In the fourth quarter 2013, adjusted EBITDA was $87 million, which put the annual number of $386 million within our last guidance range. Diluted earnings per share were $0.23 for the quarter and included three items that negatively impacted earnings per share by $0.09 per share.

Diluted earnings per share were $1.48 for the year and also included unusual items that reduced EPS by $0.12. Full year adjusted EPS was $1.60 compared to the low end of our guidance of $1.65. EPS was outside of our guided range largely due to lower gross profit margin in the fourth quarter. Jim will go into more detail on the nature of these items.

We continue to execute our long-term strategy. As we have mentioned before our strategic initiatives to rebalance our product mix and deemphasize our lowest margin in most volatile product line, oil country tubular goods, began in the third quarter of 2012. Therefore, this quarter was the first quarter where there was no significant year-over-year impact.

Our rebalancing effort resulted in a decline of approximately $250 million in sales from OCTG in 2013. For 2013, OCTG sales were 9% of total sales which is within the 8% to 10% range we guided as our run rate going forward.

Our targeted growth account program for those accounts ranked 25 to 100 was successful in 2013. In North America, we grew sales in these accounts by more than 20% in 2013 over 2012. This group of customers will remain a focus in 2014.

We also continued to grow by acquisition where we see opportunity to expand our reach. Expanding our international geographic footprint, as well as certain product lines has been a major focus and we are pleased to have closed the previously announced acquisitions of both Flangefitt Stainless in the U.K. and STREAM in Norway.

The Flangefitt acquisition gives us a stronger presence in stainless and alloy product lines an area in which we continue to focus. The STREAM acquisition gives us offshore capabilities and technologies, we didn't have previously. Before STREAM about 2% of our revenue was generated from offshore business, with STREAM this will now be about 8%. Our plan is to take this expertise and leverage it into other areas outside of the Norwegian Continental Shelf. We expect this will take some time, but our initial focus is on the U.K. Continental Shelf.

Our international expansion strategy is focused on positioning MRC to best serve the IOCs on a global basis. As I mentioned before approximately 75% of our major customer spending is outside of North America and we are positioning MRC to expand our contracts with those customers in order to capture that market share.

Current estimate show that of the more than $700 billion of global E&P capital expenditures estimated to be spent in 2014, approximately $100 billion is estimated to be spent in the four largest offshore markets of Norway, Brazil, the U.S. Gulf of Mexico and the U.K. Of these Norwegian Continental Shelf is the largest.

With these two acquisitions along with our existing operations in the U.S. Gulf of Mexico, we now have operations focused on growing in three of the four largest offshore E&P markets in the world.

We continue to evaluate and pursue potential acquisitions. We would expect that these would be more likely to occur in the second half of 2014 rather than the first half having just closed Stream.

We continue to enter into broad multi-region agreements with our top customers to expand into new geographies and expand product scope. Since we last spoke, we have announced new agreements with BP and Chevron. We also have a notable contract renewal with ConocoPhillips to tell you about today.

First, the announcements with BP were for MRO work retained as well as new project work. The global projects for pipe, flanges and fittings opens up a new opportunity for us. We now have the ability to bid on projects that were previously inaccessible. We estimate that this could be worth $50 million to $75 million a year depending on our success on these project bids.

Our most recent announcement earlier this month with Chevron covers three regions where we have expanded our work with them and as part of our strategy to add scope with existing domestic customers in new geographies.

First, we are now able to supply with them valves on their upstream future growth project in Kazakhstan, which is $30 billion project. This is not exclusive although we are on a very short list of valve suppliers. This is also another great opportunity to gain access to some of their project works.

The other components of our Chevron contract announcement of our MRO business include our full product offerings of pipe, valves and fittings for both their Australian and Thailand operations, leveraging our longstanding domestic relationship and building out our presence in Australia provided that opportunity to gain this new market share. While the Australian business is an exclusive, we are competitive with our scale there. We are the primary supplier in Thailand, and we will be ramping up our current valve warehouse there to serve the customer.

This contract allows to expand our footprint in Southeast Asia and extend our product offering there. Chevron spent 70% of their capital expenditure budget on international upstream and with these contracts we are capturing more of it. We have also renewed an important contract with ConocoPhillips for PVF as the primary supplier in the lower 48 states. This is an example of retaining a longstanding piece of business that went out for bid.

We retained the work due to a large part through our outstanding service for ConocoPhillips over the past 10 years. It is a three year contract with two one-year op renewals and the opportunity to go with the expected five year life of the contract is expected to be $500 million. Obtaining Enterprise Framework Agreement and adding scope to existing contracts, our major tenants of our strategy. And you should expect to hear more from us on these periodically.

Before I turn the call over to Jim Braun to review our financial results in more detail, let me give a quick recap of our top line performance from 2012 to 2013. We finished 2012 with revenue of $5.57 billion. In 2013, we experienced lower revenue driven by reduced spending in certain customer groups. Approximately $100 million related to some of our major U.S. and Canadian upstream customers, about $30 million from our downstream Australian mining business and about $120 million from three of our largest midstream customers.

