You may not have heard of small-cap construction and engineering firm MasTec (MTZ) before, but it could be the secret to playing one of the most compelling long-term investment themes in the oil and gas sector: infrastructure spending.
In fact, such spending — which will be required in order to tap our continents “oily” bounty — is estimated to tally $210 billion over the next 20 years. To that end, investors have been gravitating to big names like Chicago Bridge & Iron (CBI) or Fluor Corp. (FLR).
Meanwhile, smaller and unknown MasTec — originally just associated with the electric transmission work and services it provides to telecoms like AT&T (T) — continues to expand into the pipeline space, rack up contracts and blow earnings out of the water.
Quite simply, it is becoming a pipeline construction tour de force.
Another Big Buy-Out
Back in 2011, MasTec purchased Canadian pipeline and facility construction services company Fabcor and its subsidiaries for only about $29 million dollars. That purchase gave the construction company access to some pretty major energy clients including EnCana (ECA), Devon Energy (DVN) and Murphy Energy (MUR), while allowing MasTec to participate in other areas of infrastructure construction outside of wireless tower and electricity transmission line work.
Such an expansion into the petroleum industry was quite fruitful for the firm, as roughly 45% of MasTec’s revenue came from the energy sector for 2012.
Seeing the continued opportunity for rising infrastructure spending, MTZ is back at the acquisition well and recently paid $103 million in cash — along with the assumption of $24 million worth of debt — for privately held Big Country Energy Services.
While that amount of cash seems very small considering some of the recent M&A deals in the sector — CBI paid roughly $3 billion to acquire Shaw group earlier this year, for example — MasTec is once again getting a heck of a deal for its spending.
Big Country is engaged in all areas of energy midstream infrastructure — including gathering systems and pipeline construction, modification/replacement services, and compressor and pumping station construction. The company employs around 1,200 people, owns 600 pieces of equipment and continues gaining additional midstream construction jobs across the U.S. and Canada.
And like the Fabcor deal, the Big Country buy adds an extraordinary list of clients to MTZ’s order book. These include projects for Royal Dutch Shell (RDS.A, RDS.B), “drop-down” superstar Spectra Energy (SE) and roughly $35 million worth of station upgrades for Enbridge (ENB).
The Basis For Investment
Given that billions of dollars’ worth of investment will be needed for new oil and gas infrastructure over the next decade, MasTec seems to be positioning itself quite nicely. Once again, the Big Country buy-out will allow MasTec to continue cashing in on the rapidly expanding opportunities in energy infrastructure … and cashing in it has been.
MasTec’s first quarter results showed a huge 93% year-over-year increase in earnings and a 24% jump in net sales — all of which was driven by the growth in oil and gas pipeline and facilities construction. Both metrics beat analyst and management predictions, while MasTec’s energy segment specifically saw revenue surge 90% from the prior year.
On the latest earnings conference call, CEO Jose Mas estimated that MasTec’s oil and gas revenue growth should exceed 30% this year, primarily built on the company’s continued success in different shale plays, along with increased activity in large-diameter, long-haul pipeline construction.
The Big Country purchase will only serve to underscore that revenue growth even more.
No wonder MasTec stock has been on fire as of late. Shares have jumped about 24% this year — reaching 12-year highs before selling off in the past week. That puts the stock just over $30 — a mere 14 times forward earnings.
This makes MTZ truly a bargain once you factor in the Big Country buy and the billions being spent on new transmission lines, hydroelectric power plants and renewable energy construction that fit into MasTec’s traditional “core” areas of work. Heck, MasTec is currently trading for a price/earnings-to-growth ratio of just 0.63.
At the end of the day, little-known MasTec is quickly emerging into an energy construction powerhouse — one investors should place their bets on.
As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.