Willbros A Profitable Pipeline Play

By Eric Fox | February 12, 2009 AAA

Willbros Group (NYSE:WG) will benefit from several strong secular trends that feed the expansion of pipeline and other infrastructure both in North America and internationally. These include the development of unconventional oil-and-gas resources and the aging energy infrastructure. Investors can look at the 79% decline in Willbros from its high as an opportunity.

Willbros Group is an energy services company active in pipeline engineering and construction. The company has three market segments: upstream oil and gas, downstream oil and gas, and engineering.

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Secular Growth Trends
Strong secular growth trends underline the pipeline business, as infrastructure has to be built to keep up with the growth in natural gas and oil production. According to Willbros' January 2009 presentation, the company estimates that global pipeline build spending will grow strongly the next few years. The predictions are:

Year 2009 2010 2011 2012
Global Pipeline Build $34.4 billion $35.3 billion $35.7 billion $ 39.2 billion
Source: Douglas-Westwood, October 2007

While some of this spending may be deferred to the economy and restricted access to the capital markets, the long-term trend will eventually reassert itself. In North America, this demand for new infrastructure is being driven by the development of new unconventional sources of hydrocarbons in the Barnett, Haynesville and Marcellus and other shale plays.

Southwestern Energy
(NYSE:SWN) recently announced in its capital budget for 2009, that it would spend $200 million for expansions to its gathering systems in the Fayetteville Shale. Also, Anadarko Petroleum (NYSE:APC) decided to cut capital expenditure in 2009 as much as 18% stating 2009 should be a "challenging year", according to CEO Jim Hackett (February, 11, 2009). He added that taking into account OPEC cuts and continued uncertainty that "even with reduced year-over-year capital expenditures, we expect to increase our total sales volumes in 2009".

By The Numbers
Another strong secular trend is in the downstream segment where an aging infrastructure requires constant maintenance and upgrading. It is estimated that refiners and others will spend $10.7 billion in 2009 on new projects and maintenance, up from $9.9 billion in 2008. Willbros Group had cash of $127 million and total debt of only $145.3 million at September 30, 2008. It has two convertible issues due 2012 and 2024, and has nothing drawn on its credit facility.

Risks
One risk for Willbros is customer concentration. The company won't reveal the name of its largest customers, but its top three customers in fiscal 2007 represented 35% of its overall revenues. Large concentration like this can lead to pressure on pricing and other concessions, and sudden drops in the stock price. An example of this in another industry was a recent announcement by Wal-Mart (NYSE:WMT) that said it would not renew its contract with the Cott Corporation (NYSE:COT). Cott is the exclusive supplier to Wal-Mart for retailer brand carbonated soft drinks, and in the nine months ending September 27, 2008, Wal-Mart was 35% of revenues for the company. The stock has lost more than 40% of its value since the news became public.

An investment in Willbros is a derivative play on two trends in the industry - the development of shale and other unconventional resources, and the aging of the energy infrastructure in the U.S. Investors should look beyond the current downturn and consider these trends instead.

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