The Engineers – Fluor and KBR – a Saner Play on Natural Gas?
Natural gas prices are up some 50%-plus since an April low, giving investors hope that those pulverized shares of gas drillers will have some life yet. But so far, a couple of engineering companies are getting the bigger bang from this rise.
Engineers Fluor Corp. (FLR) and KBR (KBR) both reported in the last few weeks strong business, often from natural gas related projects. Order books are stronger than analysts had expected, and both companies boosted their earnings projections recently. While both shares still underperform the S&P 500 for the year, those recent announcements helped them make up some lost ground, as seen in this stock chart.
Shares of both companies are awash in buy recommendations at the moment. Fluor is the industry stalwart with an $8 billion market cap and a 1.3% dividend yield. KBR, at a $4 billion market cap, is a pint-sized Fluor drawing forecasts of a record share price in the next year or so. PE ratios have moved but aren't sky high.
That’s largely because shares of Fluor and KBR got kicked down last year as U.S. government spending in Iraq and Afghanistan began to wind down. Fluor is the largest publicly traded engineering company and a big Department of Defense supplier. KBR, which until 2007 was a division of Halliburton called Kellogg Brown & Root, was the U.S. Army’s biggest contractor last year. Both companies will see their government paychecks cut this year.
Both companies are expected to replace government work with more lucrative private energy contracts. In particular, the boom in natural gas production has put the engineers in demand even though natural gas prices remain low. Regardless of the damage that the gas rush did to producers, natural gas is still seen as the fuel for the immediate future; a cheaper, cleaner alternative to oil and coal. Power and manufacturing plants are still converting to it, and with fracking making the stuff easier to get out of the ground, producers still expect to supply a lot of it for years to come.
Companies like Fluor and KBR get paid for engineering down the line, from the facilities to get the gas out of the ground, to the gas-to-liquids operations necessary to transport the product, to the manufacturing plants around the world designed to run off the product. Fluor’s overall order book was up about 7% in the most recent quarter over a year ago. KBR’s rose 27%.
A very hot summer requiring lost of air conditioning has helped eat down the glut of gas and brought up that Henry Hub spot price, but it remains less than a third of what it was when many of these companies were forking over the massive amounts of cash it took to get in on the fracking rush. Last year’s even lower prices did serious damage to some balance sheets. There hasn’t been a lot of enthusiasm for the sector as a value play recently.
Investors obviously haven’t had a lot of luck forecasting natural gas prices, and there’s no real consensus on if or when higher prices will prevail. Fluor and KBR get great marks for fundamentals from YCharts Pro. They will get paid for the contracts in their pockets whether Henry Hub rises or falls.
Filed under: Company Analysis