We also completed our planned reduction in OCTG reducing revenue by approximately $250 million as well as reduced revenue of $25 million from foreign currency. These reductions were partially offset by growth from acquisitions of approximately $190 million yielding a net reduction of $335 million which resulted in $5.23 billion of sales in 2013. While we have had several customers reduce their spending in 2013, we did not lose any of our major long-term contracts, but instead added to our strong contract framework. We also made acquisitions to position us for growth in 2014 and beyond.

So with that, let me now turn the call over to Jim to review our financial results.

Jim Braun

Well, thanks Andrew, and good morning, everyone.

Our total revenues for the fourth quarter were $1.34 billion which were 3% higher than the $1.31 billion we reported in the fourth quarter of last year. The year-over-year increase was driven by the impact of our acquisitions, which added an incremental $37 million of revenue in the quarter.

The U.S. drilling rig count was down 3% in the fourth quarter from a year ago, while the U.S. land-well count was up 5% over that same period. U.S. revenues were $1 billion in the quarter up 6% from the fourth quarter of last year. Organic growth in the quarter was 2.3%, while acquisitions contributing an additional 3.7%. Sequentially, the U.S. segment sales were flat from the third quarter. Canadian revenues were $189 million in the fourth quarter down 23 million or 11% from the fourth quarter of last year.

While we had less project work this quarter compared to last year approximately half of the decline in the Canada segment was due to the decline in the Canadian dollar relative to the U.S. dollar. Sequentially, the Canadian segment is up 17% from the third quarter benefiting from a large line pipe order in the fourth quarter. Historically, the fourth and first quarters are the strongest in Canada.

Internationally, fourth quarter revenues were up $3 million or 2% from a year ago to $143 million. This increase was the result of increased sales in Europe partially offset by weaker demand particularly in Australia where we've seen reduced customer spending in the mining and oil and gas sectors. Nearly a third of the decline in Australia is due to a weaker Australian dollar. Sequentially, the international segment was up 5% from the third quarter due to stronger activity in Europe and Asia Pacific.

Turning to our results based on end market sector. In the upstream sector, fourth quarter sales increased 6% from the same quarter last year to $606 million. This increase was driven by the acquisitions of production specialty services and flow control while the acquisition of Flangefitt in mid-December had a little impact on the quarter. Sequentially upstream sales increased by 3% compared to the third quarter. This increase is largely driven by an increase in OCTG and line pipe sales.

The midstream sector was $392 million in the fourth quarter of 2013, an increase of 7% over 2012. Compared to the fourth quarter last year, this quarter saw a growth in both the gas utility and transmission sectors, which were up 14% and 4% respectively. Sequentially, the midstream sector was up 4% as well.

The fourth quarter saw 18% growth from the previous quarter with our transmission customers driven by line pipe sales while our gas utility customer segment decreased by 14%, which was negatively impacted by weather. In the downstream sector, fourth quarter 2013 revenues decreased by approximately 6% to $346 million as compared to the fourth quarter 2012. The decrease is primarily attributable to weaker sales in our international and Canadian segments.

The U.S. downstream sector was up 2% from the fourth quarter a year ago, and sequentially, the downstream sector was flat.

Turning to revenue by product class. Our energy carbon steel tubular products accounted for $409 million during the fourth quarter 2013, with line pipe sales of $291 million and OCTG sales of $190 million. Overall, sales from this product class increased 4% in the fourth quarter from the same quarter a year ago including $4 million or 4% increase in OCTG sales and $11 million or 4% increase in line pipe. About 2.6% of the increase in line pipe was organic and 1.5% was due to the acquisition of PSS.

Fourth quarter 2013 was a record quarter for line pipe ton sold from stock in North America. We sold 35% more tons of line pipe and had higher revenues in the fourth quarter of 2013 compared to the fourth quarter of 2012. However, those increased volumes were higher mix of lower priced ERW pipe. Also impacting the quarter was approximately $60 million in lower margin line pipe sales that shift in the fourth quarter of 2013, these orders had been expected to ship in the first quarter of 2014 was shifted to the fourth quarter.

For the fourth quarter 2013, 52% of line pipe sales were within our midstream sector, while upstream and downstream made up 30% and 18% respectively.

The recent preliminary decision in the OCTG trade suitcase is not expected to impact us significantly since our OCTG business is not focused on the spot market, but rather it is with our larger customers under cost-plus arrangements.

Sales of valves, fittings and other products were $935 million in the fourth quarter; this represents an increase of 2% from the fourth quarter of 2012. Revenues from valves were up 3% during the quarter primarily due to acquisitions. Fittings and flanges were down about 8% after benefiting 3% from acquisitions compared to the quarter a year ago. Other products were up 12% primarily due to organic growth of 7% and then 5% from acquisitions.

And now turning to margins, in the fourth quarter of 2013, the gross profit percentage declined 300 basis points to 16.8% from 19.8% in the fourth quarter of last year. The decrease was largely due to the impact from LIFO. The LIFO benefit of $27 million was recorded in the fourth quarter 2012 as compared to $1 million of expense in the fourth quarter of 2013 and that equates to an $0.18 per diluted share impact year-over-year.

