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MRC Global Braves Risks With Upstream & Midstream Growth

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On Apr 6, we issued an updated research report on MRC Global Inc. (MRC - Free Report) . The company is a renowned distributor of pipes, valves and fittings (PVF).

These products are used across the upstream, midstream and downstream sectors of the oil and gas industry. Over the last month, this Zacks Rank #3 (Hold) stock inched up 0.4%, as against the 1.7% loss incurred by the industry.


Notably, the company currently flaunts a VGM Score of A.

You can see the complete list of today’s Zacks #1 Rank stocks (Strong Buy) here.

Inside Story

MRC Global’s top-line results have remarkably improved over the past two quarters. In fourth-quarter 2017, the company’s U.S. sales were up 30% year over year, backed by increased midstream gathering and transmission, well completions, and downstream project deliveries. Canadian revenues improved 29% year over year, driven by solid upstream business and appreciation of the Canadian currency with respect to the U.S. dollar. International sales increased 3% year over year attributed to elevated upstream sector sales and favorable foreign currency-translation impact.

Rise in crude oil prices will likely help bolster MRC Global’s revenues in the quarters ahead, on the back of stronger upstream and midstream business performance. The West Texas Intermediate crude prices traded above $60 throughout this March, reflecting a healthy pricing scenario. Moreover, the crude exporters’ decision to trim production till the end of 2018 will likely support the upsurge in the near term.

MRC Global has also been strengthening its competency on the back of strategic organic deals. For instance, the five-year long maintenance, repair and operations agreement signed with Exxon Mobil Corporation (XOM - Free Report) (March 2017) is likely to boost the company's yearly sales by nearly $50 million for consecutive five years, starting 2018. Notably, the PVF deal secured from PBF Energy Inc. (PBF - Free Report) (April 2017), as well as the contract wins from Deutsche Erdoel AG and renewal of the existing deal with NiSource, Inc (NI - Free Report) (July 2017) will likely fuel the company's top-line results in the quarters ahead.

For 2018, MRC Global anticipates to report revenues of $3.85-$4.25 billion, estimating a gain of 11% over 2017 (at the mid-point). As per our projection, the company’s revenues are expected to be up 11.9% in 2018 and 8% in 2019.

The company believes improved revenues, diligent cost-saving moves and reduced corporate tax rates will aid in boosting its profitability in the near term. Per our projection, MRC Global’s earnings are projected to rise 2,266.7% in 2018 and 54.3% in 2019.

Despite the aforementioned growth drivers, we predict that the prevalent headwinds might dampen MRC Global’s near-term revenues and profitability.

For instance, rising crude oil prices might impact the company’s downstream businesses. Moreover, a stronger U.S. dollar might hurt its profitability across the foreign end-markets. Also, the company faces stiff competition in the industry. Extensive business rivalry increases the bargaining power of customers and thus, exposes the company to risks of market share loss.

Furthermore, MRC Global’s profitability is highly sensitive to market price, as well as availability of intermediate inputs. Any sudden supply-demand imbalance or fluctuations in the prices of these materials might escalate the company’s operational expenses, in turn, dragging down its bottom-line performance in the quarters ahead. For instance, MRC Global sells various steel products under its tubular product category. Sudden inflation in the price of iron ore (major steel-making component) might weigh over company’s results going forward.  

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