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 to MRC 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 alternative fuels for oil and gas;




                                       16

--------------------------------------------------------------------------------


  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 U.S. and international laws and regulations, including the Foreign
    Corrupt Practices Act and the U.K. Bribery Act and other economic sanctions
    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 largest distributor of pipe, valves and fittings ("PVF") and other infrastructure products and services to the energy industry, based on sales. We provide innovative supply chain solutions and technical product expertise to customers globally through our leading position across each of our diversified end-markets including the upstream production (exploration, production and extraction of underground oil and gas), midstream pipeline (gathering and transmission of oil and gas), gas utilities and downstream and industrial (crude oil refining and petrochemical and chemical processing and general industrials) sectors. 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 nearly 100 years of history, our approximate 2,850 employees serve over 13,000 customers through approximately 240 service locations including regional distribution centers, branches, corporate offices and third party pipe yards, where we often deploy pipe near customer locations. We seek to provide best-in-class service to our customers by satisfying the most complex, multi-site needs of many of the largest companies in the energy sector as their primary PVF supplier. We believe the critical role we play in our customers' supply chain, together with our extensive product and service offerings, broad global presence, customer-linked scalable information systems and efficient distribution capabilities, serve to solidify our long-standing customer relationships and drive our growth. As a result, we have an average relationship of over 25 years with our 25 largest customers.





                                       17

--------------------------------------------------------------------------------


  Table of Contents



Key Drivers of Our Business

Our revenue is predominantly derived from the sale of PVF and other oilfield and industrial supplies to the energy sector 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 upstream production, midstream pipeline, gas utilities and downstream and industrial sectors of the industry. Long-term growth in spending has been driven by several factors, including demand growth for petroleum and petroleum derived products, underinvestment in global energy infrastructure, 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 future oil, natural gas, refined products and petrochemical PVF spending is influenced by numerous factors, including the following:





  ? Oil and Natural Gas Prices. Sales of PVF and related infrastructure products
    to the oil and natural gas industry constitute over 90% of our sales. As a
    result, we depend upon the oil and natural gas industry and its ability and
    willingness to make maintenance and capital expenditures to explore for,
    produce and process oil, natural gas and refined products. Oil and natural gas
    prices, both current and projected, along with the costs necessary to produce
    oil and gas, impact other drivers of our business, including capital spending
    by customers, additions to and maintenance of pipelines, refinery utilization
    and petrochemical processing activity.



  ? Economic Conditions. The demand for the products we distribute is dependent on
    the general economy, the energy sector and other factors. Changes in the
    general economy or in the energy sector (domestically or internationally) can
    cause 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 would
    likely result in increased sales volumes and overall profitability.



  ? Steel Prices, Availability and 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, or
    other steel products that we do not supply, impacts the pricing and
    availability of our products and, ultimately, our sales and operating
    profitability.




Recent Trends and Outlook

During the first six months of 2020, the average oil price of West Texas Intermediate ("WTI") decreased to $36.58 per barrel from $57.39 per barrel in the first six months of 2019. Natural gas prices decreased to an average price of $1.80/MMBtu (Henry Hub) for the first six months of 2020 compared to $2.74/MMBtu (Henry Hub) for the first six months of 2019. North American drilling rig activity decreased 39% in the first six months of 2020 as compared to the first six months of 2019. U.S. well completions were down 36% in the first six months of 2020 compared to the same period in 2019.

