Matrix Service Co.: Rising Refiner Profits Are Bullish for Revenue Growth

| About: Matrix Service (MTRX)
BP’s Refining Marker Margin, an industry wide look at refiner profitability, is testing highs as fuel demand, both domestic and export, returns. As refiners capture wider margins, look for service and maintenance spending, which suffered through the recession, to rebound. That’s good news for Matrix Services Co (NASDAQ:MTRX), which gets 41% of its revenue from downstream oil markets.
Historically, the crack spread peaks in May. The current crack spread is the highest since Q2, 2007. Adding complexity to refining markets, the earthquake severely impaired Japan’s power generation and refining industries. As Japan rebuilds its energy infrastructure, fuel consumption will increase to make up for nuclear production shortfalls. This dynamic will boost U.S. exports, providing additional refiner profits and driving an increase in demand for Matrix products and services.
Matrix builds and maintains above ground storage tanks, builds and monitors pipelines and conducts refinery maintenance and service. The company suffered through the recessionary downturn in refinery spending, seeing its revenue peak in 2008 at $731 million. In Q1, 2009 its quarterly revenue fell 19% year-over-year. It fell another 17% year-over-year in Q1 2010. However, the corner is turning for Matrix, as it's put together two consecutive quarters of year-over-year growth in Q3 and Q4, 2010. And, the revenue peak year in 2008 came one year following the last time crack spreads were this wide; suggesting 2011 and 2012 could be very strong for Matrix.
Today, nearly 40% of its revenue comes from above ground storage tank (AST) work. Revenue from its AST products and services rose 34% in the six months ending in December. The business is being supported by ongoing growth in refined product grades and infrastructure spending tied to Canadian oil sands development. The company also benefits from shale development and the necessary infrastructure building needed to bring NG and crude to market, such as in the Marcellus Shale. Revenue from its electronic & instrument (E&I) products and services were up 117% in the six months ending in December. The combination of AST and E&I strength boosted the construction services segment year-over-year revenue to $105.6 million from $80.6 million.
Another 14% of its revenue comes from industrial and power generation, where the company has expanded services to include nuclear and alternative energy. These areas are likely to see increased attention in the wake of the recent earthquake’s impact on Japan’s nuclear facilities.
Despite the recessionary revenue challenges, Matrix was able to increase its customer count from 350 to roughly 400 today. This suggests a wider audience and more revenue opportunities as industry spending returns.
The anvil on revenue growth, until now, has been the repair and maintenance services segment. Last quarter, revenue for the segment was $69.7 million, essentially flat year-over-year. This segment offers the best upside opportunity on a return of downstream spending. MTRX expects higher refinery utilization and crack spreads to boost turnarounds this year with second half revenue strengthening over first half revenue.
Overall, MTRX has little debt and $1.65 per share in cash. There are 5.7 days to cover short and the company has beaten the Street in 3 of the past 4 quarters. MTRX is trading at 13x 2012 estimates of $1.02, 42% EPS growth from 2011’s $0.72 estimate. Given robust margins for refineries, MTRX is well positioned to benefit from the next cycle of industry spending.

Disclosure: I am long TSO, WNR, HOC, FTO, ALJ, VLO, MTRX.

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