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2 Engineering & Construction Stocks To Buy, 1 To Hold

Monday - 5/20/2013, 3:41pm  ET

The recently held Offshore Technology Conference in Houston has brought along some important takeaways for investors in engineering and construction (E&C) companies. In my earlier posts, I have been emphasizing how the E&C sector has been a main beneficiary of the shale gas boom, which promises to bring a multi-billion dollar investment cycle in this industry.

Offshore opportunities

This post is more focused on offshore-related opportunities that lie for these companies. The three companies I discuss in this post have significant offshore oil and gas businesses. Foster Wheeler  is the first one that I plan to discuss. Foster Wheeler was more upbeat about its upstream oil and gas prospects than the Street would have expected.

Many believe that Foster Wheeler will have to learn to walk before it runs in the upstream oil/gas market. However, there is no doubt, that the company is doing a lot of the right things to grow the business organically. Also, there are high chances that the company would also look to more quickly bolster its global capabilities through acquisitions, given its strong cash position.

Moreover, in just the last year or so, Foster Wheeler has significantly increased the senior level head count at its Reading, U.K. office. This includes hiring away some senior level upstream personnel from a more established competitor in the market, which sends a strong message to customers that the company is serious about building this business with good talent.

What’s more is that Foster Wheeler has been able to get its cost structure better aligned with current market opportunities, and in turn, the company is now much better positioned to compete on cost than it was in the past, which could translate to an increased win rate over time. Currently, Foster Wheeler has at least a half dozen or so bids outstanding in its upstream, and while most of these seem to be moderately-sized (not mega prospects), the market has sensed that one or two could go forward in the near to medium term.

Overall, the stock is down 6% year-to-date. The stock looks cheap, while trading at a forward multiple of 11 times, well below the industry average of 13 times. The company’s earnings are expected to grow by 43% in the next year and 16% per annum for the next five years.

International growth for this E&C Company

KBR , unlike its peer, is up more than 8% year-to-date. KBR also sounded bullish on its offshore international projects. While KBR did note some large project delays (i.e. Browse LNG), which is not surprising, the company does see good opportunities to book significant work in North America, Asia, and even parts of Europe.

KBR management has recently mentioned significant opportunities to build oil/gas backlog later this year. North America, particularly the Gulf of Mexico region, seems to be a very stable market opportunity from KBR’s perspective that is keeping the Houston office very busy. KBR also still seems to be chasing some large project opportunities in the Middle East, including the relatively large sized Shah Deniz project, which could be awarded over the next several quarters. In addition, KBR seemed particularly excited about future market penetration into Malaysia, where it is seeing a distinct pickup in offshore-related opportunities.

KBR could be in the running for some larger project work in the North Sea region for Statoil, which is increasing its spending there, and where KBR has done work in the past.

The only bearish indication given by the company was for the Australian market. Australia seems to be a very weak market for KBR, with little project activity (even on the small to medium side) outside of the mega projects that are well-known to investors. That’s not surprising, since the Street predicted this situation. What's interesting to note is that KBR seems relatively optimistic that the Browse LNG project could go forward as a Floating LNG development, and that it could potentially win some early engineering work on the project, perhaps as soon as early 2014.

A brief discussion on shale gas boom

As outlined in one of my previous posts, KBR has been one of my favorite bets in the E&C space. KBR is poised to benefit from the $57 billion-$65 billion investment that is expected to come in this space, given the shale gas boom.

What is interesting to note that the stock is only up 8% since the start of the year, which is much less than the 27% gain seen by one of its peers, Chicago Bridge & Iron . Chicago Bridge & Iron's end products and markets are almost identical to KBR's.

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