MRC GLOBAL INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. As used in this Form 10-Q, unless otherwise indicated or the context otherwise requires, all references to the "Company," "MRC Global ," "we," "our" or "us" refer toMRC Global Inc. and its consolidated subsidiaries.
Cautionary Note Regarding Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of Operations (as well as other sections of this Quarterly Report on Form 10-Q) contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include those preceded by, followed by or including the words "will," "expect," "intended," "anticipated," "believe," "project," "forecast," "propose," "plan," "estimate," "enable" and similar expressions, including, for example, statements about our business strategy, our industry, our future profitability, growth in the industry sectors we serve, our expectations, beliefs, plans, strategies, objectives, prospects and assumptions, and estimates and projections of future activity and trends in the oil and natural gas industry. These forward-looking statements are not guarantees of future performance. These statements are based on management's expectations that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, most of which are difficult to predict and many of which are beyond our control, including the factors described under "Risk Factors," that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Such risks and uncertainties include, among other things: ? decreases in oil and natural gas prices;
? decreases in oil and natural gas industry expenditure levels, which may result
from decreased oil and natural gas prices or other factors;
? U.S. and international general economic conditions;
? our ability to compete successfully with other companies in our industry;
? the risk that manufacturers of the products we distribute will sell a
substantial amount of goods directly to end users in the industry sectors we
serve;
? unexpected supply shortages;
? cost increases by our suppliers;
? our lack of long-term contracts with most of our suppliers;
? suppliers' price reductions of products that we sell, which could cause the
value of our inventory to decline;
? decreases in steel prices, which could significantly lower our profit;
? increases in steel prices, which we may be unable to pass along to our
customers which could significantly lower our profit;
? our lack of long-term contracts with many of our customers and our lack of
contracts with customers that require minimum purchase volumes;
? changes in our customer and product mix;
? risks related to our customers' creditworthiness;
? the success of our acquisition strategies;
? the potential adverse effects associated with integrating acquisitions into
our business and whether these acquisitions will yield their intended
benefits;
? our significant indebtedness;
? the dependence on our subsidiaries for cash to meet our obligations;
? changes in our credit profile;
? a decline in demand for or adverse change in the value of certain of the
products we distribute if tariffs and duties on these products are imposed or
lifted;
? significant substitution of renewables and low-carbon fuels for oil and gas;
15
--------------------------------------------------------------------------------
Table of Contents
? environmental, health and safety laws and regulations and the interpretation
or implementation thereof;
? the sufficiency of our insurance policies to cover losses, including
liabilities arising from litigation;
? product liability claims against us;
? pending or future asbestos-related claims against us;
? the potential loss of key personnel;
? adverse health events, such as a pandemic;
? interruption in the proper functioning of our information systems;
? the occurrence of cybersecurity incidents;
? loss of third-party transportation providers;
? potential inability to obtain necessary capital;
? risks related to adverse weather events or natural disasters;
? impairment of our goodwill or other intangible assets;
? adverse changes in political or economic conditions in the countries in which
we operate;
? exposure to
Corrupt Practices Act and the
programs;
? risks associated with international instability and geopolitical developments,
including armed conflicts and terrorism;
? risks relating to ongoing evaluations of internal controls required by Section
404 of the Sarbanes-Oxley Act;
? our intention not to pay dividends; and
? risks related to changing laws and regulations, including trade policies and
tariffs.
Undue reliance should not be placed on our forward-looking statements. Although
forward-looking statements reflect our good faith beliefs, reliance should not
be placed on forward-looking statements because they involve known and unknown
risks, uncertainties and other factors, which may cause our actual results,
performance or achievements to differ materially from anticipated future
results, performance or achievements expressed or implied by such
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statement, whether as a result of new information,
future events, changed circumstances or otherwise, except to the extent law
requires.