Our adjusted gross profit percentage, which is gross profit plus depreciation, amortization of intangibles and plus or minus the impact of LIFO inventory costing decreased to 18.3% in the fourth quarter of 2013 from 19% in the fourth quarter of 2012. Lower line pipe spot prices and a larger than normal amount of lower priced ERW line pipe sales created pressure on margins. All in the average line pipe sales prices declined about 20% and OCTG pricing declined 4% from the fourth quarter of 2012 to the fourth quarter of 2013.

On a sequential basis adjusted gross profit was 80 basis points slower than the third quarter. This was primarily due to lower margins in the U.S. and Canada segments partially offset by a margin improvement in the international segment. We don't believe the lower margin in the quarter is indicative of a structural change in our product mix, but rather the fourth quarter experienced a higher demand for ERW line pipe primarily in our midstream sector.

SG&A cost for the fourth quarter 2013 were $167 million or 12.5% of sales compared to $154 million or 11.8% of sales for the fourth quarter 2012. The increase is primarily due to $5 million of incremental SG&A related to acquisitions and $5.2 million for the accelerated recognition of equity-based compensation expense triggered by the November 2013 sales stock by our private equity sponsor. We expect SG&A expense to be around $180 million per quarter in 2014 with the addition of STREAM and Flangefitt.

Operating income for the fourth quarter of 2013 was $59 million versus $104 million in last year's fourth quarter. The operating margin also declined compared to last year from 8% to 4.4%. This is due primarily to the impact of the LIFO benefit in 2012 and lower profit margins on line pipe that I discussed earlier. Another item of note in the quarter is the gain on our derivative instrument from a foreign currency forward contract related to the STREAM acquisition. Approximately $3.7 million gain was recognized in December 2013 and an offsetting $2.1 million loss is to be recognized in January 2014.

Our interest expense totaled $14.7 million in the fourth quarter of 2013, which was 26% reduction compared with $19.9 million in the fourth quarter of 2012. This was due to the redemption of our 9.5% senior notes in November of 2012 as well as the repricing of our Term Loan B in November of 2013, and the resulting lower interest rates. In addition, average debt levels were approximately $190 million lower in the fourth quarter of this year compared with the fourth quarter 2012. And at the end of December, our weighted average interest rate was 4.5%.

Our net income was $23 million for the fourth quarter or $0.23 per diluted share compared to a net loss of $6 million or $0.06 per share in the fourth quarter of 2012. Fourth quarter 2013 adjusted net income is $33 million and is adjusted for three items. A $3.3 million after-tax charge related to expenses from the repricing of the company's senior secured Term Loan B in November of 2013, a $3.4 million after-tax charge for the accelerated recognition of equity-based compensation as a result of the November 2013 sale of a common stock by our private equity sponsor, which sold its remaining interest in MRC Global and this was recorded in SG&A.

And finally, a $3 million after-tax charge for net adjustment to increase the valuation allowance on deferred tax assets for certain foreign jurisdictions. Note that this adjustment helps explaining our effective tax rate of 45.3% for the fourth quarter of 2013 and 35.8% for the year. In 2014, we expect our tax rate to be between 35% and 36%. The cumulative impact to EPS of those items is $0.09, which resulted in adjusted diluted EPS of $0.32 for the quarter.

Adjusted net income for the fourth quarter of 2012 was approximately $56 million and excludes $59.9 million after-tax charge or $0.58 per diluted share related to the purchase and early redemption of a portion of our senior notes as well as $2.9 million after-tax charge related to the termination of a defined benefit pension plan in The Netherlands.

Adjusted EBITDA was down 12% year-over-year to $87 million in the fourth quarter versus $99 million a year ago. Adjusted EBITDA margins fell to 6.5% from 7.6% a year ago.

For the year sales declined $340 million or 6% to $5.23 billion for 2013 as compared to $5.57 billion for 2012. The 6% decrease reflected a planned $250 million reduction in the OCTG business resulting from a strategy to rebalance our sales and inventories. Revenue is also contracted by over $250 million from lower capital spending by our customers during 2013 longer than normal spring break up in Canada a decline in project sales particularly in Oil Sand regions in Northern Alberta and weaker demand in parts of Australia where we experienced reduced customer spending in the mining and oil and gas sectors.

We also experienced weaker foreign currency, which had the impact of reducing revenue by approximately $25 million throughout 2013. Our 2013 sales benefited from several acquisitions contributing $189 million in 2013. SG&A expense increased $36 million in 2013 over 2012 primarily due to the incremental cost associated with our acquisitions. Interest expense was $52 million lower in 2013 than 2012 primarily due to the November 2012 debt refinancing.

Net income in 2013 was $152 million up 29% from last year's net income of $118 million. Our debt outstanding at December 31, 2013 was $986.8 million compared to $1.257 billion at the end of 2012. Considering the debt incurred as part of the January 2014 STREAM acquisition on a pro forma basis net debt outstanding at December would have been $1.23 billion.

At December 31, 2013 our leverage ratio which we defined as total debt less cash to the trailing 12 months of adjusted EBITDA was 2.5x as compared to 2.6x at December 2012. On a pro forma basis for the acquisition of Stream, leverage moves to 3x, however, our 2014 forecast is for our free cash flow to be used to pay down debt over the next 12 months.

