My investment theme has been firms that are benefiting from growth in emerging markets and the resulting increase in commodities demand. Furthermore, high oil prices have prompted some analysts to conclude that the current energy investment cycle is secular instead of cyclical. According to the International Energy Agency, global energy use is expected to increase by over 53 percent by 2030, requiring $20 trillion in investments. The major beneficiaries from this uptrend will be engineering and construction (E&C) companies, which have high international exposure to oil and gas segment. A few of them are Foster Wheeler (FWLT), Fluor (FLR), and McDermott (MDR).While these companies have demonstrated solid backlog growth, new contract announcements could also serve as near-term catalysts for their stock prices. However, since the industry has had a strong performance year to-date, investors should be very careful in terms of stock picking.
Based on comparable analysis, Foster Wheeler is my top pick in the group.Foster Wheeler's Global E&C group, which contributed about 63 percent of the company's total 2006 revenue, provides a variety of engineering, consulting, and project management services. 90 percent of the group's backlog in terms of future revenues is derived from its wide client base of oil and gas companies. FWLT is known for its expertise and technology in projects such as upstream oil and gas, oil refining, and petrochemicals. Furthermore, the company is also a major player in the power sector. As of the second quarter, about 94% of its total backlog is for projects located outside the US: 33% in Middle East, 33% in Asia, 15% in Europe, and 13% in Australasia. By applying an estimated P/E multiple of 21 times to its average FY 2009 EPS estimate of $7.02, my 12-month price target for the stock is $147- implying an 18 percent upside from the current levels.
nother company that will continue to capitalize from the strong demand for energy infrastructure is Fluor, a global E&C company that is diversified across energy, industrial, and government segments and possesses strong balance sheet. Fluor management has also reiterated that the company is still in the early stages for upstream and petrochemical activities, supported by its ability to win more and more clients in the oil-rich Middle East. As of the second quarter, Fluor's backlog stands at a record high of $25.7 billion, 43 percent higher than a year earlier. More than half of this is oil and gas projects outside the US. Unfortunately the stock's valuation looks a bit stretched now, unless upward EPS revisions occur from many analysts. Currently Merrill Lynch has the street-high FY 2009 EPS estimate of $7.90, and target price of $165.
Lastly, McDermott International is a leader in E&C for offshore oil and gas worldwide. In addition to benefiting from the uptrend in offshore capital expenditures abroad, MDR is also poised to benefit from the rising electricity demand in the US through its power generation segment (they build coal-fired power plants and nuclear generators). As of the second quarter, MDR's backlog stands at a record high of $8.9 billion with about 50 percent from its oil and gas segment. Furthermore, the company boasts superior operating margins relative to its peers. Although MDR's fundamentals are strong, the stock's upside looks limited after the 110 percent run-up year-to-date.
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