Diversified manufacturing stock ShawCor is a buy

ShawCor Ltd. remains a buy. It can prosper despite lower oil and natural gas prices—this impacts only a quarter of its revenue. And this oil services sector company operates worldwide. Buy ShawCor for long-term share price gains as well as decent and rising dividends.

This dividend aristocrat’s profit is expected to rebound next year. It remains a buy for long-term price gains as well as decent and rising dividends.

In the first quarter, ShawCor earned $37.8 million, or 58 cents a share. This was down by 44 per cent from $61.9 million, or $1.03 a share, a year earlier.

A quarter of manufacturing stock ShawCor’s revenue comes from North American oil well construction and completion. The company expected that fewer wells drilled and completed would hurt its oil services sector results in 2015.

ShawCor is well diversified

Chief executive officer Steve Orr writes, “The remaining 75% of ShawCor’s revenue is not directly linked to the fluctuations in commodity prices. Most of this revenue is derived from customer expenditures on long-term energy infrastructure, much of which is related to natural gas transportation. These projects take years to develop and are based on . . . long-term commodity price assumptions.” These projects should generate steady revenue.

ShawCor is also geographically diversified. It operates over 90 manufacturing and service facilities worldwide. It provides pipeline and pipe services in the Middle East and Africa, Latin America, Europe, central Asia and the Asia Pacific regions. It also provides pipeline and pipe services in North America, of course. This geographic diversification has added some stability to ShawCor’s financial results.

Last year, however, ShawCor completed work on large Australian [liquefied natural gas] projects. As a result, it faced less activity in its Asia Pacific region this year. On the positive side, work in central Asia is improving. A US$500 million order from BP in Azerbaijan is expected to contribute US$190 million to ShawCor’s revenue this year. And work on the South Stream Pipeline in the Black Sea is expected to add another US$114 million to its revenue this year.

Cost cutting follows plunge in oil well construction

ShawCor expects North American well completions to plunge by 50 per cent in 2015. To deal with this, it continues to cut its costs in related businesses and at the corporate level. Mr. Orr said, “Since the end of the third quarter of 2014, the overall staffing levels have been reduced by greater than 10% with further reductions planned for the second quarter.” Severance packages and related costs will reduce the company’s reported second quarter earnings.

Mr. Orr is optimistic about ShawCor. He said, “Once these cost reduction measures are complete, the Company anticipates that the combination of our strong balance sheet, a $703 million backlog, and excellent strategic positioning, will enable ShawCor to generate healthy free cash flow in 2015 and emerge from the downturn well positioned to continue to execute our long term growth strategy.”

Investing for growth

ShawCor does have a strong balance sheet. It has cash of C$99.3 million and a safe net debt-to-cash-flow ratio of 1.4 times. In fact, it was confident enough to complete an acquisition of Dhatec B.V. This Dutch firm “designs, assembles and sells engineered pipe logistics products and services which mitigate damage and enhance safety and efficiency in the manufacturing, coating, handling, transportation, preservation and storage of pipe.” Dhatec currently generates revenue of US$25 million a year.

ShawCor works to maintain its order backlog. On April 22, it won a US$55 million pipeline coatings contract for the Argentina Northeast Gas Pipeline.

Next year, ShawCor’s earnings are expected to partly recover to $2.78 a share. Based on this estimate, it trades at an attractively-low price-to-earnings ratio of only 13.3 times.

ShawCor (TSX─SCL) remains a buy for long-term price gains as well as decent and rising dividends.


The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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