Our operations generated cash of $82 million in the fourth quarter of 2013 and our working capital at the end of the year was $1.84 billion, $43 million lower than it was at September 30, 2013. For the year 2013, we generated cash from operations of $324 million. Next year, we expect cash from operations will be lower in a range between $175 million and $200 million as we expect revenue growth will consume some cash in the form of additional working capital.

Cash used in investing activities totaled $35 million in the fourth quarter and included capital expenditures of $7 million and the acquisition of Flangefitt.

Our 2013 capital expenditures were $22 million. And in 2014 we expect capital expenditures excluding acquisitions to be between $25 million and $30 million. And while not in the fourth quarter, but noteworthy in January of 2014, we sold our Canadian progressive cavity pump distribution and servicing by to Europump, our primary manufacturer and supplier of progressive cavity pumps. We believe this divestiture will allow us to focus on our core business of supplying PVF products and services to the energy industrial markets.

We expect the impact of this divestiture to be a reduction of sales in Canada of approximately $82 million in 2014 of which approximately $25 million will be in the first quarter. However, through the elimination of cost associated with the business including the cancellation of a profit sharing arrangement to Europump shareholders related to pipe, valves and fitting sales in the heavy oil region of Canada, we expect the disposition will have a modestly accretive impact on profitability going forward. However, we do anticipate a first quarter 2014 pre-tax charge of approximately $7 million associated with determination of our profit sharing arrangement with Europump.

Looking ahead, January and February results reflect the impact of inclement weather in our operations in part of the Midwest and the Eastern U.S. Combined with the large line pipe sales in the fourth quarter and the loss of sales from the disposition of our Canadian pump business, we expect revenues to be down mid-single digits in the first quarter of 2014 from the fourth quarter of 2013 even after considering the revenue from the STREAM and Flangefitt acquisitions. However, results to-date in 2014 reflect a higher adjusted gross profit percentage and was experienced in the fourth quarter consistent with our belief, if there has not been a structural change in our product mix.

I'll make one final comment before turning it back to Andrew. While the start of 2014 will be impacted by poor weather and a strong fourth quarter of 2013 our backlog remains strong. Our backlog was $758 million at the end of December, which was 3% higher than September and 14% higher than December of 2012. Year-over-year backlog in all three geographic segments is up. And in addition, since the end of the year we're seeing continued strength in the U.S. backlog in particular. It has grown from $470 million at December to just over $550 million through this week. We believe this is indicative of the opportunities in 2014.

And now I'll turn it back to Andrew for his closing comments.

Andrew Lane

Thanks Jim.

Let me conclude with some comments about our guidance for 2014. For the full year 2014, we expect sales to be in the range of $5.5 billion to $5.8 billion and adjusted EBITDA to be in the range of $400 million to $450 million. We have been diligent in determining our estimates for this year considering many different factors to arrive at these ranges. Some of the factors we consider were industry capital expenditure forecast and surveys, our specific customers capital expenditure forecast, feedback from our supply chain, discussions with our top 20 suppliers, our current backlog and specific insight from our top 25 customers including in our thinking is the slow first quarter, our contract framework agreement wins in 2013, and our acquisitions that have been completed along with general market dynamics.

Overall, the midpoint of our revenue guidance assumes 4% organic growth and 6% growth from the acquisition of STREAM and Flangefitt starting from a 2013 revenue level adjusted for the sale of our Canada pump business. In addition, the midpoint of our revenue guidance assumes a 1% revenue decrease due to a weaker Canadian dollar in 2014 versus what we experienced in 2013.

We are also expecting our contracts with Shell and Chevron to add a total of $70 million in 2014 over 2013. We have not assumed any further acquisitions in our estimate. We have decided not to provide earnings per share guidance this year as the LIFO volatility makes forecast in EPS to uncertain.

From an upstream perspective all the major industry reports indicate higher spending for North America E&P and a further increase in U.S. land completion capital expenditures in 2014 over 2013, although they vary on how much. On the high-end Barclays shows North America spending is up 7% with 8.5% in the U.S. and 3% in Canada. On the low-end Morgan Stanley shows North America and the U.S. up around 3%. Internationally, Barclays shows European fee spending close to growing to close to 8% and Bank of America Merrill Lynch shows international spending increasing around 8% as well.

At the midpoint of our guidance, we expect double-digit growth from upstream including acquisition related growth. Looking at midstream, we expect very modest growth from the sector based on our current customer base and their expected trending levels. We see the potential volatility in this area depending on project progression. While we see good opportunities with our core midstream customers, we have several large midstream customers who are expected to spend less in 2014. At the midpoint of our guidance, we see low single-digit growth on midstream. We expect mid-single digit growth in the downstream sector driven largely by a very active turnaround in the U.S. with spending increases in chemical and petrochemical sectors.

From a product line perspective, we expect double-digit growth from our valves and valve automation business lines. From a macro point of view, we see oil and gas commodity prices in early 2014 having a positive impact on our customers' cash flows and this being a real positive and we expect 2014 to be a year of increasing spending levels by our major customers in the second half of 2014 and we've always – already seen example for this.

With that, we will now take your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question is from Matt Duncan with Stephens. Please go ahead.

Matt Duncan - Stephens

Good morning guys.