The energy industry, and our business in turn, is cyclical in nature. In 2019, our customers demonstrated an increased focus on returns on invested capital, which drove a more disciplined approach to spending that continues to impact each of our business sectors. In the first half of 2020, demand for oil and natural gas declined sharply as a result of the coronavirus disease 2019 ("COVID-19") pandemic. As various governments implemented COVID-19 isolation orders, transportation use declined, energy use declined and manufacturing declined. As a result, the need for oil consumption dropped dramatically. At the same time, the Organization of Petroleum Exporting Countries ("OPEC") and other oil producing nations were initially unable to reach an agreement on oil production levels. This lack of agreement, between Saudi Arabia and Russia in particular, escalated concerns over the potential for oversupply of oil during a period of weakened demand thereby causing a significant, sustained decline in commodity prices. Major oil-producing nations did reduce oil production during the second quarter of 2020 to help offset the virus-related demand destruction but have recently announced their intention to start easing these cuts beginning in August 2020 due to current trends indicating a modest increase in oil demand. However, the expected level of oil demand in the near term is projected to be substantially lower than prior year levels. There remains significant uncertainty regarding the timing and extent of any recovery, including the possibility of a global recession or depression and any possible 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. As a result, spending plan estimates by sell-side research analysts indicate a decrease in oil and gas industry spending in 2020 of as much as 30% globally, including up to 50% in the U.S. upstream market. These reductions in spending directly impact both the upstream production and midstream pipeline components of our business. In addition, we have seen our customers in the downstream sector seek to defer turnarounds and routine maintenance and idle facilities in order to preserve liquidity and comply with COVID-19 related limitations on employee activities. Furthermore, approximately 80% of our business is concentrated in the U.S. market where the majority of industry spend reductions are occurring. Given these recent developments, the risk of resurgence of the COVID-19 virus and the continuing focus on capital discipline by oil and gas exploration and production operators, we experienced a sharp decline in sales during the second quarter of 2020 and expect the market to remain challenged until there is a step-change improvement related to COVID-19 concerns, improving the outlook for global oil demand.

Because of the challenging outlook for the remainder of 2020, we have taken a number of steps to further reduce our operating costs. These steps include the following:





  ? A voluntary early retirement program and an involuntary reduction in force to
    reduce headcount
  ? Ongoing freezes on hiring and compensation increases
  ? An indefinite suspension of the Company's 401(k) matching contributions to its
    U.S. employees
  ? Reductions in annual bonus incentive targets and resulting payouts for both
    executive management and eligible employees
  ? A 30% reduction in equity grants to non-executive directors




                                       18

--------------------------------------------------------------------------------


  Table of Contents



  ? For eligible executives and employees, a reduction in the long-term incentive
    awards that the Company grants to them pursuant to the Company's 2011 Omnibus
    Incentive Plan
  ? Management and employee furloughs
  ? Closure of certain branches and distribution centers where customer spending
    demand does not warrant continuation of those operations as we continue to
    adjust our distribution network as needed.
  ? Continued cost reductions and efficiency efforts throughout the Company

In addition to these efforts, we are actively managing our investment in working capital to an appropriate level, which can allow us to generate cash and reduce our indebtedness.

During the second quarter of 2020, we closed 11 branches and took other actions to reduce our costs associated with leased branches. As a result of these actions, we incurred charges totaling $15 million related to impairment of right of use assets, lease abandonment and charges associated with contractual obligations under lease agreements. Through these branch closures and other reductions in force, we reduced headcount by over 300 employees during the second quarter of 2020. In connection with these reductions, we incurred severance costs of $7 million during the quarter. We continue to take actions to further reduce operating costs and have plans to close additional facilities and further reduce headcount in the third quarter. Additional severance, restructuring and closure costs may be incurred to complete these actions.

During the COVID-19 pandemic crisis, we have continued to operate our business. Our video and audio conferencing and enterprise resource planning and other operational systems have enabled our office employees to work from home, performing their job functions with minimal disruption or impact on our internal control environment. We required our employees to work from home as a result of governmental isolation orders and, in many cases, in advance of those orders for the health and safety of our employees. We have limited employee travel to local deliveries of our products. 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 taken measures to safeguard the health and welfare of our employees, including (among other things) social distancing measures while at work, certain screening, providing personal protection equipment such as face masks and hand sanitizer and providing "deep" cleaning services at Company facilities. Currently, of our approximate 2,850 employees, we have 27 employees with current cases of COVID-19. If we were to develop a COVID-19 hotspot at one of our facilities, we have plans to isolate those in contact with the impacted employees and to either staff the facility with employees from other facilities or supply product to customers from other facilities. We monitor guidelines of the Center for Disease Control ("CDC") and other authorities on an ongoing basis, and 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.

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. While there have been some temporary interruptions of manufacturing for some of our products, especially those who manufacture product or components in China, South Korea and Italy, many of these manufacturers have now resumed production. We have not experienced significant delays by transportation providers. Our inventory position for most products has allowed us to continue supply to most customers with little interruption. In those instances where there is interruption, we are working with our customers to discuss the impact of the COVID-19 delay. We continue to monitor the situation and have ongoing dialogue with our customers regarding the status of impacted orders.

