The hydraulic fracturing and shale revolutions are providing plenty of “oomph” to a variety of sectors and industries aside from the actual producers of domestic energy.
Some of the biggest beneficiaries? Firms in the chemical and basic materials sector. Why? Because domestic manufacturers have been able feast on rock bottom natural gas as a feedstock.
Produced alongside natural gas, ethane — a natural gas liquid (NGL) — is sent through a refining process and “cracked” in similar fashion to crude oil to produce one of most basic of commodity chemicals, ethylene. Ethylene is a building block for various plastics, paints, glues and other products. With an abundance of natural gas, American chemical stocks are enjoying a large cost advantage over their European rivals.
That cost advantage is prompting a new domestic chemical facility building binge not seen in decades. In fact, Netherland’s LyondellBasell Industries (LYB), Exxon Mobil (XOM) and Japan’s Mitsui & Co. (MITSY) are all about to expand or build new chemical plants right here in good ol’ U.S.
And they’re not alone.
According to a new report by the American Chemistry Council, there are currently 97 different petrochemical and plastics projects in the planning or early construction stages across the country. These various projects — including Exxon’s plans for a new ethylene cracker and two polyethylene plants at its Baytown facility, along with Eastman Chemical’s (EMN) new cracker and propylene unit in Longview, Texas — will cost an unprecedented $71.1 billion in capital investment by 2020.
Overall, the ACC believes that much of that CAPEX spending on new facilities will be done within the next five to 10 years, making those who do the participants’ heavy construction industry great plays for the medium to long term.
With that in mind, let’s look at three picks that fit that profile.
Chicago Bridge & Iron Company
While it’s not actually based in Chicago nor does it build bridges, Chicago Bridge & Iron (CBI) could be one of the best ways to play the build-out. The firm is a petrochemical construction powerhouse and is involved in a variety petroleum-related projects, including the design and construction of liquefied natural gas (LNG) terminals, ethane crackers and hydrocarbon storage facilities.
That position in energy was only strengthened last year when it purchased Shaw Group. The buy-out created one of the most complete energy-focused engineering and fabrication companies in the world.
This focus on energy could help explain why Warren Buffett and Berkshire Hathaway (BRK.A, BRK.B) now count themselves as shareholders in the firm. Berk’s latest 13F shows that the holding company owns around 6.5 million shares of the Netherlands-based engineering company, valued at roughly $400 million.
Even with Buffett’s seal of approval, CBI is still cheap. The company can be had modest forward P/E of 12 and a PEG ratio of just 0.65. That’s pretty good considering CBI has continuously managed to grow its backlog — a key metric for the construction industry — over the years. By the end of 2012, its backlog stood at $10.9 billion — up 22% from the end of 2011.
While Fluor (FLR) already has a strong presence in key natural resource economies — such as Australia and Latin America — the engineering giant has quickly become a leader right here at home and continues rack up shale-related construction contracts.
The latest is providing construction services for Dow Chemical’s (DOW) planned $1.7 billion ethylene production plant in Freeport, Texas. Fluor was also tapped by the diversified chemical producer to design and build a propane dehydrogenation unit as well as associated power, utilities and infrastructure upgrades at the site. With a total of $4 billion worth of projects Dow is planning to build at Freeport, odds are pretty good that Fluor will get the nod for the remaining bids.
Of course, FLR has already gained over 18% in the last month, so it doesn’t seem like a bargain today. However, the continued building binge in the heart of shale country could push its already double-digit earnings growth estimates even higher as the company wins more big-time contracts from the likes of Dow or its competitors, and also beef up the company’s strong cash flows and revenue growth.
KBR’s (KBR) pedigree in the oil and gas sector runs deep. The construction firm was a spin-off from oil service kingpin Halliburton (HAL). As such, it’s quickly become a leading provider of services to the petrochemical industry tapping America’s shale.
The company has been adding new contracts to its arsenal across a variety of shale-related sectors including natural gas processing and fractionation. Analysts estimate that will continue, as KBR has roughly 50% market share for building ammonia facilities. Strong fundamentals in the U.S chemicals industry, plus new LNG export construction, should help drive a 25% increase in earnings growth this year, and double-digit growth for the next five.
And yet KBR stock is trading for the cheapest on this list, as shares can be had for just a forward P/E of just 11. And to top it off, the company has very little in the way of long-term debt.
As of this writing, Aaron Levitt did not own a position in any of the aforementioned.