Description
Wilbros Group (WG) provides construction services, engineering services and other specialty oilfield related services to the oil and gas industry and government entities worldwide. With over $2 per share in cash, no debt,a projected P/E multiple of 8.5 for 2003, and anticipated free cash flow after capital expenditures of .57 cents per share, I believe that investors have the potential for a nice upside move with little downside risk.
After hitting a high of $19 in April of '02, WG took a beating in October when it announced that it was lowering its 2003 estimate from $1.90 per share to around $1.00. The root of the difficulty was a weak North American market for pipeline work. Although the majority of WG's worldwide revenues are not derived from the troubled power industry (Duke, WIlliams, El Paso), those companies do contribute to North American earnings. Fortunately for WG, healthy powerhouses such as ExxonMobil and Royal Dutch Shell account for a greater % of revenues.
Management will need to deliver on their forcasts going forward to get the investment community back on board. I believe that WG started that process with their 2002 4th qtr report that was announced on February 13th.
After speaking to management in October and hearing a very tenuous outlook for business in 2003, I was pleased to hear the upbeat tone in the February 13th conference call. In fact, the company has 85% of its 2003 backlog already in place and management is confident that they will close the remaing gap and meet expectations.
The backlog amounts in each division consist of the following:
Construction: 132.5 million
Engineering: 23.7 million
Specialty services: 59.8 million
The geographic breakdown of the backlog is as follows:
West Africa 77.1 million
Latin America 65.9 million
North America 66.7 million
Middle East 6.3 million
Other significant year-end numbers that were disclosed:
Cash: 49.5 million
Working Capital: 91.1 million
Total Assets: 298 million
Debt: 0
Stockholders Equity: 211 million
For 2003 management gave the following estimates:
Revenues 500-525 million
EPS .90-1.10
Tax Rate 40-43%
EBIDTA 60-63 million
Free cash flow 12 million
Shares Outstanding 21 million
Management has kept a tight control on G&A expenses with it representing 5.8% of revenues in '02, down from 7.7% of revenues in 2001. In addition, WG's strong capital structure is giving the company a real advantage. Customers and competitors are approaching WG because insurance and bonding prices are skyrocketing. WG is finding that its capital structure is an engine of growth.
One interesting detail that I found out was that many new pipeline owners do not have the expertise for pipeline repair/refurbishing work. Most of you have probably read about Buffett buying into the pipeline business. Some of the owners in distress that he bought from did their own pipeline work. WG feels that Buffett as well as other recent buyers will outsource this work and WG is a prime candidate to pick up some of this business.
Risks:
WG has a small exposure to Venezuela. They are expecting .05-.07 cents of eps will shift to the 2nd and 3rd qtr due to the recent disruption in business. If that situation blows up, then that could get pushed further back.
Natural Gas pipeline owners difficulties increase and they continue to shift work into 2004 and beyond.
The remaining backlog work they need to land does not materialize and they disappoint Wall Street again.
WG is an experienced operator that has done work in 55 countries. They understand that backlog is important but profits are more important. With oil and natural gas prices up, companies cannot afford to delay projects forever.
Catalyst
Investors are looking for strong balance sheets. I think by the 2nd half of 2003, WG will begin to attract the attention that it received earlier in 2002. Historically the company has traded at an average of 11.5 times forward earnings. That is a 35% upside from the present price in what people could argue is a cyclical low point of earnings.