Willbros Group (WG) has taken its lumps over the past three years, having seen a couple of sizable pullbacks, which comes as the company's fundamentals appeared to be deteriorating. As a result, the stock now trades at under 2.5x book value, which is well below the oil and gas industry average of 4x. And the median price target is nearly 20% higher than current trading levels.
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The worst is behind us
Willbros is an engineering and construction company, offering infrastructure services to the oil and gas and utility industries. Another very appealing aspect to Willbros' business model is that it targets a broad range of markets, offering services that include upstream, midstream, downstream and electric transmission. Its oil and gas segment leads the way when it comes to revenue generation.
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The first quarter of 2013 was abysmal for Willbros with respect to earnings, with the stock falling over 20%. Earnings for 2Q came in better than expected. The earnings improvement comes as the company saw some strength given the increased spending in the utility sector. The utility segment got a big boost from storm work, making up about $4.5 million in revenue. Yet, the bigger problem was that the oil and gas segment continued to be problematic, losing nearly $20 million in the quarter, this is on top of the $15 million the segment lost in 1Q.
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The latest quarter showed more weakness, and another earnings miss. Willbros posted a 3Q loss of 26 cents per share, compared to the consensus estimate for a gain of 8 cents. Its operating loss came in at $8.8 million for 3Q, an improvement from the loss of $18.8 million during 2Q. Oil and gas continued to see weakness, with segment revenues down 35% year over year during 3Q.
The utility segment saw revenues down 12.6% year over year. However, with the help of margin improvement, operating income jumped to $2.9 million, versus $2 million in the same period last year. The Canada segment generated revenues that were up 117% Y/Y, with operating margin expanding to 8.9% for the segment, compared to 0.1% in the same quarter last year. Helping drive the Canada market is oil sands mining. Professional services segment managed to grow sales 3% Y/Y during 3Q.
Let the turnaround begin
Willbros is dumping its Hawkeye and Oman businesses as part of its plan to sell off underperforming assets. It then hopes to use those proceeds to reduce debt and get its financial covenants back in compliance.
One of the biggest factors in driving Willbros' core markets is a rise in the global economy. Higher GDP, expanding middle class, and rising urbanization all lead to a higher demand in Willbros' engineering and construction services.
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Beyond that, the company has some big positives that should help drive the turnaround in each of its four segments.
Oil & gas: The turnaround in oil & gas is expected to gain traction in 4Q, where the segment is expected to post a profit. The oil and gas industry should be helped out by continued work on a cross-country pipeline project in Oklahoma. Other major projects include the increase in pump and flow stations, gas processing facilities and storage tanks. Since the third quarter closed, Willbros was awarded nearly $100 million of significant cross-country pipeline work in the Northeast. The company is also highly confident that it will be awarded another approximately $100 million large diameter pipeline project in Texas by the end of the year.
Utility: Willbros expects margins to increase as it ramps up work in other areas, beyond Texas. There are some $500 million of prospects in markets that are contiguous to Texas that the company plans on tapping in 2014. The other big positive is that its utility business generates some $200 million, while it believes the entire market is valued at over $12 billion. Over the next three to five years, Willbros has a construction target of $500 million revenue with operating margins of 8% to 12%.
Willbros is also looking to grow its market share in utility distribution services. The company just recently won a master services agreement (MSA) and is working on three more. These MSAs give Willbros the opportunity to grow its business with new electric utility customers. Without the MSAs, Willbros is pretty much stuck with storm work with those customers. The MSAs allow Willbros to pick up additional work with its customers.
Canada: In this market, Willbros plans on focusing on its core business of providing services in the oil sands mines. They have a high quality backlog here and they expect production from oil sands to really ramp up over the next ten years. Canada has generated 5 consecutive quarters of positive performance and $31.8 million in operating income. CEO Robert Harl said on the company's earnings call regarding Willbros Canadian operations.
"We believe Canada is on track to meet or exceed the growth and performance objectives we established: $500 million in quality revenue by 2016 and operating margins on par or better than our peers."
Professional services: This segment could be one of the dark horse areas for the company. This comes as the low price of natural gas has brought back a new interest in the petrochemical industry. While we expect the other segments to be the primary growth drivers, this is one segment that could offer an upside surprise due to low natural gas prices.
Investment thesis: 2014 is a turning point
Three of its four segments are generating positive operating performance. They have plenty of room with its cash on hand ($54 million) and revolver ($40 million available), so the debt is not a near-term issue. This comes as the company has managed to adapt to a changing market and we believe the company will streamline operations, better aligning costs and resources to fit its debt reduction profile. The other positive will be a focus on accounts receivable, which spiked last quarter. The company's day sales outstanding is up to 79 for 3Q.
Driving the company is its strong order backlog. Willbros has a total backlog of $1.95 billion and a 12-month backlog of $956.8 million, which is up from $919 million at the end of 2Q. The 12-month backlog consists of approximately 65% time and material and unit rate work with the remainder being fixed price. During 3Q, Willbros booked $540.8 million in new work.
The real driver though for shares will be the company's return to profitability. This year the company is forecast to post an EPS loss 35 cents. This is on top of the 22 cent loss last year. However, next year the company returns to profitability. Full-year EPS estimates range from $0.60 to $0.95, with $0.76 being the average estimate. This puts shares trading at only 11x next year's earnings.(click to enlarge)
Source: Yahoo! Finance
We also like the strong insider ownership in Willbros. There has been no insider selling in the past six months and Board Member S. Miller Williams just purchased 10,000 shares at $8.94. All together, insiders own 20% of the company.
Bottom line
Willbros is uniquely positioned to generate impressive revenue growth over the interim. This should come as all of Willbros' major segments should begin seeing a turnaround in 2014. One of the biggest drivers of the stock is the rise of oil and gas production in the U.S. On the utility side, the ramp up in rebuilding of the U.S. electric grid is a big positive. On the most recent conference call, CEO Robert Harl laid out his vision for 2014 and why there's reason to be optimistic heading into next year:
"We believe our opportunities in the marketplace are strong, and we expect our 12-month backlog will continue to grow in the fourth quarter of 2013. We have much better visibility going into 2014 than we had at this time last year. By the fourth quarter, we expect positive operating results in the Oil & Gas segment. Our pipeline and facility services lines are fully booked for this quarter, and with the expected award of the highly confident large diameter pipeline project I mentioned earlier, our spread capacity will be booked into the early fall of next year."
And finally, a growing economy and increased urbanization will lead to a multi-year bull run in the infrastructure investment cycle. All this should help drive revenue to new highs over the next couple of years, giving the company some much needed cash flow to pay down debt. We see Willbros' book value multiple getting to the industry average over the next year or so, suggesting upside to $14, or 60% upside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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