Oil/Gas Engineering Industry: Improved Earnings, Rising Stock Prices

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Includes: AMFW, CBI, CVX, FLR, JEC, KBR, MDR, OII, RDS.A, SHAW, WG, XOM
by: Tate Dwinnell

I'm pleased to bring you a report on the oil/gas engineering industry written from the perspective of someone who has more than 40 years of experience working for major oil corporations as well as smaller companies all across the globe.

Robert Williams has extensive petroleum, water and electrical industries experience regarding Supervisory Control and Data Acquisition (SCADA) systems, Management Information Systems (MIS/IT), Distributed Control Systems fire & gas/emergency shutdown systems, instrumentation, metering, communications, security/CCTV and electrical engineering on such major projects as Shell Bonga FPSO, Saudi Strategic Storage Project, Libyan Water Pipeline, Trans Alaska crude oil pipeline, Alaska Natural Gas Transportation System, Occidental Piper B and Saltire offshore platforms and many other worldwide projects.

This is the inauguration issue of the Oil & Gas Industry Perspective published with the express purpose of keeping you abreast of industry trends and developments and to potentially identify investment opportunities. Industry sectors involved are the Integrated Companies, Services and Equipment Companies and Operations Companies. All these industry sector companies are involved with future developments capital expenditures either for exploration, production, distribution or for technological advancements.

Not included in these Oil/Gas industry sectors is one industry which is highly involved with oil and gas developments. This industry is the engineering companies that are listed under engineering because many are also diversified into environmental, power, federal government, pharmaceuticals, nuclear and life sciences engineering projects.

Future Oil & Gas Industry Perspectives will address these sectors as well as major equipment and systems suppliers that specialize in these industries since they are also improving earnings due to the tremendous investments occurring in this industry. These future Industry Perspectives will have the express purpose of identifying potentially profitable investment opportunities.

The following summarizes some of the major engineering companies who are extensively involved in oil and gas engineering projects. These companies are identified as Engineering, Procurement and Construction or EPC. Their engineering projects are phased into Front End Engineering Design [FEED] and detailed engineering with follow on into field construction activities which include installation, startup and commissioning. Some of these engineering companies will also contract for operations and maintenance.

AMEC supply consultancy, engineering, and project management services to energy, power and process industries. AMEC have defined the following core businesses: Oil and Gas; Oil Sands; Minerals and Metals Mining; Nuclear; Industrial; Earth and Environmental; and Wind Energy. AMEC is an international organization but because they have acquired two US oil and gas engineering companies they are included in this summary. Stock is listed on the London exchange as AMEC.
CBI is an engineering, procurement and construction company specializing in projects for customers that produce, process, store and distribute natural resources. CBI is an integrated EPC service provider, providing conceptual design, engineering, procurement, fabrication, field erection, mechanical installation and commissioning. Projects include hydrocarbon processing plants, liquefied natural gas [LNG] terminals and peak shaving plants, offshore structures, pipelines, bulk liquid terminals, water storage and treatment facilities, and other steel structures and their associated systems.
FLR provides engineering, procurement, construction and maintenance services. Fluor serves a number of industries worldwide, including oil and gas, chemical and petrochemicals, life sciences, manufacturing, power, and transportation infrastructure. Fluor is also a primary service provider to the United States Federal Government. The Company is aligned into five principal operating segments: Oil and Gas, Industrial and Infrastructure, Government, Global Services and Power.
FWLT operates through two business groups, Global Engineering and Construction Group (E&C Group), and Global Power Group. The Global E&C Group designs, engineers and constructs onshore and offshore upstream oil and gas processing facilities, natural gas liquefaction facilities and receiving terminals, gas-to-liquids facilities, oil refining, and chemical and petrochemical, pharmaceutical, biotechnology and healthcare facilities and related infrastructure, including power generation and distribution facilities. Global Power Group designs, manufactures, and erects steam generating and auxiliary equipment for electric power generating stations and industrial facilities worldwide.
JEC provides engineering, design, architectural, and similar services; process, scientific, and systems consulting services; operations and maintenance services, and construction services, which include direct-hire construction and construction management services. JEC concentrates its services on selected industry groups and markets, including oil and gas exploration, production and refining; programs for various federal governments; pharmaceuticals and biotechnology; chemicals and polymers; buildings, which includes projects in the fields of healthcare and education, as well as civic, governmental and other buildings; infrastructure and technology and manufacturing.
KBR is a global engineering, construction and services company supporting the energy, petrochemicals, government services and civil infrastructure sectors. The Company operates in two segments: Energy and Chemicals [E&C] and Government and Infrastructure [G&I]. The E&C segment designs and constructs energy and petrochemical projects, including large, technically complex projects in remote locations around the world. The G&I segment delivers on-demand support services across the full military mission cycle from contingency logistics and field support to operations and maintenance on military bases. KBR have been in the news recently because of their Iraqi involvement.
MDR is an engineering and construction company with specialty manufacturing and service capabilities. MII is the parent company of the McDermott group of companies, which includes J. Ray McDermott; McDermott Holdings, Inc.; McDermott Incorporated; The Babcock & Wilcox Companies; BWX Technologies, Inc. and Babcock & Wilcox Company. MDR is a worldwide energy services company operating in three business segments: Offshore Oil and Gas Construction, Government Operations and Power Generation Systems.
OII is a global oilfield provider of engineered services and products primarily to the offshore oil and gas industry, with a focus on deepwater applications. The Company also serves the defense and aerospace industries. The services and products the Company provides to the oil and gas industry include remotely operated vehicles, mobile offshore production systems, built-to-order specialty hardware, engineering and project management, subsea intervention services, nondestructive testing and inspection, and manned diving.
SGR is a provider of services to the energy, chemical, and environmental and infrastructure industries, including consulting, engineering, construction, remediation and facilities management services to governmental and commercial customers. The Company operates through segments, which include Environmental and Infrastructure (E&I), Energy and Chemicals (E&C), Fabrication and Manufacturing (F&M), and Maintenance.
WG is an independent international contractor serving the oil, gas and power industries and government entities worldwide. Willbros operates its business in two segments: the United States and Canada and International. It provides engineering; construction; engineering, procurement and construction [EPC], and specialty services to industry and governmental entities worldwide, specializing in pipelines and associated facilities for onshore, coastal and offshore locations.
WG [UK] is an international energy services company. The Group three businesses are 1) Engineering & Production Facilities, 2) Well Support, and 3) Gas Turbine Services which provide a range of engineering, production support, maintenance management and industrial gas turbine overhaul and repair services to the oil & gas and power generation industries worldwide.