Overview
We are the leading global distributor of pipe, valves, fittings ("PVF") and
other infrastructure products and services to diversified energy and industrial
end-markets. We provide innovative supply chain solutions, technical product
expertise and a robust digital platform to customers globally through our
leading position across each of our diversified end-markets including the
following sectors:
? gas utilities (storage and distribution of natural gas)
downstream, industrial and energy transition (crude oil refining,
? petrochemical and chemical processing, general industrials and energy
transition projects)? upstream production (exploration, production and extraction of underground
oil and gas)
? midstream pipeline (gathering, processing and transmission of oil and gas)
We offer over 200,000 SKUs, including an extensive array of PVF, oilfield
supply, valve automation and modification, measurement, instrumentation and
other general and specialty products from our global network of over
10,000 suppliers. With over 100 years of experience, our over 2,500 employees
serve approximately 12,000 customers through approximately 220 service locations
including regional distribution centers, branches, corporate offices and third
party pipe yards, where we often deploy pipe near customer locations.
16--------------------------------------------------------------------------------
Table of ContentsKey Drivers of Our Business We derive our revenue predominantly from the sale of PVF and other oilfield and industrial supplies to energy, industrial and gas utility customers globally. Our business is, therefore, dependent upon both the current conditions and future prospects in the energy industry and, in particular, maintenance and expansionary operating and capital expenditures by our customers in the gas utilities, downstream, industrial and energy transition, upstream production and midstream pipeline sectors. Several factors drive our customers' spending, including demand growth for petroleum and petroleum derived products, underinvestment in global energy infrastructure, safety and integrity upgrades to gas utility systems, growth in demand for alternative energy, growth in shale and unconventional exploration and production ("E&P") activity, and anticipated strength in the oil, natural gas, refined products and petrochemical sectors. The outlook for PVF spending is influenced by numerous factors, including the following:
? Energy Infrastructure Integrity and Modernization. Ongoing maintenance and
upgrading of existing energy facilities, pipelines and other infrastructure
equipment is a meaningful driver for business across the sectors we serve.
This is particularly true for gas utilities, which is currently our largest
sector by sales. Activity with customers in this sector is dependent on new
residential and commercial development as well as upgrades of existing
infrastructure. Maintenance of an aging network of pipelines and local
distribution networks is a critical requirement for these customers
irrespective of broader economic conditions. As a result, this business tends
to be more stable over time and moves independently of commodity prices.
? Oil and Natural Gas Demand and Prices. Sales of PVF and infrastructure
products to the oil and natural gas industry constitute a significant portion
of our sales. As a result, we depend upon oil and natural gas participants to
make maintenance and capital expenditures to explore for, produce and process
oil, natural gas and refined products. Demand for oil and natural gas, current
and projected commodity prices and the costs necessary to produce oil and
gas impact customer capital spending, additions to and maintenance of
pipelines, refinery utilization and petrochemical processing
activity. Additionally, as these participants rebalance their capital
investment away from traditional, carbon-based energy toward alternative
sources, we expect to continue to supply them and enhance our product and
service offerings to support their changing requirements, including in areas
such as carbon capture, biofuels and wind.
? Economic Conditions. Changes in the general economy or in the energy sector
(domestically or internationally) can cause demand for fuels, feedstocks and
petroleum-derived products to vary, thereby causing demand for the products we
distribute to materially change.
? Manufacturer and Distributor Inventory Levels of PVF and Related Products.
Manufacturer and distributor inventory levels of PVF and related products can
change significantly from period to period. Increased inventory levels by
manufacturers or other distributors can cause an oversupply of PVF and related
products in the industry sectors we serve and reduce the prices that we are
able to charge for the products we distribute. Reduced prices, in turn, would
likely reduce our profitability. Conversely, decreased manufacturer inventory
levels may ultimately lead to increased demand for our products and
often result in increased revenue, higher PVF pricing and
improved profitability.
