Economic and Industry Overview

Transcription

1 Economic and Industry Overview APCA Midyear Meeting October 13, 2017

2 Discussion Topics 2 The broader construction cycle? Power and energy spending trends Trump Congress political agendas Factors influencing gathering and takeaway spending The growing influence of technology and innovation M&A Activity What challenges are C-level industry wrestling with Trends in private ownership and transition

3 FMI Point of View 3 The midstream infrastructure downturn ( 15/ 16) is officially over 2017 & 2018 should be strong years for gathering and takeway - Permian (Delaware) - Marcellus/Utica - Mid Continent Scoop and Stack Oil price appears to be stabilizing with upward pressure over the mid-term - Global demand growth Gas production growing 5%+ per year stabilized by growing exports M&A activity increasing producers, oilfield services & equipment, pipeline & facility Regulatory (state) and social movements (activism) are getting worse, not better Skilled labor is retiring out faster than can be developed and retained Technology and innovation are having a growing impact on the E&C industry

4 Where Are We in the Construction Cycle? 4 Total U.S. Construction Put in Place ($ billions) 11 years The industry cycle (peak to peak) has extended to 11 years Sixth consecutive year of growth for the industry as a whole Outlook for 2018 looks solidly favorable, but the rate of growth is slowing

5 Construction Spending Has Not Caught Up With the Broader Economy 5 Inflation $1,405,152,000 14% 8% U.S. Construction as % GDP 6.4% Spending still lags behind the 2006 peak when adjusted for inflation Construction is a smaller part of the overall economy (GDP) compared to history

6 U.S. Economy and Global Commodity Trends Impact Energy Spending 6 Power & Energy Put in Place ($ billions) Power & Energy out performed at the start of the Great Recession ( ) - Power transmission and shale revolution Downturn when non-residential sectors hit with recession (largest decline post-wwii Recovered until global oil price collapse

7 Monthly US Crude Oil Production (000 bbls/day) Oct-2012 Mar-2013 Aug-2013 Jan-2014 Jun-2014 Nov-2014 Apr-2015 Sept-2015 Feb-2016 Jul-2016 Dec-2016 May-2017 Oct-2017 Mar-2018 Aug-2018 Jan-2019 Jun-2019 Nov-2019 Apr-2020 Sept-2020 Feb-2021 The U.S. is responsible for nearly the entire net increase in global oil production Domestic production trending toward 10 mmbbl/d by Q4 18

8 Gross Monthly Gas Withdrawals (MMcf) 8 2,900,000 2,175,000 1,450, ,000 '- 0 Oct-2012 Mar-2013 Aug-2013 Jan-2014 Jun-2014 Nov-2014 Apr-2015 Sept-2015 Feb-2016 Jul-2016 Dec-2016 May-2017 Oct-2017 Mar-2018 Aug-2018 Jan-2019 Jun-2019 Nov-2019 Apr-2020 Sept-2020 Feb-2021 Jul-202 U.S. is now a net exporter of natural gas (Q2 17)

9 Concentrated Recovery. 9

10 Construction Spending Forecast by MSA 10 Size of bubble represents 2017 construction spending for Nonresidential segment and color represents the CAGR compared to the average of the nation, + 4.1%

11 FMI Forecast Rate of Growth is Moderating Across Major Sectors 11 Construction Put in Place Estimated for The United States Change From Prior Year - Current Dollar Basis 3rd Quarter 2017 Forecast (based on Q Actuals) RESIDENTIAL BUILDINGS Single Family 29% 13% 16% 9% 9% 7% 5% 3% Multifamily 37% 32% 15% 15% 7% 5% 4% 3% Improvements* 5% 10% 12% 10% 14% 6% 3% 1% Total Residential 19% 14% 14% 10% 10% 7% 4% 2% NONRESIDENTIAL BUILDINGS Lodging 24% 24% 31% 23% 5% 5% 3% 2% Office 0% 23% 19% 21% 9% 9% 6% 4% Commercial 12% 18% 5% 16% 10% 7% 4% 2% Health Care -4% -5% 1% -1% 1% 3% 4% 3% Educational -7% 1% 6% 5% -2% 3% 3% 4% Religious -7% -6% 6% -2% -6% 1% 1% 2% Public Safety -9% -1% -10% -6% -1% 1% 3% 3% Amusement and Recreation -2% 10% 21% 11% 4% 4% 2% 1% Transportation 4% 7% 7% -6% 1% 2% 4% 5% Communication 10% -3% 25% 2% 2% 3% 4% 3% Manufacturing 6% 16% 36% -6% -7% 6% 8% 5% Total Nonresidential Buildings 2% 9% 14% 6% 2% 5% 4% 3% NONBUILDING STRUCTURES Power, Oil & Gas -4% 18% -6% 3% -3% 4% 5% 6% Highway and Street 1% 4% 7% 1% -1% 2% 2% 2% Sewage and Waste Disposal 1% 3% 5% -7% -11% -4% 1% 3% Water Supply 3% -2% -2% -5% -8% -3% 1% 2% Conservation and Development -4% 23% 6% 0% -6% 3% 4% 5% Total Nonbuilding Structures -1% 10% 0% 1% -4% 2% 3% 4% Total Put in Place 7% 11% 11% 6% 4% 5% 4% 3% *Improvements include additions, alterations and major replacements. It does not include maintenance and repairs.

