Jacobs Engineering Group posted solid results for its fiscal third quarter ended June 28, 2013. The engineering, procurement and construction outfit generated net income of $108.9 million over this three-month period, up 9% from year-ago levels. Meanwhile, the company’s backlog increased by 10.2%, to $17.2 million.
Highlights from the fiscal third quarter include the resilience of Jacob Engineering’s public and institutional business, which continues to take market share in the U.S. and inked four major contracts with the federal government for a total consideration of $12 billion. Management also noted that the company hasn’t been as hard hit by project delays and cancellations in the mining sector because the firm’s expertise resides primarily plant optimization–one of the few in-demand engineering services in an industry focused on cost reduction.
But robust order flow from customers in the chemicals and oil and gas industries drove much of the backlog growth over this three-month period. In a conference call to discuss second-quarter results, management highlighted what Jacob Engineering’s sales team described as a “tsunami of new orders” from the U.S. chemical industry over the next three to four years.
This wave of new construction stems from the ongoing shale oil and gas revolution.
Oil and gas companies’ overzealous production of natural gas and natural gas liquids has restored the fortunes of domestic chemical producers, an energy-intensive industry that relies on these commodities to generate power and as feedstock. Within this space, olefin producers have benefited the most from trends in the energy patch.
The two most prominent olefins, ethylene and propylene, serve as the basic building blocks for three-quarters of all chemicals, plastics and synthetic fibers. Petrochemical firms produce these commodity chemicals in cracking facilities, the majority of which are located on the Gulf Coast, that heat ethane and propane with steam.
Whereas ethane and propane account for about 90% of the feedstock used at cracking facilities in the U.S., petrochemical plants in Western Europe generate more than 70% of their ethylene from naphtha, natural gasoline and other petroleum derivatives that hinge on the price of Brent crude oil. Plants in Asia likewise rely heavily on naphtha as a feedstock.
Eager to exploit this cost advantage, petrochemical companies have announced a number of major projects to build world-scale crackers or expand existing facilities.
Although Jacobs Engineering doesn’t work inside the battery limits (i.e., on internal processes) for ethane crackers, the firm does handle the power and pipeline infrastructure for these facilities. The company’s traditional focus has been on polypropylene production facilities and other derivatives plants, a business that’s expected to go through its own expansion phase as domestic ethylene and propylene output continues to rise.
These tailwinds make Jacobs Engineering our top play on the U.S. industrial revolution; the stock rates a buy up to $60.00 per share.
Elliott Gue and Roger Conrad, Energy & Income Advisor, 888-960-2759, September 14, 2013