Andrew Lane

Good morning, Matt.

Matt Duncan - Stephens

Can we dig a little bit more into sort of what's going on with line pipe pricing, have you seen that start to stabilize and/or your margins in that product line getting better here Jim in the first quarter?

Jim Braun

Yes. Matt, we think the margins will get better in the first quarter. We think that will be driven by a reverse of the mixed change we saw here in the fourth quarter there continues to be some downward pressure on pricing in that sector. Spot prices continue to move down a point or two, but that's part of the headwind they will have to overcome. But the large decrease in margins that you saw there in the fourth quarter we should see those return to more normal levels in the fourth quarter.

Andrew Lane

Matt, let me just add a comment to Jim's. When I look back at the year, we had softer demand early in the year in 2013 on line pipe, but the mix was pretty historically normal for us. Later in the year, we saw a pick up we had deflation through the whole year that Jim described in the comments earlier and what we saw in the last year was typical some years. And I can name couple of others that where we had end of year budgets being spent and in this year, it was largely in midstream, which makes sense for us, the first half of our year midstream was soft, third quarter was a record level of shipments from stock and the fourth quarter exceeded that even.

And so as long as we've been in the midstream business and line pipe servicing that to have the most ton shipped in the fourth quarter in the history of the company was another good milestone. A lot of volume there it was heavily weighted to ERW, which is our lowest margin of the mix Seamless and DSaw being a higher margin products for us. And so there was really just the mix impact of large midstream sales in the fourth quarter.

Matt Duncan - Stephens

Okay. And then the second thing for me and then I'll hop back in the queue. Just looking at the organic growth implied in your guidance a little bit here it looks like; it's probably on the order of sort of flattish to may be up 6% or 7%. CapEx budgets, I know from a lot of your upstream customer especially you're up a lot more than that. I appreciate the color you gave us on sort of end market by end market.

I'm curious with, how do you factor in what's been going on with natural gas prices to that guide because obviously it's strengthened, I would think that that's going to cause some of your drilling customers and even the midstream side, it's focused on gas to possibly get more active. So are you factoring that into the guidance, and what are you seeing from that customer base?

Andrew Lane

Yes, Matt. Let me start and Jim might add some color to my comments. But, first half, we had a lot of volatility in our forecast in 2013, and we're not going to have that again in 2014. So we're going to start being conservative in our forecasting to the 2014 year, so that's principle number one. When I think about the year, and we talked about this might be a year where we have more growth through acquisitions than organic, which is reverse of what we've had for a last couple of years. And in our comments we said 4% organic growth and 6% acquisition. You have to adjust – the way I look at it and Jim would give more color from the end markets, but you start with the $5.23 billion and you take off $80 million of revenue, we'll lose – have lost from the divesture in Canada.

And then we have specifically three midstream customers well-publicized decreases in CapEx spending for 2014, three of our larger ones. So we're factoring in $150 million drop from that, from a run rate perspective. So you start at $5 billion, you add the $325 million for our acquisitions. And then the next $325 million comes from a combination of both the growth in the market and also our previously discussed MRO contract wins. So a combination of the contracts we've already won in 2013 with additional scope plus a very conservative view of organic growth is what gets us to the midpoint which we're guiding you to.

But, I will say, I think this is going to be one of years where it come out at midyear with higher capital spending, we've seen this before, when commodity pricing is high for our customers in the first half of the year. They normally have a reset higher we are not including that in our guidance, we'll of course update our guidance later in the year when we see that.

But, one prime example is Access Midstream who already increased their capital budget from original estimate $500 million in the last week. So I think that's one of several of our customers where we might be forecasting conservatively right now for midstream and we'll see a pick up in the second half with -- these are tremendous cash flows for our customers in the first half that we didn't expect.

Operator

Thank you. And next is William Bremer with Maxim. Please go ahead.

William Bremer - Maxim

Good morning, gentlemen.

Andrew Lane

Good morning, William.

Jim Braun

Hi, William.

William Bremer - Maxim

Jim, can I just go through quickly, I'm sorry if I missed this, sort of the revenue by sector forecast. So if I'm – if I heard you correctly, upstream double-digit growth, midstream we're looking at low single digits now due to what you just called out and then downstream more mid singles. Is that correct?

Jim Braun

Yes, that's correct Bill. And that upstream growth that you had was double digit, it's kind of mid-single digits organic and then the benefit of the acquisition adds another 5% to 7% growth.

William Bremer - Maxim

Okay. Now, what we're seeing in terms of all this activity in the Gulf, can you give us sort of maybe a longer term view to the factor, we know the first half year is going to be a little difficult, but longer term in terms of what we're seeing in the bills on the chemical in the downstream area there. How you guys positioned for that? What are you seeing there?

Andrew Lane

Yes, Bill, let me just add a couple of comments there. From the – in the Gulf of Mexico we're primary land business, so heavily focused on refining chemical and petrochemical land infrastructure, that's the bulk of our business, it looks like one of the highlights for our year. We had the big CP Chem win last year that we announced in the third quarter, so that contract will be gearing up in 2014. So that part of our business looks very good.

