Oil and Gas Pipeline Construction
Finance & Investment Club
Industrials Sector
Fall 2012
Senior Analyst: Jake Siegel
Junior Analysts: Payal Patel Vincent Liao, Valentina
Delgado, Robert Maghielse, Soosok Kim, Shane
Byrnes, Tinna Zhang, Daniel Krieger, Ruby Lin,
James Yu
Industry Definition – Oil and Gas Pipeline Construction
 Firms in this industry derive the majority of their revenue from the design,
engineering and construction of pipelines used in the procurement,
production and transfer of oil and other natural gases. These products
primarily service a wide range of various U.S government agencies in
addition to both domestic and international private clients who are in the
business of the production, procurement and transfer of oil.
Fluor Corporation
(NYSE: FLR)
KBR, Inc.
(NYSE: KBR)
Jacobs Engineering Group, Inc.
(NYSE: JEC)
McDermott International
(NYSE: MDR)
Quanta Services, Inc.
NYSE: PWR
MasTec, Inc.
(NYSE: MTZ)
WillBros Group, Inc.
(NYSE: WG)
2
Industry Breakdown and Summary
Industry Breakdown By Market Cap ($BLN)
Sub-Sector Breakdown by 2011 Revenue ($M)
Industrial Goods
$ 48387B
5% 3%
6%
Heavy Construction
970B (2.01 %)
42%
17%
8%
Oil & Natural Gas
Pipeline Construction
27B (0.057%)
19%
3
Revenue Generation and Industry Model
Bid For Contract
Design Pipeline
System
Raw Materials
(Iron Ore)
Build Pipeline
System
4
Revenue Generation By Operating Segments
Engineering
Collection
Services
58% 30%
Construction
Services
60%
• Provide traditional
field construction
services to private
and public sector
clients
•
Employ engineering,
architectural and
design related
disciplines necessary
to build transportation
system
Operations and
Maintenance
10%
• Repair and
replacement of
pumps, piping, heat
exchangers, and other
equipment
Private and Government
Clients
5
Presentation Overview
Oil and Natural Gas Pipeline Construction
Oil and Natural Gas Pipeline Construction Industry Rating:
POSITIVE
Key Industry Drivers/Trends
Growing Crude Oil
Outputs
Increased electronic
Decreasing Iron Demand
Ore
in Increasing Demand
demand and usage
Prices Aerospacefrom U.S. Government
in China
6
Trends
Growing Crude
Oil Outputs
Decreasing Iron
Ore Prices
Increasing
Demand from
U.S Government
7
Trend I: Revenue Expectations from Growing Crude Oil Outputs
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%
-20.00%
-25.00%
20% Decrease from
May 2008-May
2009
40.00%
30.00%
20.00%
May-2012
Jan-2012
Sep-2011
May-2011
Jan-2011
Sep-2010
May-2010
Jan-2010
Sep-2009
May-2009
Jan-2009
Sep-2008
May-2008
Jan-2008
Sep-2007
May-2007
50.00%
7% Increase in
Jan. 2012
Jan-2007
% Change in Total Industry Revenue
21% Decrease in
May 2008
Sep-2006
• A relationship exists between total
revenue of the Oil & NG Pipeline
Construction Industry and Global
Crude Oil Output
• There is an apparent one year lag
between increases in Crude Oil Output
and increases to industry revenue
% Change in Global Crude Oil Output
Projected 7%
Increase in
Jan. 2013 Revenue
that is Attributable
to Crude Oil
Outputs
10.00%
0.00%
-10.00%
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
-20.00%
8
Trends
Growing
Crude Oil
Outputs
Decreasing
Iron Ore
Prices
Increasing
Demand
from U.S.
Government
9
Trend II: Cost Benefits of Decreasing Iron Ore Prices
% Change in Iron Ore Prices
• Iron Ore represents 50-70% of
industry COGS
• We expect Iron Ore prices to drop
even further in the next year which
will continue to provide the industry
with this cost advantage
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
% Change in Industry COGS/Sales
2.00%
1.00%
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
-5.00%
-6.00%
3.5% Decrease in
March 2012
• Current Iron Ore stockpiles at Chinese
ports are at a record high 97.43M metric
tons
• India has instituted a 2-year ban on
distribution of 120M metric ton supply of
iron ore
10
Trends
Growing
Crude Oil
Outputs
Decreasing
Iron Ore
Prices
Increasing
Demand from
U.S.
Government
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Trend III: Increasing Demand from U.S. Government
Net Revenue Growth Attributable to PHMSA
$300,000,000.00
• 2009 and 2010
PHMSA regulations
mandated pipeline
maintenance and
repair throughout the
U.S.
• Contracts with
PHMSA effective in
2013 and 2014 will
grow revenue by a
projected $250m
Projected .75% Increase to
Industry Revenue
$250,000,000.00
$200,000,000.00
.65% Increase to
Industry Revenue
$150,000,000.00
$100,000,000.00
$50,000,000.00
$0.00
2009
2010
2013E
2014E
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Risks
The industry is subject to risk associated with commodity price volatility
• With iron ore accounting for between 50-70% of COGS, hikes in the price of iron ore can force
constituent firms to incur more costs and a shrink to margins.
Global crude oil output sets the level of demand for industry services
• If crude oil output experiences a large falloff, industry revenues may start to decrease as
pipeline transportation capacity demand will fall.
Operations include construction and maintenance site that are inherently dangerous workplaces
• Failure to maintain safe work sites can expose companies to significant financial loses and
potential civil and criminal liability.
Firms in this industry run the risk of entering into bidding wars
• Firms in the industry enter silent bids for news contracts and run the risk of pricing themselves
too low in order to acquire the most business
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Key Financials
Company
Market
5-Year Revenue Growth (%) LTM ROI or ROE
Cap.
LTM EBITDA
Growth(%)
EV/EBITDA
P/E
Fluor
Jacobs
Quanta
KBR
8.4
5.2
5.7
4.1
10.68
5.15
16.76
1.01
17.23
10.77
3.93
20.25
60.55
6.67
9.58
3.11
5.32
6.97
9.18
5.48
15.30
14.07
19.59
20.43
McDerm
ott
2.4
-3.52
8.93
-20.43
4.92
14.54
MasTec 1.74
Willbros 0.246
26.19
24.35
14.48
-7.06
4.93
1.32
7.78
25.00
21.46
12.03
High
8.4
Low
0.246
Median 4.1
Mean 3.97
26.19
-3.52
10.68
11.52
20.25
-7.06
10.77
9.79
60.55
-20.43
4.93
9.39
25
4.92
6.97
9.24
21.46
12.03
15.3
16.77
14
Presentation Overview
Oil and Natural Gas Pipeline Construction Industry Rating:
POSITIVE
Key Industry Drivers/Trends
• Projected 7% increase to revenue due to growing crude oil output
• Projected 3.5% decrease to COGS/Sales due to decreasing iron ore prices
• Projected .75% increase to revenue in both 2013 and 2014 due Increased
to Pipeline
and
electronic
Demand in
demand and usage
Hazardous Materials Safety Administration regulations
Aerospace
in China
15
Thank You & Slide Matrix
Thank You For Your Time
We Welcome Any Questions You May Have
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Industry Definition
Industry Breakdown and Summary
Revenue Generation Model I
Revenue Generation Model II
Presentation Overview
Revenue Expectations from Crude Oil Outputs
Decreasing Iron Ore Prices
PHMSA Regulation
Risks
Key Financials
Conclusion
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