Sector Watch: Energy infrastructure stocks
With global energy demand expected to rise 54% by 2025, accompanied by increasing oil prices, Gulf Island Fabrication, Inc. (Nasdaq: GIFI) and Hiland Holdings GP, LP (Nasdaq: HPGP) are benefiting from increased oil exploration activity and production spending by oil companies.
Gulf Island Fabrication builds drilling and production platforms that enable offshore oil exploration by energy companies. The company also constructs specialized structures used in off-shore production, such as jackets and decks for fixed production platforms and hulls and decks used for floating platforms, production storage and offloading vessels, offshore living quarters and tankers and barges. In addition, Gulf Island Fabrication provides offshore oilfield services such as connecting pipelines, lifting platform sections to be integrated into offshore ships, loading and offloading drilling rigs and production hulls, warehousing cargo and other materials.
The company operates fabrication yards in Louisiana and Texas and serves oilfield customers working in the Gulf of Mexico, Africa, the Middle East and the North Sea.
During the first nine months of 2007, Gulf Island Fabrication’s revenues improved 57% year-over-year to $371.8 million from $236.2 million and net income jumped 27% year-over-year to $22.3 million, or $1.56 per share, from $17.6 million, or $1.27 per share. Net income grew more slowly than revenues because of pass-through and contract labor costs Gulf Island Fabrication plans to pass on its customers.
So far in 2007, the company has increased cash dividend 33% to a $0.90 annualized rate. The outlook for the fourth quarter is equally as favorable: Gulf Island Fabrication ended the September quarter with a revenue backlog of $245.2 million and a labor backlog of approximately 2.7 million man-hours. Analysts expect this company to produce 35% growth this year, 28% growth next year and longer-term growth averaging 26% annually. Given this growth outlook, these shares appear reasonably priced at a nine times P/E multiple. My $35 target for Gulf Island Fabrication is above the closing price of $25.35 on Tuesday. The stock has traded between $24.88 and $39.37 over the last 52 weeks.
Much like Gulf Island Fabrication, Hiland Holdings owns and operates gas gathering systems in the U.S. mid-Continent and Rocky Mountain regions. This company also assists companies exploring for natural gas with gas gathering, compressing, dehydrating, treating, processing and marketing services. In addition, Hiland provides services which include fractionating natural gas liquids and supplying compressed air and water injection for enhancing gas well production and flow rates.
Hiland owns 13 natural gas gathering systems, more than 1,800 miles of gas gathering pipeline, five natural gas processing plants, three natural gas treatment facilities and three natural gas liquid fractionation plants.
The company’s net income soared 70-fold in the first nine months of 2007 to $3.6 million ($0.17 per partnership unit) from $0.05 million in the first nine months of 2006. However, net income before minority interest was lower at $5.7 million in this year’s nine-month period versus $9.5 million one year ago due to significantly increased depreciation and interest expense resulting from a mid-2006 pipeline acquisition and interest on borrowings used to fund organic growth projects.
During the September quarter, Hiland improved gas processing margins, completed new processing facilities in North Dakota and Montana, and expanded its gas gathering system in Oklahoma. Gas gathering volume rose 71% year-over-year during the first nine months of 2007 124.5 million BTU per day from 72.7 million to and natural gas sales increased 22% year-over-year to 79.0 million BTU per day from 64.8 million. Analysts look for Hiland Holdings to generate 100% growth this year, 75% growth next year and 18% annual longer-term growth. My $32 target for Hiland Holdings (HPGP) compares with Tuesday’s closing price of $24.16. Over the last 52 weeks, shares have ranged between $21.74 and $42.22.
