An Alternative To Investing In Oil Companies

Key Points:

• Engineering and consulting firms are an alternative way to get exposure to the energy sector.
• A heavy reliance on revenues from oil companies provides upside, while a diversified list of customers in other industries lessens risk.
• Analysts have recently raised forecasts on several engineering and consulting firms

Last week, I discussed how the decline in oil prices was causing analysts to lower their forecasts on exploration and production (E&P) stocks.

An alternative for investors looking to keep some exposure to the energy sector are engineering and consulting firms. These are companies that provide maintenance, construction and project management services to the energy sector.

They are less sensitive to the price of oil than E&P companies, but still benefit from elevated oil prices.

The key for firms such as Fluor (FLR - Snapshot Report) and Jacobs Engineering (JEC - Snapshot Report) is that oil stays at a high enough level to justify spending on maintenance and expansion. Assuming that oil falls no lower than $70 per barrel, a prospect I believe is unlikely, oil companies should continue to pursue capital improvement projects.

Adding a margin of safety is exposure to other business sectors. FLR has industrial, power generation and government clients. JEC has pharmaceutical, construction and government clients. Oil and gas account for the largest proportion of revenues for both companies, however.

Most importantly, FLR is a Zacks #1 Rank ("strong buy") stock and JEC is a Zacks #2 Rank ("buy") stock.

Fluor Beats, Raises Guidance

FLR surpassed second-quarter expectations by 7 cents with adjusted earnings of 87 cents per share. (The company had earned 53 cents per share a year prior.) Oil and gas revenues surged 56% to $3.3 billion. FLR also realized exceptional growth in its power segment, where revenues rose 86% to $522 million.

Chief Financial Officer Mike Steuert believes the positive business momentum will continue throughout the remainder of the year. He expects full-year profits to total between $3.65 and $3.80 per share, a 25-cent increase over previous guidance.

The majority of covering analysts adjusted their forecasts in response, pushing the consensus earnings estimate 31 cents higher to $3.59 per share.

A Bullish Report From Jacobs Engineering

JEC issued a five-cent earnings surprise. Fiscal third-quarter profits totaled 87 cents per share, versus 61 cents a year prior.

Revenues reached $2.9 billion, a 40% increase. The growth was driven by downstream (e.g. refining) projects. The company also saw strong demand for upstream projects, though they accounted for a much smaller portion of total revenues.

Citing a record backlog, CFO John Prosser, Jr. raised his fiscal 2008 profit forecast to between $3.15 and $3.40 per share. All 11 covering brokerage analysts adjusted their projections in response, pushing the consensus earnings estimate 11 cents higher to $3.35 per share.

Notably all of the covering analysts also raised their fiscal 2009 projections. The new consensus earnings estimate of $4.14 is 23 cents above the average forecast of a month ago.

Industry Groups

FLR is classified in Engineering/R&D Services and JEC is classified in Building-Heavy Construction.

ENGlobal (ENG - Snapshot Report), like JEC, is classified in Engineering/R&D Services and has exposure to the energy sector. Following this company's bullish earnings report earlier this month, both of the covering brokerage analysts have raised their full-year forecasts. The consensus earnings estimate of 85 cents per share is 21 cents above the average forecast of a month ago.

Another Building-Heavy Construction company with exposure to the energy sector is Foster Wheeler (FWLT - Analyst Report). FWLT exceeded second-quarter expectations by 17 cents with profits of 98 cents per share. The majority of the covering brokerage analysts have raised their forecasts following the report, pushing the consensus earnings estimate 16 cents higher to $3.69 per share.

Related ETFs

There is not a pure-play ETF for these types of companies. The closest might be PowerShares Dynamic Building & Construction Portfolio (PKB), which holds positions in both FLR and JEC. However, the ETF is designed to cover the broad building and construction sector and not just companies that provide capital project services for energy companies.

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.