We have small exposure to the offshore market and it's mostly on MRO production facilities from our PVF perspective. So we don't have a lot of exposure to the deepwater drilling environment. So the biggest impact for us is in the plan spend on the land.

William Bremer - Maxim

Right, right. So that when you said mid-single digits in that downstream area, I'm sort of got a little puzzled on that given what you just mentioned here, I thought that would be a little bit higher?

Andrew Lane

Well, it's stronger in the U.S., we didn't give that detail but stronger in the U.S. than the general guidance still muted in Europe, we have a big downstream refining business in Europe. And then still muted with our downstream business in Australia where they're going through the structural change in both refining and mining. So I would say it is better. If you had a U.S.-only perspective, but weighed – on a average basis weighted down by the Europe and the Australian component.

William Bremer - Maxim

Great. Okay. Thanks Andrew.

Operator

Thank you. Next is Sean Meakim with Barclays. Please go ahead.

Sean Meakim – Barclays

Hey, good morning guys.

Andrew Lane

Good morning, Sean.

Sean Meakim – Barclays

I wanted to dig a little deeper on the SG&A guidance that you gave, so just thinking about what the top-line impact is expected to be for STREAM relative to the SG&A impact? It seems like SG&A is a higher relative contributor. Is the accretion on the gross margin side, is that going to help balance out this higher SG&A spend that we're expecting see in 2014?

Jim Braun

No. You're exactly right Sean. I mean STREAM in particular will bring with it higher gross margins relative to our base business, that also comes with a higher load of SG&A operating expenses. Little more service oriented a lot of technical people associated with that business.

Sean Meakim – Barclays

Okay. And I guess staying on the international side, can you give us a little more color on Stream's position in that market? And then kind of broadly now as this acquisition ramps up, what is this do in terms of getting you to the scale you needed internationally to get margins back to something comparable to North America?

Andrew Lane

Yes, Sean. Let me start and Jim can add a little color on the margin side. But, from a competitive position, this is going to go down, it's one of our best acquisitions of all time. They really have a great position, clearly number one position in Norwegian Continental Shelf from an offshore upstream perspective. We've combined it with our – but even here in the first month after refining them we put that group together with our U.K. valve group and with the Flangefitt's PFF business of stainless and alloy. And we have Steinar Aasland, who is former CEO of STREAM now running all of our North Sea and Western Europe business. And we have the German Chemical business from instrumentation standpoint to go along with our Dutch and French and Belgium based businesses in valve.

So we really are pleased with the position we have there, we had a lot of talent, high margin business and we brought a lot of valves in high-end instrumentation that we had desired to expand into. So from just a competitive standpoint, we think we've hit a home-run there and that was a targeted market for us for a number of years and we had to be patient on the STREAM acquisition.

From an overall international standpoint, this makes a big step forward. We've guided after those two acquisitions will be over $900 million in international in 2014 and we're on a path to be over $1 billion in 2015 and those are still are good targets. Jim, do you anything to speak?

Jim Braun

No. I was just going to say Sean to your question about leveraging margins, this is the first step, this isn't the end game in terms of our international business in getting the same leverage or similar leverage to what we have in the U.S. but it's the first big step.

Sean Meakim - Barclays

And I guess just one last follow on to that. Talking about the – you gave some numbers around the Shell and Chevron contracts, how are we doing on that Shell contract kind of getting up to that ramp? Are we still kind of slow going here, when do we see that full run rate taking effect?

Andrew Lane

Okay, Sean. What we experienced in 2013, we have guided previously after signing that contract in 2012 that we ramp up $40 million to $50 million in revenue in 2013. For a couple of reasons, first getting into the mix of projects that – a lot of work that was already in the feed stage or in construction stage was passed us, so we had to get into new project mix, that took longer than we thought.

And also Shell was going through a lot of strategic reviews of their portfolio and in their investments. So what it was, it was basically one year delay, we are going to see that same $40 million to $50 million ramp up that we thought was going to come in 2013, we're forecasting that to come in 2014 from Shell. And then with the new scope added to the Chevron contract another $20 million to $30 million so that gives us $70 million plus of ramp up just from those two contracts.

Operator

Thank you. Next, we have Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Jeff Hammond - KeyBanc Capital Markets

To this kind of bridge you gave Andy on the revenue build up and the $325 million, I think you said $325 million of kind of organic growth, that's the – that incorporates your market expectations as well as your contract growth wins?

Andrew Lane

Yes, Jeff. We gave some color on that last quarter on the MRO contract wins that we had already secured through the third quarter. And we said we had renewed $500 million of overall business with an increment of $200 million of MRO scope. We had additional MRO scope wins in the fourth quarter. And then we just signed up with the ConocoPhillips, which is a retain for us, the U.S. portion in January. So you add those together and that $325 million or so, it's the combination of contracts we've already scoped we've already won and a conservative look of ramp up of incremental spend.

Jeff Hammond - KeyBanc Capital Markets

But, it seems like – I think you used the $250 million number and then you have additional wins and then you have the $70 million, you're kind of already hit that $325 million. So I mean is that imply that the market is flat?

Andrew Lane

No. The $70 million in the contract wins, in the MRO scope because that's additional MRO scope for those two customers, so it's not added on top but it's in that. But it's a flat to slightly growing market, it is the starting point for us, that's correct.

