Two Picks to Dig Into Pipelines, Shale Energy -- Barron's

Maxim Group

What started as a U.S. shale oil and gas boom has now become a true North American phenomenon, creating opportunities all along the value chain.

After peaking in late June, world oil prices have fallen about 20%, prompting speculation that capital-expenditure spending may be deferred as explorer and producers (E&Ps) see lower returns on investment. However, in spite of recent declines, channel checks indicate a resilient market in North America, with a favorable outlook for capital-expenditure spending.

This bodes particularly well for specialty contractors like Quanta Services (ticker: PWR) and MasTec ( MTZ), which have significant pipeline exposure and stand to benefit materially from the build-out of infrastructure related to U.S. shale oil and gas.

Furthermore, opportunities abound in Canada and Mexico, following the latter's recent decision to allow direct foreign investment in oil and gas resources. We highlight MasTec's recent acquisition of Pacer Construction Holdings [of Calgary] and its recent award for a 24-inch pipeline crossing the Rio Grande River into Mexico as examples of how the dash for unconventional oil and gas resources has pushed beyond U.S. borders.

As we anticipated, the third quarter saw announcements for large-scale transmission awards, and we anticipate further announcements through the fourth quarter and into fiscal 2015. This quarter saw Quanta record its largest individual transmission project ever, the Labrador Island Link Transmission project, of which Quanta was awarded over $500 million. This is a large-scale project encompassing 684 miles of 350 kilovolt (kV) transmission line. We look forward to similar announcements of large-scale transmission and distribution projects from MasTec, MYR Group ( MYRG) and more-regional player PowerSecure International ( POWR) over the coming quarters.

Catalysts for the space include regulatory pressures, such as Federal Energy Regulatory Commission (FERC) Order No. 1000, the Environmental Protection Agency's Mercury and Air Toxics Standards, and the recently upheld "good neighbor" provision of the EPA's Transport Rule, which may accelerate the shutdown of coal-fired and oil-fired generating plants, resulting in the need for line upgrades and new substations, having a long-term positive impact on electric-transmission development.

For MRC Global ( MRC), due to the near-term macro headwinds, we are slightly reducing our non-GAAP earnings-per-share estimates for the third and fourth quarters to 45 cents and 45 cents, respectively, from 48 cents and 49 cents, respectively. In addition, for MasTec, we are slightly reducing our estimate for fiscal 2014 non-GAAP EPS to $1.54, from $1.56, to reflect near-term challenges, primarily related to the recent acquisitions and deferred capital-expenditure spending from AT&T ( T).

-- William Bremer

-- Joseph Nelson

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