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 capital and other expenditure levels in the industries that we
serve; ?U.S. and international general economic conditions; ? decreases in oil and natural gas prices; ? unexpected supply shortages; ? loss of third-party transportation providers; ? cost increases by our suppliers and transportation providers; ? 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 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;
? a decline in demand for certain of the products we distribute if tariffs and
duties on these products are imposed or lifted;
? holding more inventory than can be sold in a commercial time frame;
? significant substitution of renewables and low-carbon fuels for oil and gas,
impacting demand for our products;
? risks related to adverse weather events or natural disasters;
? environmental, health and safety laws and regulations and the interpretation
or implementation thereof;
? changes in our customer and product mix;
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;
? failure to operate our business in an efficient or optimized manner;
? our ability to compete successfully with other companies in our industry;
? our lack of long-term contracts with many of our customers and our lack of
contracts with customers that require minimum purchase volumes; 17
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? inability to attract and retain our employees or 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; ? 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; ? impairment of our goodwill or other intangible assets;
? adverse changes in political or economic conditions in the countries in which
we operate;
? our significant indebtedness;
? the dependence on our subsidiaries for cash to meet our parent company's
obligations; ? changes in our credit profile; ? potential inability to obtain necessary capital; ? 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; ? exposure toU.S. and international laws and regulations, regulating corruption, limiting imports or exports or imposing economic sanctions;
? risks relating to ongoing evaluations of internal controls required by Section
404 of the Sarbanes-Oxley Act; 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, industrial and gas utility 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 250,000 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 2,700 employees serve approximately 10,000 customers through 206 service locations including regional distribution centers, branches, corporate offices and third-party pipe yards, where we often deploy pipe near customer locations. 18
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Table of ContentsKey Drivers of Our Business We derive our revenue predominantly from the sale of PVF and other supplies to energy, industrial and gas utility customers globally. Our business is dependent upon both the current conditions and future prospects in these industries and, in particular, our customers' maintenance and expansionary operating and capital expenditures. 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 driven by upgrades
of existing infrastructure as well as new residential and commercial
development. Continual 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 the maintenance and capital
expenditures of oil and natural gas companies 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 utilization and storage, biofuels, offshore wind and
hydrogen processing.
? 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, Supply 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 During the three months endedSeptember 30, 2022 , revenue increased 7% sequentially from the three months endedJune 30, 2022 , supporting our strong growth outlook for 2022. Despite near-term risk related to a potential global economic slowdown, market fundamentals in the industries we support remain strong. As a result, our customers have increased their spending levels, as evidenced by our 49% growth in backlog fromDecember 31, 2021 toSeptember 30, 2022 . We expect revenue growth in 2022 compared to 2021 to exceed 25%, which assumes a seasonal decline in revenues of approximately 5% in the fourth quarter of 2022.Gas Utilities Our gas utility business continues to be our largest sector, making up 38% of our total company revenue with a 26% increase in sales compared to the nine months endedSeptember 30, 2021 . This sector is expected to have continued strong growth in 2022 due to long-term market drivers including distribution integrity upgrade programs as well as new home construction. The majority of the work we perform with our gas utility customers are multi-year programs where they continually evaluate, monitor and implement measures to improve their pipeline distribution networks, ensuring the safety and the integrity of their system. As of 2021, which is the most recently available information, thePipeline and Hazardous Materials Safety Administration (PHMSA) estimates approximately 37% of the gas distribution main and service line miles are over 40 years old or of unknown origin. This infrastructure requires continuous replacement and maintenance as these gas distribution networks continue to age. We supply many of the replacement products including valves, line pipe, smart meters, risers and other gas products. A large percentage of the line pipe we sell is sold to our gas utilities customers for line replacement and new sections of their distribution network. Additionally, as our gas utility customers connect new homes and businesses to their gas distribution network, the growth in the housing market creates new revenue opportunities for our business to supply the related infrastructure products. While new housing market starts have started to decline with interest rate increases, we do not anticipate this to have a significant impact, as customers will generally reallocate their budgets towards integrity upgrade projects. The compound annual growth rate since 2010 for this sector is 11% and based on market fundamentals and new market share opportunities, we expect this area of our business to continue to have steady growth. Additionally, this sector has proven historically to be less sensitive to a scenario of economic slowdown due to its reduced dependency on energy demand and commodity prices. 19
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Downstream, Industrial and Energy Transition (DIET) DIET, our second largest sector, generated 30% of our total company revenue and grew 31% from the first nine months of 2021. We continue to expect this sector to deliver strong growth in 2022 driven by increased customer activity levels related to new energy transition related projects, maintenance, repair and operations ("MRO") activities, and project turnaround activity in refineries and chemical plants.Industrial Info Resources (IIR) estimates for US petroleum refining spending, updatedAugust 2022 , continue to project a double-digit increase for both MRO activities and projects in 2022 over 2021. The energy transition portion of our business is growing rapidly, particularly for biofuels refinery projects. The outlook for energy transition projects in the coming years is robust, as pressure to decarbonize the economy rises and government incentives and policy such as those in the Inflation Reduction Act of 2022 begin to support the development of carbon energy alternatives. We are well-positioned to grow our energy transition