? Steel Prices, Availability and Demand. Fluctuations in steel prices can lead
to volatility in the pricing of the products we distribute, especially carbon
steel line pipe products, which can influence the buying patterns of our
customers. A majority of the products we distribute contain various types of
steel. The worldwide supply and demand for these products and other steel
products that we do not supply, impact the pricing and availability of our
products and, ultimately, our sales and operating profitability. Additionally,
supply chain disruptions with key manufacturers or in markets in which we
source products can impact the availability of inventory we require to support
our customers. Furthermore, logistical challenges, including inflation and
availability of freight providers and containers for shipping can also
significantly impact our profitability and inventory lead-times.
Recent Trends and Outlook
The energy industry, and our business in turn, is cyclical in nature. In the
first half of 2020, demand for oil and natural gas declined sharply because of
the COVID-19 pandemic. This resulted in lower commodity prices, which, in turn,
led to a significant decline in oil and gas industry spending. Based on an
average of industry research estimates, there was a decrease in oil and gas
industry spending in 2020 of 32% globally, including approximately 45% in the
U.S. upstream production market. These reductions in spending directly impacted
both the upstream production and midstream pipeline components of our business.
In addition, our customers in the downstream, industrial and energy transition
sector deferred turnarounds and routine maintenance as well as idled facilities
to preserve liquidity and to comply with COVID-19 related limitations on
employee activities. Furthermore, approximately 81% of our business is
concentrated in the U.S. where the majority of industry spending reductions
occurred.
During the first nine months of 2021, we have seen an improvement in the demand
for oil and natural gas as the roll out of the COVID-19 vaccinations gradually
improved around the globe and pandemic restrictions eased. The increasing
optimism related to demand recovery has led to higher commodity prices. Most
recently, oil prices have risen to levels not seen since 2014. Although demand
levels remain below pre-pandemic levels, there is growing confidence of
returning to 2019 demand levels as soon as the end of 2022. Also contributing to
the improvement in oil prices has been cooperation within OPEC to implement
production cuts over the last year; however, OPEC has begun increasing
production and is expected to continue into late 2022 to match increasing
demand. Demand recovery could still possibly slow or pause as a result of
additional waves of pandemic outbreak or heightened pandemic control measures.
Over the longer term, we could also experience a structural shift in the global
economy and its demand for oil and natural gas as a result of changes in the way
people work, travel and interact.
Notwithstanding the ongoing uncertainty, our 2021 revenue has recovered from the
low point in the fourth quarter of 2020. Revenue is currently trending
approximately 18% higher than the second half of 2020 run rate, and we are
expecting continued growth in all our sectors in 2022. Recent spending plan
estimates by sell-side research analysts indicate U.S. upstream spending in
2022 will experience double-digit growth compared to 2021. However, the
percentage increases can vary significantly by customer and we expect a
continued focus on capital discipline by oil and gas exploration and production
operators, particularly the larger public operators that typically represent a
significant portion of our upstream revenue. Additionally, analysts are
projecting that North America upstream capital spending in 2022 will be more
heavily weighted to drilling activity instead of completions activity, and the
latter is correlated more closely to our upstream revenues. Furthermore, since
the U.S. rig count bottomed in the second quarter of 2020, the majority of the
rig count increase since then has been driven by private operators, who
historically have represented a smaller portion of our upstream revenues. As
such, our company upstream revenues may trend lower compared to projected market
improvements in the U.S. upstream spending estimates.
17--------------------------------------------------------------------------------
Table of Contents
Although the energy sector is a significant part of our business, we have increased the diversification of our end markets greatly over the last few years. As of the third quarter 2021, 69% of our revenue is derived from our gas utility and downstream, industrial and energy transition (DIET) sectors.
