Summary
- MRC Global shares have declined 7% since reporting 4Q22 results.
- As its business mix has shifted toward gas utilities over the past decade, MRC Global should be a less cyclical business going forward.
- MRC Global has de-leveraged its balance sheet over the past five years. Current net debt to EBITDA sits at a comfortable 1.2x.
- At $12.15/share, MRC Global trades at a current EV/EBITDA multiple of just under 6x (and just under 7x 11-year average EBITDA). Shares look to have 15-30% upside.
Things haven't panned out for MRC Global (MRC) shareholders over the past decade. Shares have declined nearly 60% over the past ten years as revenue and EBITDA have fallen 40+% driven by significant declines in its upstream oil and gas equipment distribution business.
However, I believe that the future will be better than the past as ~40% of the company's business now comes from its stable and growing gas utility segment. Similarly, the volatile upstream/midstream business now represents just 32% of revenue and could be poised for a rebound on the back of a more favorable outlook for commodity prices. In addition, MRC has paid down about half its debt over the past 5 years and now sports a net debt to EBITDA ratio of just 1.2x.
While shares are inexpensive at less than 6x 2023e EV/EBITDA, they aren't quite cheap enough for me to buy them. As discussed below, I estimate fair value for MRC to be $14-$16 per share. As a value investor, I look to buy in at a 30+% discount to my fair value estimate. As such, I'd be interested in becoming a shareholder should shares dip back to the ~$10 range.
Historical Results
As shown below, financial results for MRC have fluctuated wildly over the past 11 years:
A decade ago, MRC derived nearly 3/4 of its revenue from supplying equipment to the volatile upstream and midstream segments. In 2012, the upstream segment saw high levels of drilling activity as oil prices were north of $100 per barrel. The midstream segment benefitted from both the high expectations for future energy prices as well as a very low cost of capital (recall that high yielding Master Limited Partnerships were the investment flavor of the day).
As oil prices declined (bottoming in 2016 and 2020) and the midstream boom became a bust, MRC saw significant erosion in its financial results with EBITDA bottoming at $75 million in 2016 (down 80% from 2016 levels!). Of course oil and gas prices have since improved and the steady growth of other business lines have made for what looks to be a more stable business going forward (discussed below).
Improved Mix
As shown above, MRC is much less reliant on the more volatile upstream and midstream segments (just 32% of revenue versus ~75% a decade ago). Importantly, gas utility customers have grown to nearly 40% of revenue (with a 10% revenue CAGR over the past several years). As shown below, MRC expects to see continued strong growth in this customer segment.
It is also worth noting that MRC has been a beneficiary of the resurgence of US chemical and industrial sector (which are driven by a structural advantage in natural gas pricing).
While these segments should prove more resilient than the upstream segment, I expect chemicals, industrial, and refining demand will exhibit cyclicality based on customer capital expenditures.
Valuation
At $12.15 per share, I have MRC trading at 5.7x management's expected 2023e EBITDA and 6.8x 11-year average EBITDA. Over the past five years, MRC has traded in a wide range of 5-11x forward EBITDA.
On the one hand, MRC's leading market position and improved business mix suggest that a 5x multiple is unreasonably low. On the other hand, 11x seems high given that the company is still exposed to the oil & gas cycle (albeit to a lesser extent) and could face pressure from chemical/industrial capex cuts. As such I think a 7.5-8x EBITDA multiple (on 11-year average EBITDA) is warranted which gets me to a fair value of $14-$16 per share after taking into account preferred stock and net debt. At a recent price of $12.15, this suggests upside of 15-30%.
Conclusion
MRC has come a long way over the past decade with an improved balance sheet and more diversified customer base. While shares are inexpensive at less than 6x 2023e EV/EBITDA, they aren't quite cheap enough for me to buy them. As discussed below, I estimate fair value for MRC to be $14-16 per share. As a value investor I look to buy in at a 30+% discount to my fair value estimate. As such, I'd be interested in becoming a shareholder should shares dip back to the ~$10 range.
For further details see:
MRC Global: Better Positioned But Not Cheap Enough