IPO Preview: MRC Global

Apr.11.12 | About: MRC Global (MRC)

Based in Houston, Texas, MRC Global (proposed MRC) scheduled a $500 million IPO with a market capitalization of $2.2 billion at a price range mid-point of $22 for Thursday, April 12, 2012. S-1

MRC is the largest global industrial distributor of pipe, valves and fittings ("PVF") and related products and services to the energy industry based on sales.

It's the product of a Goldman-sponsored leverage buy-out in 2007. Goldman's group owns 99.6% pre-IPO. Operating results have improved considerably in the last 3 years.

In the 'recent developments' portion of MRC S-1 filing MRC compares the March 2011 quarter with the March 2010 quarter. Revenue was up 33% to $1.3 billion, net income increased to $33 million from a loss of $1 million, and EBIDTA increased 76% to $106 million.

Manager, Joint Managers: Goldman Sachs; Barclay

MRC valuation pluses include:

  • 2/3 of revenue is recurring multi-year maintenance, repair and operations revenue. The average annual retention rate for these contracts since 2000 is 95%.
  • MRC is the largest in its industry, with 20 year established relationships with customers.
  • Backlog up 41% in 2011 versus 2010.
  • Further growth is expected from the shale gas segment
  • Regulations which became effective in January 2012 should have a positive impact in MRC's business.

Based on the above pluses metric comparisons National-Oilwell Varco (NOV), mentioned as a competitor in MRC's SEC filing, it seems that MRC is a buy on the IPO at the price range mid-point of $22. NOV is much larger with about 15 times the market capitalization at $34 billion, but MRC appears to be more dominant in its specialized niche.

MRC says it is the largest global industrial distributor of pipe, valves and fittings ("PVF") and related products and services to the energy industry based on sales.

MRC further maintains that is holds the leading position in its industry across each of the upstream, midstream and downstream sectors.

MRC's more than 150,000 stock keeping units include an extensive array of PVF, oilfield supply, automation, instrumentation and other general and specialty industry supply products from over 12,000 suppliers.

Through North American and International segments, MRC serves more than 12,000 customers through over 400 service locations throughout North America, Europe, Asia and Australasia.

MCR has an average relationship of over 20 years with its largest 25 customers.

MCR's PVF and oilfield supplies are used in mission critical process applications that require a high degree of product knowledge, technical expertise and value added services.

MRC believes that growth in PVF and industrial supply spending within the energy industry is likely to continue. MRC cites as reasons the underinvestment in North American energy infrastructure, production and capacity constraints, and market expectations of future improvements in the oil, natural gas, refined products, petrochemical and other industrial sectors.

Significant growth in U.S. shale activity
The development of shale oil and gas in the U.S. has been rapid over the past several years. Natural gas is a major source of energy in the U.S., providing about 25% of total U.S. energy according to the Department of Energy.

Shale gas, as a percentage of total natural gas production, has, in turn, rapidly increased from less than 2% of total U.S. natural gas production in 2001 to 30% in 2011 and is projected to increase to 49% by 2035 according to the EIA.

Over the past ten years, technological advances in directional drilling and fracturing technologies have enabled the production of oil and natural gas products in previously underdeveloped U.S. oil and natural gas shale basins. As a result, unconventional E&P activity in shale regions has accelerated significantly and production levels have increased.

MRC believes that PVF expenditures for unconventional shale plays can amount to as much as five times that required for comparable conventional plays. MRC has positioned itself to benefit from this increase in unconventional E&P and midstream infrastructure activity by investing in shale regions.

In addition, MRC believes it is well positioned to continue to benefit from the more recent marked shift in E&P (exploration & production) activity in the U.S. towards oil production. During 2007, 17% of E&P activity in the U.S. consisted of oil drilling and 83% consisted of natural gas drilling.

During the fourth quarter of 2011, 55% of E&P activity in the U.S. consisted of oil drilling and 45% consisted of natural gas drilling. This is the highest percentage of oil drilling in the U.S. in approximately two decades.

New regulations
MRC's major midstream customers face new safety regulations requiring additional inspection and hydro-testing requirements for U.S. pipelines. On January 3, 2012, the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 (the "Pipeline Act") was enacted into law.

The Pipeline Act is expected to accelerate PVF testing and replacement as well as require midstream participants to install additional automatic or remote-controlled shut-off valves and excess flow valves in new or replaced transmission pipelines.

In addition, 60% of the 178,000 miles of pipeline in the U.S. is over 40 years old. Recent initiatives from several of major customers suggest a longer term trend towards continued replacement of this aged pipeline infrastructure and related MRO spending.

MRC believes its acquisition of LaBarge Pipe & Steel Company, along with increased focus and investments in line pipe and its attendant PVF and industrial supply products, uniquely positions MRC to benefit from increased pipeline replacement and MRO spending in the midstream sector over the next 10 years.

Two-thirds of MRC's sales are attributable to multi-year maintenance, repair and operations ("MRO") arrangements. The average annual retention rate for these contracts since 2000 is 95%.

Expected results for the three months ending March 31, 2012 primarily reflect continued strength in each of the upstream, midstream and downstream sectors of MRC's business, including strong drilling activity in North America, particularly in the shale and conventional oil regions.

The results estimated above include a $1.7 million write-off of deferred financing costs, which MRC expects to record in the three months ending March 31, 2012 in connection with a financing of its ABL Credit Facility.

MRC determines backlog by the amount of unshipped third-party customer orders, either specific or general in nature (including orders held under pipe programs), which the customer may revise or cancel in certain instances.

MRC's backlog at December 31, 2011 was $823 million, including $693 million in the North American segment and $130 million in the International segment. In total, this backlog represents year over year growth of 41%, which MRC believes is a relatively good general indicator of overall activity for MRC.

99.6% owned by The Goldman Sachs Group, pre-IPO.

No dividends.

As of December 31, 2011, MRC had 3,450 employees in North America, and 650 employees internationally.

MRC is the largest North American PVF distributor to the energy industry based on sales.

Competitors include nationally recognized PVF distributors, such as Wilson Industries, Inc. (a subsidiary of Schlumberger), National Oilwell Varco . and Ferguson Enterprises (a subsidiary of Wolseley, plc), several large regional or product-specific competitors and many local, family-owned PVF distributors.

$350 million from sale of 17 million shares. Stockholders intend to sell 5.7 million shares. MRC's IPO proceeds are allocated to repay debt.

Eight IPOs are scheduled for this week. The full IPO calendar is here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.