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Willbros Group (WG); another natural gas play

August 20th, 2008 · No Comments

They  make big pipelines. Seems a good business to us. This is a preliminary write-up, otherwise the file would get way too long.. 

Company

  • They have quite a history (founded in 1908, first pipeline constructed in 1915, etc.), listed on the NYSE in 1996, and have completed a host of big international contracts [WG website]

Industry

  • Pipelines is their main thing, but their also an engineering and construction company, not surprising because laying pipes in rough terrain would normally involve a good bit of both.
  • Indeed: “We also build the necessary infrastructure (roads, bridges, camps) to access the project locale when necessary” [WG website]
  • It is not an industry that excites us terribly, we have to say. It’s way too linear in the sense that output and profit grow more or less in step with inputs, and all grow more or less in step with demand and market growth, there is no room for sudden ruptures (like a big resource find for exploration companies) or a lot of leverage (like high fixed cost businesses can have when they recoup the fixed cost (in software, for instance), or a discovery for a R&D based company
  • However, having said that, the trajectory is certainly upwards, a steady grower, the trend is with them.
  • If you’re more daring, you should start trading the same trend (roughly) with oil or natural gas futures, perhaps. But if you have a nervous disposition, this is a stock to play the same trend. (We also had another suggestion, UNG, a natural gas EFT).
  • If you think it’s a steady business without much risk, think again:
  • “For 2006, the Company reported a loss of $105.4 million on revenue of $991.3 million.  These results reflect charges related to discontinued operations in Nigeria, Venezuela and the Opal facility.  Continuing operations, in North America and Oman, showed improvement and, looking ahead, we believe our financial results will continue to demonstrate improved performance.  Since late in 2005 we have been evaluating our strategic options and in 2006, the Company made significant progress toward reshaping its business to address its risk profile, which was adversely affected by events in Nigeria.” [2006 annual report]
  • These adversarial events were that hostages were taken, and the company bailed. Risk seems mainly political, but cost overruns, bad weather, and stuff like that are not to be neglected

Sustainable competitive advantage

  • “Over the years, the Company has developed expertise in addressing the unique engineering challenges involved with pipeline systems and associated facilities to be installed where climatic conditions are extreme, areas where environmentally sensitive terrain must be crossed, and where fluids which present extreme health hazards or which present technical challenges regarding the selection of materials for fluid/gas conveyance must be transported. These services are furnished to a number of oil, gas, power and government clients on a stand-alone basis and are also provided as part of EPC contracts.” [WG website]
  • The amount of projects they have completed certainly seems to testify this, and their long history allows the slow accumulation of the necessary learning process
  • We would like to see some kind of knowledge system where they codify the project learning so that it can be transferred to new projects, or at least a simpler system with an inventory of employees and their different specialities and experience (also to transfer knowledge). The closest we could find is this:
  • “Offering complete turnkey capabilities including project management, engineering, procurement, construction and supporting field services, Willbros’ combined resources present a total-package expertise. From the union of these internal resources, Willbros has built an integrated team that has worked on many turnkey projects. The long-standing relationships that exist between personnel in our various subsidiaries offer shared knowledge, familiarity with one another’s standard operations, and understanding of each other’s clearly-defined responsibilities for a smooth transition from one phase of the project to the next.” [WG website]
  • We like their turnkey approach. They solve problems, that keeps customers happy, but we expect competitors having similar knowledge practices in place.
  • The companies in this sector are probably pretty well insolated against too much competition as they possess deep knowledge (that is, tacit collective knowledge from decades of practice) and, not unlike universities, will have their own field of strength which will differ a little from those of competitors, not unlike the monopolistic competition model, but with significant entry barriers. This should protect margins from too much downdraft.
  • We therefore think that the prime movers, in terms of opportunities for shareholders, is market growth, and we’re pretty optimistic about these.

Basic Metrics

  • It’s not terribly attractive. Peg ratio above one, we know quite a few that are way below that (TSL comes to mind)
  • Forward p/e of 16, that’s ok
  • Margins are not very high, but if the industry just keeps growing, and margins stay stable or could improve somewhat (because of high demand, this might become a little bit more of a sellers market)
  • It argues it’s 52 week high was $62, but that can’t be right (see chart below)

Earnings surprises

  • It’s one of the first things we look at if we embark on a new stock, does the company consistently surprises on the upside? Well.. 3 out of 4 ain’t bad, that Dec07 quarter was quite a disaster, but it’s a one off (see above), although these kind could very well happen more often.

Finance

  • In October 2006, the Company closed a purchase agreement for the private placement of approximately 3.7 million shares of its common stock, priced at $14.00 per share, with warrants to purchase an additional 558,354 shares at an exercise price of $19.03 per share.  The net proceeds of the offering, approximately $49 million, were used for general corporate purposes to address the robust and growing North American market for engineering and construction services, both in the oil sands region of northern Alberta, Canada, and in the expansion of natural gas pipeline infrastructure in the United States. [2006 annual report]
  • This was last Friday: “Willbros Group, Inc. 2.75% Convertible Senior Notes Due 2024. Please be advised that pursuant to Section 12.1(a)(i) of the Indenture, the 2.75% Notes will be convertible beginning today, August 15, 2008, and will continue to be convertible through November 14, 2008. The 2.75% Notes may be converted in whole or in part (in denominations of $1,000 and integral multiples thereof). The Conversion Price pursuant to the Indenture is currently $19.47.” [Yahoo]
  • Curiously, it didn’t say how many of these convertible notes are out, and we couldn’t immediately locate this in the SEC filings either.

New projects

  • “Willbros has been awarded contracts by Enbridge Pipelines Inc. for construction of the Canadian Mainline Pipeline Project, Contract “A” Line 4 Expansion and a segment of the Alberta Clipper pipeline. The scope of work for the Line 4 Expansion includes 135 kilometres (km) of 36-inch pipelines in three loops from Sherwood Park to Hardisty, Alberta. The Alberta Clipper segment includes 99 km of 36-inch pipeline from Hardisty to the Alberta/Saskatchewan border near Kerrobert, Saskatchewan. The work is scheduled for August 2008 to March 2009, with final pipeline right-of-way clean-up in summer 2009.”
  • You can see where they’re busy here
  • They will be busy for some time, since this is the main driving metric, we’re cautiously optimistic because their backlog is growing:
  • “At June 30, 2008, Willbros reported backlog (2) of approximately $1.3 billion compared to $1.2 billion at March 31, 2008. Management remains highly confident that backlog will grow year over year in the robust environment for its services. Backlog has increased from $1.0 billion at June 30, 2007. At June 30, 2008, approximately 79 percent of contract backlog was cost reimbursable.” [8K August 6]
  • So it will be all systems go, which should provide a nice upside, but it’s the linear model that bugs us a little, to be honest.

The Chart

  • Upwards path, just as we expected, because they rise with the energy market. And that could very well continue for some time to come. Buy on dips would be best, but we just had a dip, so we’ll sit on the fence for this one.

Tags: WG