Another positive for ShawCor is its recent reorganization to buy out family and eliminate dual class ownership of shares.
In the reorganization, ShawCor Ltd. (TSX:SCL) reduced its outstanding shares by 16.2%, which is good for existing shareholders, but borrowed $350 million in order to buy out the Shaw family. The additional debt is a negative, but with strong cash flow, this company could pay off that debt in 18-to-24 months. Meanwhile, an acquisition of Socotherm completed late in 2012 will build on this growth story.
The industry barometers
High oil prices — now over $100 per barrel — and growing rig count bode well for the pipeline business. The growth of the oil shale play in North America also is good for the pipeline industry as many of these drilling rigs are in places in desperate need of pipe.
A history of returns
ShawCor Ltd. (TSX:SCL) became a public company in 1969. It diversified with eight divisions, but its largest division is Bredero Shaw, which provides pipeline-coating services. Pipelines need to be coated in order to prevent corrosion and improve flow of product. For underwater pipe, the company adds a layer of concrete around the pipe to weigh it down on the sea floor.
In 2007, ShawCor’s Chairman Leslie Shaw died. ShawCor had two classes of stock, the family owned about 18% of the company’s equity, but controlled 69% of total shareholder votes. Family members wanted out. Last year the company was put on the market but didn’t sell. So the company borrowed money to buy out family’s stock in the first quarter. Now there is only one class of stock.
ShawCor Ltd. (TSX:SCL)’s 13.7% total annual return to shareholders from inception as a public company from February 1969 to June 30, 2012, exceeded S&P/TSX’s 8.9% return over the same period, the company said.
ShawCor’s stock performance was flat in the first half of 2013, inline with the Canadian energy stock sector’s lackluster return of -0.9% in first half of 2013. ShawCor pays a 1.2% dividend.
ShawCor’s net income was up 192% in first quarter 2013 to $70.6 million, but looks even better on a per share basis – up 197% — because the company reduced share count in the buyout of the Shaw family. Revenue in the first quarter reached a new quarterly record of $454.7 million, an increase of 46% from the $312.3 million reported in the first quarter of the prior year.
Bill Buckley, president and CEO of ShawCor Ltd. (TSX:SCL), said the strong quarter reflected the strength of the company’s global pipeline markets and the company’s success in launching and executing the major pipe coating projects that are under way, particularly in Asia Pacific.
“ShawCor continued to increase its backlog which reached a new record level of $875 million at March 31,” Buckley said. “The backlog includes firm customer contracts which will be executed over the next 12 months and is indicative of the strong international business environment as well as the positive impact of the acquisition of Socotherm that was completed late in 2012. All indications continue to suggest that the company will generate record financial performance in 2013.”
ShawCor recently announced it had secured a $30 million contract from Statoil Norway to coat pipe in the North Sea. The contract will be executed at the Bredero Shaw pipe coating facility in Leith, Scotland. Pipe will receive polypropylene anticorrosion coating, internal flow efficiency coating and concrete weight coating.
Another player
Another player in the pipe coating industry is Aegion Corp – Class A (NASDAQ:AEGN) , a St. Louis, Mo., company that owns The Bayou Companies, which provides pipe coating and welding services for the oil and gas services onshore and offshore. At a $953 million market cap, Aegion Corp – Class A (NASDAQ:AEGN) is small in comparison to ShawCor’s $2.5 billion market cap. Earnings in first quarter 2013 for Aegion Corp – Class A (NASDAQ:AEGN) were $0.07, down 58% from $0.17 in first quarter 2012.
The Foolish bottom line
The North American oil and gas sector is hampered by a lack of pipeline capacity, but that is likely to improve as Canadian authorities look for ways to improve safety of crude shipments after a runaway train carrying crude crashed in Lac-Mégantic, Quebec, killing 47 people.
While most of ShawCor’s business is in North America, the company continues to benefit from increasing demand for pipe coating services worldwide, especially in Asia-Pacific. The company bought out the Shaw family, reducing share count, and has a record backlog of business. ShawCor’s stock price has been compressed along with the rest of the Canadian energy stocks, but its earnings are growing at exceptional levels. I expect blockbuster financial results in the second quarter.
AltaCorp Capital’s price target for ShawCor Ltd. (TSX:SCL) is $58 by year-end. ShawCor is an undervalued stock with the potential for above-market returns.
The article Canadian Pipeline Firm Sees Exceptional Growth originally appeared on Fool.com and is written by Michael Hooper.
Michael Hooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Michael is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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