Our gas utility business had the most significant contribution to our revenue improvement in the first nine months of 2021, with an increase of 22% compared to the first nine months of 2020. This continues to be our largest sector, making up 40% of our total company revenue in the third quarter of 2021. This business, which is largely independent of oil and gas commodity prices, was also initially impacted by certain customer activity delays due to COVID-19 concerns but did not experience any material budget cuts or project cancellations. This sector is expected to have the most significant revenue improvement for the full year 2021, with a double-digit percentage increase compared to 2020 due to increased customer activity levels as pandemic restrictions ease, and customers continue to execute their integrity upgrade programs. DIET, our second largest sector, generated 29% of our total company revenue. Although DIET revenue for the first nine months of 2021 declined 5% compared to the same period in 2020, the average monthly revenue in 2021 has increased 8% compared to the second half of 2020. COVID-19 had a significant impact on maintenance, repair and operations (MRO) and upgrade projects in 2020 but we have seen meaningful improvements in activity levels in 2021. This business has historically been less volatile than the upstream production and midstream pipeline sectors as it is less commodity price dependent because the revenue allocation is typically evenly split between chemicals, refining and other industrial markets that are more focused on MRO and turnaround activity. Also, starting this quarter we began including all energy transition related project revenue in this sector. InJanuary 2021 , a newU.S. President took office and a newU.S. Congress was seated. Both have publicly stated a desire to support alternative energy sources such as solar, wind and "green" hydrogen, reduceU.S. emissions of greenhouse gases and generally address climate change. To that end, the new administration has implemented executive orders for theU.S. to rejoin the Paris Agreement, which presumably will require theU.S. to set greenhouse gas reduction goals and enact policies to meet those goals. It has also announced an aggressive policy agenda to change the tax system, increase corporate and other income taxes, modify the relationships betweenthe United States and other countries and make changes that reverse actions taken by the prior President.Congress has made proposals to increaseU.S. federal government spending significantly on infrastructure and programs to address climate changes and to add new taxes to help pay for these proposals. OnNovember 5, 2021 ,Congress passed H.R. 3684, the "Infrastructure Investment and Jobs Act", the first of these proposals, which the President is expected to sign into law. This act is primarily focused on providing funding for upgrading roads, bridges, public transit, railways, broadband infrastructure and clean water projects. This act is not expected to have a direct, negative impact on the Company's business. As of the date of this filing, other proposals have not yet been enacted. Until specific laws are passed, executive actions are taken or federal regulatory action is enacted, it is unclear what impact these policies will have on our business. However, we believe that carbon-based energy will continue to play a critical role in supporting economic growth, particularly in developing countries, and that oil and gas demand will continue to be significant in the coming decades. TheU.S. EIA in its Reference Case published in the Annual Energy Outlook 2021 projectsU.S. energy consumption rising by 17% between 2020 and 2050. Even as the EIA projects in its Reference Case that renewables become the fastest growing energy source by 2050, the EIA also projects petroleum and other liquids demand in theU.S. to rise by 16% in that timeframe and natural gas to rise more than 22% after reaching a trough in 2021. While theU.S. EIA has not recently published a global outlook, itsU.S. Reference Case suggests world demand for hydrocarbons may also increase. This would require an increase in oil and gas production from current levels, which would continue to provide a robust market for our existing goods and services. Furthermore, our largest customers are among the leading investors in energy transition projects. As they further rebalance their capital investment away from traditional, carbon-based energy toward alternative sources, we expect to continue to supply them and enhance our product and service offerings to support their changing requirements, including in areas such as carbon capture, biofuels and wind. During the COVID-19 pandemic, we have continued to operate our business, and our warehouses and regional distribution centers have remained open. Under various isolation orders by national, state, provincial