Industry Perspectives

1. All across the world major oil companies, Exxon (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.A), Chevron/Phillips (NYSE:CVX), Marathon (NYSE:MRO), etc. and Middle East national oil corporations, e.g. Kuwait are all in various degrees of revamping their existing refineries with the express purpose of increasing overall refining capacity, and where necessary, adding heavy crude oil refining capability.

2. Major capital expenditure projects are financed by the continuously increasing crude oil prices. Current crude oil prices are sufficient to provide a return on investment and, in most cases, the necessary capital is already justified and committed to the refinery expansions. Refinery revamp projects are currently ongoing in California, Texas, Louisiana, Michigan and other states. Front End Design [FEED] and Engineering Procurement Construction [EPC] contracts have been placed with engineering contractors who have specialized skills to complete these projects.

3. Specialized skills include positive experience on similar projects, project management capability, project control systems with competitive rates and qualified engineering, procurement and construction personnel.

4. In 1982 there were 301 refineries in the USA but in 1992 there were only 199; 2002 only 153 and in 2007 the number of refineries was down to 149. Crude oil pricing went the opposite direction from $18.91 in 1990, to $23.17 (Jan, 2000); $28.00 (Jan, 2004); $35.16 (Jan, 2005); $55.12 (Jan, 2006); $54.63 (Jan, 2007); $94.44 (Nov, 2007), and January 2008 100 ++?? (Source: US Energy Information Administration) [www.eia.doe.gov]

5. Gasoline refining in the US has not kept up with demand with the shortfall being made up by imports with an estimated current import of 1 million barrels. A good size refinery is about 250,000 barrels per day of crude oil.

6. No new refineries have been built in the US for the past 25 years.

7. Refined products consumption will continue to increase as will the political pressure for gasoline imports independence.

8. During the 80’s and 90’s the oil/gas industry suffered a major downturn and no major projects were initiated to replace older equipment and technology. A result is the ongoing maintenance shutdowns for US refineries.

9. Similarly, the major oil/gas companies and the EPC engineering contractors divested themselves of professionally qualified and experienced engineers of all disciplines. Newly assigned engineering projects are being partially staffed from returnee engineers, retired engineers and new graduate hires. A major experience gap exists in staffing these projects.

10. During the industry downturn there was a trend toward lump sum contracting for global capital projects. This trend has now reversed back to the cost plus reimbursable projects.

11. An EPC contractor does not make any major capital expenditures for the refinery revamp engineering projects, since they only provide the necessary business requisites to supply experienced project managers and engineering personnel and supporting infrastructures, of buildings, computers, networks, etc.

12. One EPC contractor outlines the backlog of engineering contracts of up to five years without any new contracts being granted.

13. Domestic refining capacity is expected to grow based on the current capital expenditure projects to revamp existing refineries but this will be offset by increasing consumption. Is this another refining industry overbuild? It may very well be, but this will not become apparent for quite a few years until these refinery revamp project deliver the increased production capacity which could be utilized to reduce crude oil and petroleum products imports rather than flood the US market.

14. In previous years capital investment was directed to lower carbon emissions and to meet low-sulfur regulations. These environmental investments do not expand capacity as the currently ongoing revamp projects will as they are also designed to increase heavy crude oil refining, i.e. Canadian tar sands.

US-Listed Companies – Annual Earnings Estimates

The oil/gas engineering companies combined performance charts (see chart) positively indicates that profits are being made and that it is not too late to invest in these companies. All are indicating increasing earnings and the Insider Perspective from three to five years of backlog are recorded by these companies.

Backlog means that they would be busy for three to five years to complete existing client-approved capital expenditure projects without consideration for any new projects being negotiated or bids under preparation. Please note that recent markets declines do affect these companies’ stock pricing, but may very well provide excellent entry points depending on your market timing criteria. Weekly charts provide trend direction determination whereas daily or even 60-minute charts provide guidance as to trade entry points.

In summary, the oil/gas engineering industry is currently investing on crude-oil dependence growth which is a fundamental sign for improved earnings and rising stock prices.

Disclaimer: No position is owned in any of the companies written about above.

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