Jeff Hammond - KeyBanc Capital Markets

Okay. And then just back on line pipe because I want to be clear what do you expect continues from the fourth quarter, weak pricing through 2014, like what's implicit in your guidance because it seems like on one hand, you're saying line pipe pricing stays weak, on the other hand, you're saying there is not a structural challenge and your gross margin should normalize.

Andrew Lane

Yes, Jeff. I mean ERW target line pipe pricings but we're under pressure all year long last year. And we really think it slowed and closed the bottoming in the fourth quarter, it slowed somewhat even in the third quarter. But the level of cost there in the spot market pricing was much lower in the fourth quarter than the first quarter of 2013. We see it's staying at that level. We're conservatively forecasted, I'm mostly talking about ERW because that was the biggest swing mostly forecasting that to be flat to slightly up inflationary towards the second half of 2014.

And really Seamless and DSaw the other two components of our product mix. We're under the same kind of pricing pressure although slighter – much slighter deflation. And we see those also being flat from the current levels and rebounding but the big difference in the fourth quarter was a much higher percentage of ERW than we normally have in the mix.

Operator

Thank you. And next, we have David Manthey with Robert W. Baird. Please go ahead.

David Manthey - Robert W. Baird

Hi, good morning guys.

Jim Braun

Hi, David.

Andrew Lane

Hi.

David Manthey - Robert W. Baird

Just to explore – I want to make sure, I'm clear on your assumptions for organic growth. So you're saying upstream mid single-digits, midstream low single-digits and downstream mid-single, which gets you to 4% organic growth overall. Is that correct?

Jim Braun

That's correct, Dave. And that's off a base of last year adjusted for the $82 million of the pump servicing revenue in Canada, we backed out.

David Manthey - Robert W. Baird

Right. Okay. So if you're saying that your organic growth is looking like down mid-single to say 5% in the first quarter, that would imply up 7% over the course of the next three and I'm just wondering are you given the situations you saw here – sort of an acute situation in the first quarter, do you assume that you're going to be close to that 7% for each of the next three quarters, do you think it ramps up over time or is that even the right way to think about it?

Jim Braun

Now, we'll see some ramp in Q2, that will pick up some and then it will pick up again in the third and fourth quarter, it's not 7% across – evenly across all quarters.

David Manthey - Robert W. Baird

Okay.

Andrew Lane

Yes, Dave, I'll just add a comment. I think this year we'll look more traditional to what we've had, 2013 wasn't a typical year, I think you're going to see strong second and third quarter. I mean because of the timing of this call, we've seen a big weather impact in the last two weeks of January and the first two weeks of February and everybody else, will have seen the same impact in the first quarter. Some of that will make up in March, it's hard to estimate how much at this point. But we know March will be a good month. And then some of that will start in the second quarter because of the weather impact.

So I think when you look at our historical model over a couple of years, you will see a more typical strong second and third quarter this year as Jim just described.

David Manthey - Robert W. Baird

Okay. And then just finally on where you were talking about the gross margin issues, I believe you mentioned price intensity and I'm not sure, if you were just referring to the pricing online type as you just outlined or if that's the competitive situation. Can you help clarify that you are seeing beyond just the fact that the commodity is down, are you seeing more intense competitive pressures?

Andrew Lane

Yes. Dave, no it's not competitive pressures from historical standpoint. It's much more – some of our largest customers as we said in line pipe contracts were slower in the first half of the year. We had to get more aggressive in the smaller customer base and a little bit more in the spot market in line pipe to replace some of those revenues from our contract customers because of their slow down.

So it's more reflective of tapping into a market, its tapping into a smaller customer base. But its not a – what I would say is structural change on the competitive pricing of our contract – our major contract position. That really hasn't changed.

Operator

Thank you. Next is Allison Poliniak with Wells Fargo. Please go ahead.

Allison Poliniak - Wells Fargo

Hi, guys, good morning.

Andrew Lane

Hi, Allison.

Allison Poliniak - Wells Fargo

Yes. On the upstream outlook that you gave, could you give us a little bit more color on what your sort of expecting between the oil versus the gas markets there?

Andrew Lane

Yes. I mean, we are assuming relatively stable rig count in the U.S. basically flat slight increase in the number of well completion. Right now we are sticking with 80% of oil and 20% gas focus. But, I think we were probably conservative on the outlook of activity for drilling in gas due to the – very favorable cash flow from gas pricing right now. And we are going to come out of this winter with a very low historical storage level that has to be filled.

So I think a strong shortage of propane has been throughout the Midwest. So there is a lot of fundamental macro views that should lead to higher gas drilling in the second half of 2014. And at this point in the year, we haven't factored that in. But, we feel pretty sure that's going to show up in the second half. It's just the winter has had a major impact on both gas availability and storage.

Allison Poliniak - Wells Fargo

Great. And then regionally, it sounds like U.S. is still probably going to be your strongest market this year. It seems like there is still some pressure over in Australia?

Andrew Lane

Yes. Australia is still going to be pressured. Although, I don't think as much a downturn from the mining more flat would be my way I would characterize Australia from where we came from 2012 to 2013 was definitely decrease. But, now the U.S. is going to be strong. We are talking about the gas mostly but oil pricing around the $100 still drives a lot of activity.