In recent years, the United States imposed tariffs on imports of some products that we distribute. Although these actions generally cause the price we pay for products to increase, we are generally able to leverage long-standing relationships with our suppliers and the volume of our purchases to receive market competitive pricing. In addition, our contracts with customers generally allow us to react quickly to price increases through mechanisms that enable us to pass those increases along to customers as they occur. Of course, the price increases that tariffs and quotas engender may be offset by the pricing impacts of lower demand that the COVID-19 pandemic has caused. These issues are dynamic and continue to evolve. To the extent our products are further impacted by higher prices caused by tariffs and quotas, the ultimate impact on our revenue and cost of sales, which is determined using the last-in, first-out ("LIFO") inventory costing methodology, remains subject to uncertainty and volatility.





                                       19

--------------------------------------------------------------------------------

Table of Contents

Effective January 31, 2020, the United Kingdom formally exited the European Union ("EU"). Following the exit, there is a transition period until December 31, 2020. During the transition period, the U.K.'s trading relationship with the EU will remain the same while the two sides negotiate a free trade deal. At the same time, many other aspects of the U.K.'s future relationship with the EU - including law enforcement, data sharing and security - will also be negotiated. If a trade agreement is timely completed, the U.K.'s new trading relationship with the EU can begin immediately after the transition. If not, there would be no trade agreement, which could negatively impact our business, including any commodity pricing, transfer pricing and other cross border issues. However, we have a physical presence in both the U.K. and EU member states that would allow us to continue to operate and to serve our customers as needed. In 2019, 2.4% of our revenue was derived from our U.K. business.

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):





                June 30,      December 31,      June 30,
                  2020            2019            2019
U.S.            $     220     $         301     $     351
Canada                 22                34            39
International         150               174           188
                $     392     $         509     $     578

Approximately 3% of our June 30, 2019 ending backlog was associated with two customers in our U.S. segment. In addition, approximately 2% of our ending backlog for June 30, 2019 was associated with one customer in our International segment. In each case, these were related to significant customer projects that were substantially completed before the end of 2019. Excluding these projects, our backlog as of June 30, 2020 had decreased 23% and 28% from December 31, 2019 and June 30, 2019, respectively. 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 in the next twelve months.

The following table shows key industry indicators for the three and six months ended June 30, 2020 and 2019:





                                               Three Months Ended             Six Months Ended
                                            June 30,        June 30,       June 30,       June 30,
                                              2020            2019           2020           2019
Average Rig Count (1):
United States                                     392             989            588          1,016
Canada                                             25              82            110            132
Total North America                               417           1,071            698          1,148
International                                     834           1,109            954          1,069
Total                                           1,251           2,180          1,652          2,217

Average Commodity Prices (2):
WTI crude oil (per barrel)                 $    27.96      $    59.88     $    36.58     $    57.39
Brent crude oil (per barrel)               $    29.70      $    69.04     $    40.23     $    66.07
Natural gas ($/MMBtu)                      $     1.70      $     2.57     $     1.80     $     2.74

Average Monthly U.S. Well Permits (3)           1,441           4,887          1,844          5,363
U.S. Wells Completed (2)                        1,475           3,904          4,764          7,397
3:2:1 Crack Spread (4)                     $    12.11      $    21.73     $    12.91     $    19.39




_______________________
(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




                                       20

--------------------------------------------------------------------------------


  Table of Contents




Results of Operations

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019

The breakdown of our sales by sector for the three months ended June 30, 2020 and 2019 was as follows (in millions):





                                     Three Months Ended
                            June 30, 2020          June 30, 2019
Upstream production       $   134         22 %   $   284         29 %
Midstream pipeline             87         15 %       174         18 %
Gas utilities                 205         34 %       247         25 %
Downstream & industrial       176         29 %       279         28 %
                          $   602        100 %   $   984        100 %

For the three months ended June 30, 2020 and 2019, the following table summarizes our results of operations (in millions):

© Edgar Online, source Glimpses