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Latest MasTec Buyout Bolsters Oil And Gas Business

By: Investor's Business Daily
Posted: 6/19/2013 3:53:00 PM
Referenced Stocks: CNQ;DTV;ENB;MTZ;T

Executives atMasTec ( MTZ ) have spent the past several years using acquisitions to expand the company's customer base and broaden the kinds of construction and maintenance services it provides.

That strategy took another step forward late last month when MasTec announced a buyout of Canada's Big Country Energy Services and its affiliated operating companies for $103 million in cash.

The deal further solidifies MasTec's position in the oil and natural gas industries, where it provides services similar to those it offers to big telecom and wireless providers such asAT&T ( T ) andDirecTV Group ( DTV ).

MasTec's imprint can be found in everything from electricity transmission systems and wind farms to natural gas pipelines, industrial systems and satellite communication systems.

The company's buyout of Big Country expands its footprint in oil, natural gas and natural gas liquids gathering systems as well as pipeline construction, modification and replacement services.

From a dollar standpoint, the deal isn't a huge one for MasTec, which logged $3.7 billion in revenue last year.

Big Clients

But it does bring aboard a pretty impressive list of clients, including Shell Global,Canadian Natural Resources ( CNQ ),Enbridge ( ENB ) andSuncor Energy (SU).

"The acquisition is expected to complement MasTec's existing pipeline-oriented construction operations and other construction subsidiaries," D.A. Davidson analyst John Rogers noted.

According to a recent report from Zacks Equity Research, Big Country has around $53 million in tangible net worth, employs 1,200 people and owns 600 pieces of construction equipment. Big Country has construction offices in Calgary, British Columbia, Saskatchewan, Wyoming and North Dakota.

"This acquisition is in sync with MasTec's expansion plans in Canada's dynamic energy sector," Zacks noted. "Big Country will significantly enhance MasTec's ability to cash in on the rapidly expanding opportunities anticipated for energy infrastructure work in North America in the near future."

The deal also serves to further diversify MasTec's revenue stream. As recently as 2007, nearly 80% of the company's revenue came from the telecommunications market. Last year, that percentage had fallen to 54%. About 45% of MasTec's revenue came from the oil, gas and energy sector in 2012, with the remaining 1% coming from government work.

The move into new markets has helped MasTec more than triple its annual revenue over the last several years, from $1.04 billion in 2007 to $3.7 billion last year.

Much of the company's growth has been driven by services it provides to the oil and gas industry. During the first quarter, MasTec's oil and gas segment logged revenue of $319 million, or 35% of the total. That was up 90% from the prior year.

First-quarter EBITDA margin for the oil and gas segment was 13.3% vs. 7.5% the prior year. Backlog rose to $387 million from $220 million on a sequential basis.

On a conference call with analysts, Chief Executive Jose Mas said MasTec's oil and gas revenue growth should exceed 30% this year.

"This growth will be driven by our continued success in the different shale plays, along with increased activity in large-diameter, long-haul pipeline construction," Mas said.

Overall Q1 revenue rose 24% from the prior year to $919 million, topping consensus analyst estimates for $854.87 million. It was the 13th time in the past 14 quarters the top line rose at least 20%.

"Revenue in all segments increased year-over-year, with the exception of PowerGeneration. Management noted delays in the renewal of tax credits for wind facilities as the reason for the weakness," analyst Rogers said.

Organic revenue growth, which excludes the effect of buyouts, was 19% in the quarter, driven by strong gains in the oil and gas, electrical transmission and wireless sectors.

Earnings for the quarter nearly doubled from a year earlier to 27 cents a share, topping estimates by 3 cents. The bottom line has risen at least 25% each of the last four quarters.

Stock Price

MasTec's stock price rose more than 19% during the two sessions following its Q1 report. Shares touched a 12-1/2-year high of 33.97 on May 22 and currently trade near that level.

The continued diversification of MasTec's client base was on display during the quarter as the company's top 10 customers included one telecom client, one satellite television customer, four oil and gas clients, two electrical transmission customers and two power generation customers.

AT&T was the largest customer at 18% of total revenue, followed by DirecTV at 16%. Enbridge was next at 12% of total revenue, followed by pipeline operator DCP Midstream at 8% and Chesapeake Midstream Partners, another pipeline customer, at 4%.

Chief Financial Officer Robert Campbell pointed out to analysts that MasTec no longer has any single customer that accounts for more than 20% of overall revenue.

"We have executed nicely on our strategy of reducing our DirecTV concentration, which peaked at 47% (of total revenue) a few years ago and is now down to 16%," Campbell said.

Analysts polled by Thomson Reuters expect MasTec to report Q2 earnings of 43 cents a share, up 16% from the prior year.