Energy stocks: Acquisition to cut Shawcor’s risk

Shawcor Ltd. has $2.6 billion out in contract bids, something that could expand its 2017 earnings per share by 15 times this year’s forecast. Some of that profit should come from its latest acquisition.

SHAWCOR LTD. (Toronto symbol SCL; www.shawcor.com) makes sealants and coatings that keep oil and gas pipelines from rusting. This business supplies 87% of its revenue. The remaining 13% comes from making industrial products such as electrical wire and protective sheaths.

In the three months ended March 31, 2016, ShawCor’s revenue fell 22.5%, to $365.6 million from $471.9 million a year earlier.

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That’s mainly because weaker oil and gas prices have prompted exploration firms to drill fewer new wells. In turn, that has reduced demand for new pipelines and maintenance services.

Due to the lower revenue and higher interest costs, earnings in the quarter fell 80.2%, to $7.5 million, or $0.12 a share, from $37.8 million, or $0.58.

The company’s order backlog at March 31, 2016, was $358 million. Its strong reputation should help it win more contracts; it is currently waiting on decisions involving over $2.6 billion worth of bids.

Energy Stocks: Trades at 27.3 times 2017 forecast earnings

ShawCor is also expanding into new areas. It recently paid $37.9 million for Lake Superior Consulting. From its facilities in Minnesota, Texas, Nebraska, Kansas and North Dakota, this firm provides design, construction and related services to pipeline operators.

This purchase enhances the company’s pipeline inspection expertise. The outlook for these services is bright, particularly due to the high cost of cleaning up oil spills.

As of March 31, 2016, ShawCor’s long-term debt was $467.8 million, or 22% of its market cap. It also held cash of $281.0 million.

The company is taking steps to improve its financial flexibility. In April 2016, ShawCor used some of its cash to retire $87 million U.S. worth of its debt. It also struck a new deal with its lenders to relax some of the conditions on its remaining loans.

ShawCor will probably earn just $0.08 a share in 2016. However, its earnings in 2017 could improve to $1.21 a share. The stock trades at 27.3 times that forecast. That’s still a reasonable multiple in light of the company’s leading 25% share of the global pipeline coating market. The $0.60 dividend yields 1.8%.

Recommendation in The Successful Investor: BUY

For our investment perspective on Canadian oil and gas, read The time to invest in Canadian oil stocks is now—or is it?.

For our recent report on the progress of a Canadian renewable energy stock, read Acquisition to power Brookfield Renewable Partners.

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Jim Bates

Jim is an associate editor at TSI Network. He is the lead reporter and analyst for The Successful Investor and Wall Street Stock Forecaster and a member of the Investment Planning Committee. Jim has held the Chartered Financial Analyst designation since 1992 and spent more than a decade at the Financial Post DataGroup before joining TSI Network. He has a Bachelor of Commerce degree from the University of Toronto.

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