So we have a big operation in the Midwest and the big operation in the East U.S. and both areas were impacted significantly in January and February. But that's just a short-term weather impact. So the U.S. still will be the strongest for us.

Although, we have now created a very competitive and strong position in the North Sea from the Norway, U.K. perspective. So that will be also a highlight for us.

Allison Poliniak - Wells Fargo

Great. Thank you.

Andrew Lane

Thanks Allison.

Operator

Thank you. Next is Sam Darkatsh with Raymond James. Please go ahead.

Sam Darkatsh - Raymond James

Good morning, Andy, Jim. How are you?

Andrew Lane

Good Sam. Good morning.

Sam Darkatsh - Raymond James

Couple of questions, many of my questions have been asked and answered. And if I missed this I apologize. Is the first quarter EBITDA expectations, I know you said that sales will be down sequentially, but gross margins higher and I think there is an impact from the divestiture too. So where should we be pecking EBITDA based on all the moving parts in the first quarter?

Jim Braun

Yes, Sam. We didn't give that in the prepared comments. I think if you look at our implicit adjusted gross profit assumptions and the revenue levels we guided to that you could compute that fairly easily.

Sam Darkatsh - Raymond James

Okay. If I struggle with that I will get you offline on that.

Andrew Lane

Sam, the one thing we did mention is the one-time charges, the currency in Norwegian Kroners that will hit us in January and also the one-time charge on this divestiture ending the PVF profit sharing. So those two will be one-off that will hit us in the first quarter.

Sam Darkatsh - Raymond James

Okay. And if I could sneak two quick ones then you mentioned then in your prepared remarks Andy that in the second half you would be more inclined to make an acquisition than in the first half, which I understand it from an ingesting standpoint of the deals you already made. But you also may get your primary competitor NOV more active in the M&A sphere in the back half of 2014 after the spin.

So might there be an appetite or an indication or to do something near term or you don't think that bigger deal?

Andrew Lane

Yes. Sam, well, first I will just talk about us and then I will talk about the competitiveness a little bit there, landscape change. We just closed Flangefitt in December and STREAM in January, so a little bit is making sure, we get our hands around that and integrated early on in the first couple of months. That's part of this period we are going through right now.

Especially the STREAM one that was a big acquisition and we also want to leverage the talent of the new management team we brought on Board and giving them a larger scope. So we want to concentrate on that in the early days. But we are still very active in M&A, we always have a couple of deals working. We still have a couple of deals working right now the smaller scale than STREAM, but most likely mid-year would be the target for closing on those.

And then your point is right, with the spin-out of NOV, our distribution now from NOV, you see, they would be aggressive I think. I think their strategy will be to grow. They tend to – I can't name one of our acquisitions in the last three years where we went head to head with NOV on a bidding scenario. They tend to go after acquisitions in a different part of the market than we have. They are much more rig focused. And we are not on the rig contractors or rig equipment focused at all.

So I think they will be aggressive in the marketplace and depends on what level of depth they come out of the spin out and how and – how aggressive they are going to be in the market. But, certainly we have that in mind and they are going to be a strong competitor. And if there is something out there, we have been looking at then we really want to get close, we certainly would intend to close it or have it locked up in negotiations before the mid-year and the second half of the year. So your point is valid.

Sam Darkatsh - Raymond James

If I could sneak one more in, the ERW trends that you are seeing was that industry wide or is that specific to you folks because of certain customers?

Andrew Lane

I think was more specific to us in the midstream where a lot of our customers who were slow in that May through August point, we were normally really busy with them. And some of them had catch ups and spending of their budget before they lose them. It was one of those December end of year. So I think it's more specific to us.

Operator

Thank you. And our final question is from Mark Douglas with Longbow Research. Please go ahead.

Mark Douglas - Longbow Research

Hi. Good morning, gentlemen.

Andrew Lane

Good morning, Mark.

Jim Braun

Good morning, Mark.

Mark Douglas - Longbow Research

So back to I guess pricing in general, was there broader price pressure across the board or only ERW and with that with steel prices rising what kind of impact are you expecting in 2014?

Andrew Lane

Yes, Mark. Let me – I will just start and Jim add some to it. But, yes, it was really isolated just to ERW line pipe. There are still slight pressures on carbon pipe in OCTG also, but outside of those two ERW line pipe and OCTG, the rest of our pricing was not under the pressure and actually margins were very good under it. Jim, you add color.

Mark Douglas - Longbow Research

Then with expectations for steel costs in 2014 versus 2013, looks like you are on the rise, what kind of –

Andrew Lane

And Mark that was our comment earlier that we made – we see although we have been through a period of – year of deflation in the carbon pipe pricing, we see it stabilizing and maybe a slight rise in the marketplace. And so that's usually a much better environment for us – pricing environment.

Operator

Thank you. There are no further questions. I will turn the call back to management for closing comments.

Monica Schafer

Hi. This concludes our call today. Thank you everyone for joining and thank you your interest in MRC Global. Have a great day.

Operator

Ladies and gentlemen, this concludes our conference. Thank you for your participation. You may now disconnect.

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