business through our long-standing customer relationships as well as our product and global supply chain expertise. Upstream Production and Midstream Pipeline The upstream production and midstream pipeline sectors of our business are the most cyclical, and in the first nine months of 2022 these sectors represented about one-third of our company revenues. The upstream production sector revenue increased 27% from the nine months endedSeptember 30, 2021 , to the nine months endedSeptember 30, 2022 , while the midstream pipeline sector increased 13% over the same period. Sell-side equity research analysts currently estimate upstream spending in 2022 to increase approximately 30%, and initial estimates for 2023 suggest an additional double-digit level of growth. During the third quarter of 2022, Brent crude oil price averaged over$100 per barrel andWest Texas Intermediate ("WTI") oil prices averaged approximately$93 per barrel. Although, oil prices have recently declined from earlier highs, recent OPEC+ production cuts have maintained prices at levels that support continued growth in drilling and completion activity by our customers. Natural gas prices also drive customer activity and despite recent volatility in various parts of the world, current prices remain significantly elevated compared to prior year. There is the expectation that shale producers in theU.S. could increase drilling and production above levels already planned leading into 2023 to offset the reduced supply fromRussia . Many customers have expressed a desire to remain consistent with their commitments to their budgets, maintaining returns to their shareholders and operating within their cash flow requirements. However, given supportive commodity prices and growing public pressure, there is the potential for this posture to shift. To the extent completion activity and related production increases, this could have the impact of improving our revenue opportunities in our upstream production and midstream pipeline sectors. Higher production levels are driving the need for additional gathering and processing infrastructure benefitting our midstream business. New well completions are correlated more closely to our upstream revenue rather than rig count. Furthermore, since theU.S. rig count reached a low in the second quarter of 2020, private operators, who historically have represented a smaller portion of our upstream revenue, have driven the majority of the rig count increases. As such, our company upstream revenue may trend lower compared to projected market improvements in theU.S. upstream spending estimates. Russia-Ukraine War OnFebruary 24, 2022 ,Russia invadedUkraine , which has had several consequences to the broader economy, global attitudes toward energy security and the pace of the energy transition. Government actions to reduce dependency on Russian fuels through embargoes and encourage an end to the conflict through sanctions onRussia have spurred a commodity price spike, supply constraints and various policy changes to address energy security. While we have no operations or sales inUkraine ,Belarus orRussia , the conflict has impacted several macro energy trends.
As
Supply Chain and Labor We continue to closely monitor 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 and we expect continued disruptions related to both lead-times and logistics for the foreseeable future. Our strong inventory position has allowed us to continue to supply most customers with little interruption despite the delays from transportation providers. 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 have experienced significant increases in transportation costs as the economies of theU.S. and other countries recover from the COVID-19 pandemic, although sequentially, transportation costs have begun to decline. We continue to experience inflation for certain product categories. Although inflation causes the prices 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 time after they occur. To the extent further pricing fluctuations impact our products, 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. However, our supply chain expertise, relationships with our key suppliers and inventory position has allowed us to manage the supply chain for both inflationary and deflationary pressures. There has been little impact to our supply chain directly from the conflict inUkraine . However, the COVID-19 lockdowns inChina are constraining the global supply chain and has the potential to impact the availability of component parts, particularly for valves and meters. Globally, we are being impacted by labor constraints as the post-pandemic recovery has lowered unemployment rates and created increased competition among companies to attract and retain personnel, which has increased our selling, general and administrative expense. We proactively monitor market trends in the areas where we have operations and, due to our efficient sourcing practices, we have experienced little to no disruption supporting our customers. COVID-19 Pandemic We continue to monitor the COVID-19 pandemic as the number of cases and hospitalizations have recently increased. If we were to develop a COVID-19 outbreak at one of our facilities, we have plans to isolate those in contact with potentially infected employees and to either staff the facility with employees from other facilities or supply product to customers from other facilities. 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 continue to review our operational plans to continue operating our business while addressing the health and safety of our employees and those with whom our business comes into contact. 20
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Table of Contents Backlog
We determine backlog by the amount of unshipped customer orders, 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, 2022 2021 2021 U.S. $ 576 $ 350 $ 297 Canada 47 35 30 International 150 135 113 $ 773 $ 520 $ 440 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. Key Industry Indicators
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, 2022 2021 2022 2021 Average Rig Count (1): United States 761 496 706 448 Canada 199 151 170 122Total North America 960 647 876 570 International 857 772 832 735 Total 1,817 1,419 1,708 1,305 Average Commodity Prices (2): WTI crude oil (per barrel) $ 93.06 $ 70.58 $ 98.96 $ 65.05 Brent crude oil (per barrel)$ 100.71 $ 73.51$ 105.00 $ 67.89 Natural gas ($/MMBtu) $ 8.03 $
4.35 $ 6.74 $ 3.61
New Privately-Owned Housing Units Started(3): Total units (in thousands) 1,439 1,559 Average Monthly U.S. Well Permits (4) 3,605 2,620 3,336 2,115 U.S. Wells Completed (2) 2,908 2,336 8,606 6,834 3:2:1 Crack Spread (5) $ 37.17 $ 20.78 $ 37.54 $ 19.38 _______________________ (1) Source-Baker Hughes (www.bakerhughes.com) (Total rig count includes oil, natural gas and other rigs.) (2) Source-Department of Energy , EIA (www.eia.gov) (As revised) (3) Source-U.S. Census Bureau andU.S. Department of Housing and Urban Development ,New Residential Construction (4)Source-Evercore ISI Research (5) Source-Bloomberg 21
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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, 2022 September 30, 2021 Gas utilities$ 359 40 %$ 271 40 % Downstream, industrial and energy transition 276 31 % 197 29 % Upstream production 176 19 % 132 19 % Midstream pipeline 93 10 % 85 12 %$ 904 100 %$ 685 100 %
For the three months ended
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