Pipeline construction for the energy sector is growing worldwide. Companies that provide pipeline and pipe services are receiving contracts in Europe, Asia-Pacific, the Middle East, and North and South America. An undervalued stock in this sector is ShawCor Ltd. (TSX:SCL),
a Toronto-based company with a record $875 million backlog of business. ShawCor Ltd. (TSX:SCL) has positioned itself as a global leader in pipe coating, with manufacturing facilities in 15 countries worldwide. First-quarter net earnings more than doubled from a year ago. Second-quarter income will be exceptional, too.
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.