and local governments, we have been exempted as an "essential" business as the products we sell are necessary for the maintenance and functioning of the energy infrastructure. We have adopted significant measures to safeguard the health and safety of our employees. As the COVID-19 vaccines have become more widely distributed, we have begun to reopen our offices. In theU.S. , in particular, all of our offices are open under appropriate safety measures. As ofOctober 25, 2021 , of our approximate 2,500 employees, we had 8 employees with current cases of COVID-19. We monitor guidelines of theU.S. Centers for Disease Control ("CDC") and other authorities on an ongoing basis. As various governmental isolation orders evolve, we review our operational plans while addressing the health and safety of our employees and those with whom our business comes into contact. As a distribution business, we have also closely monitored the ability of our suppliers and transportation providers to continue the functioning of our supply chain, particularly in cases where there are limited alternative sources of supply. Lead-times for purchases of certain products have extended substantially over the last few quarters and we expect continued headwinds related to both lead-times and logistics for the foreseeable future. We have not experienced significant delays by transportation providers, but we are experiencing significant increases in transportation costs as the economies of theU.S. and other countries recover from the pandemic. Our inventory position has allowed us to continue supply to most customers with little interruption. In those instances where there is interruption, we work with our customers to limit the impacts on their business and maintain an ongoing dialogue regarding the status of impacted orders. We also continue to monitor the current constrained labor market and related costs. We have experienced significant inflation this year for certain product categories, especially in carbon steel pipe. Although inflation causes the price we pay for products to increase, we are generally able to leverage long-standing relationships with our suppliers and the high volume of our purchases to achieve market competitive pricing and preferential allocations of limited supplies. In addition, our contracts with customers generally allow us to pass price increases along to customers within a reasonable timeframe after they occur. To the extent our products are further impacted by pricing fluctuations caused by tariffs and quotas, the impact on our revenue and cost of goods sold, which is determined using the last-in, first-out ("LIFO") inventory costing methodology, remains subject to uncertainty and volatility. 18
--------------------------------------------------------------------------------
Table of Contents
We determine backlog by the amount of unshipped customer orders, either specific or general in nature, which the customer may revise or cancel in certain instances. The table below details our backlog by segment (in millions):
September 30, December 31, September 30,
2021 2020 2020
U.S. $ 297 $ 193 $ 215
Canada 30 13 15
International 113 134 145
$ 440 $ 340 $ 375
There can be no assurance that the backlog amounts will ultimately be realized
as revenue or that we will earn a profit on the backlog of orders, but we expect
that substantially all of the sales in our backlog will be realized within
twelve months.
The following table shows key industry indicators for the three and nine months
ended
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2021 2020 2021 2020
Average Rig Count (1):
United States 496 254 448 477
Canada 151 47 122 89
Total North America 647 301 570 566
International 772 731 735 879
Total 1,419 1,032 1,305 1,445
Average Commodity Prices (2):
WTI crude oil (per barrel) $ 70.58 $ 40.89 $ 65.05 $ 38.04
Brent crude oil (per barrel) $ 73.51 $ 42.91 $ 67.89 $ 41.15
Natural gas ($/MMBtu) $ 4.35 $ 2.00 $ 3.61 $ 1.87
Average Monthly U.S. Well Permits (3) 2,620 1,292 2,115 1,660 U.S. Wells Completed (2) 2,572 1,242 7,121 5,529 3:2:1 Crack Spread (4) $ 20.78 $ 10.10 $ 19.38 $ 11.96 _______________________ (1) Source-Baker Hughes (www.bhge.com) (Total rig count includes oil, natural gas and other rigs.) (2) Source-Department of Energy , EIA (www.eia.gov) (As revised) (3)Source-Evercore ISI Research (4) Source-Bloomberg 19
--------------------------------------------------------------------------------
Table of Contents Results of Operations
Three Months Ended
The breakdown of our sales by sector for the three months ended
Three Months Ended
September 30, 2021 September 30, 2020
Gas utilities $ 271 40 % $ 208 36 %
Downstream, industrial and energy transition 197 29 % 185 32 %
Upstream production 132 19 % 118 20 %
Midstream pipeline 85 12 % 74 12 %
$ 685 100 % $ 585 100 %
For the three months ended
© Edgar Online, source