12 Stabilizing Oil & Gas Markets (Near-term) 12 Natural Gas prices stabilizing at $ Inventories returning to pre-2015 levels - LNG exports growing rapidly WTI crude appears stabilizing at $ /- 10% - Global demand 1.5% - 2.0% - OPEC sustaining curbs on output - U.S. exports nearing 2MM bbl/day Upward pressure on prices after Inflation - Non-OPEC production declines

13 Henry Hub Natural Gas Spot Price (Dollars per Million Btu) 13

14 Gathering and Takeaway Bottlenecks 14 Widening (Declining) Basis Differentials are the Greatest Indicator of Underpiped Regions $0.30 Regional Hub Base Price Declines $0.20 $0.10 $- $(0.10) YTD $(0.20) $(0.30) $(0.40) SoCal OpalWyoming El Paso Permian GTMalin Columbia Appal Waha Source: FERC Marcellus (gas) Permian/Delware (oil, gas, liquids) Midcontinent SCOOP/STACK (oil) Niobrara/DJ (oil, liquids)

15 10 Factors Impacting Energy and the Midstream 15 Producer debt to capital ratios (high) Negative cash flows (overspending) Interest rates (upward pressure) Inflation Skilled labor Availability of equipment and tools (short-term) Global oil production vs. demand Executive branch (Affordable Care Act, Clean Power Plan, NAFTA, TPP) Federal regulation (FERC, PHMSA) State regulators Social norms and activism

16 16 a Trump bump has not actually materialized Health Care Tax Reform Infrastructure Congress is polarized, the majority party is divided, no major legislation to repeal, replace or reform

17 New Generation of Social and Environmental Activism 17

18 Geopolitical Wild Cards 18

19 19 Technology and innovation will impact the U.S. construction industry more in the next five years than the previous fifty.

20 A Venture Capitalists View of the Built Environment 20

21 What Is Enabling This Transition? 21

22 Industry Challenge: Scheduling, Dispatching, Forecasting 22 Scheduler Dispatcher Superintenden t Field Crew

23 Automated Real-time Scheduling, Dispatch, Request & Release + Forecasting 23

24 A Few Examples of Build Tech 24

25 M&A Activity Returning to Midstream 25 A large number of deals were canceled Revenue and earnings declines Upstream producers distressed Supply chain squeezed hard New A&D transactions in Permian Return to ES&E, services and construction deals 5-7x TTM EBITDA Margin, backlog, customer, basin, customer, safety, management

26 What E&C C-level Executives Worry About 26 Market conditions beyond 2018 The balance sheet Finding profitable growth Finding and retaining qualified employees Project execution [risk] Changes to the value chain New business models What does all this technology mean? Cybersecurity Succession and exit options

27 FMI Study on Ownership Trends 27 Fewer family members are active in their business today than they were in 2013 ESOPs are resurging, and more firms are recognizing the challenges of a third party sale Firms with a clear vision and strategy for the future are more likely to have a formal ownership transfer and succession management plan in place Succession in our industry will require embracing nontraditional means of development and cultural shifts

28 Moving Away From the Family Business 28 Ownership Dynamics Are Changing Business models that reinforce meritocracy over familial relationships Continuing trend of broader ownership that dilutes family ownership over time Consolidation among larger E&C firms via acquisitions by international buyers publicly held companies and private equity firms 79% of business owners (all industries) want to transfer ownership in next 10 years, but fewer than 15% have sought outside help

29 Thank You! 29 W. Chris Daum President and Chief Executive Officer As the president and chief executive officer of FMI Corporation, Chris oversees the management of all FMI businesses and services and leads the firm s strategic growth efforts. Previously, Chris served as president and senior managing director of FMI Capital Advisors, the firm s investment banking subsidiary, where he also led the firm s utility infrastructure practice. He works with owners, boards and management teams on strategic issues involving industry trends, management, ownership transfer, and mergers and acquisitions. He is a contributing author to numerous industry publications and media outlets and is an energetic and entertaining speaker on the current and future impact of economic, technology and competitive trends on the industry. W. Chris Daum FMI Corporation 5171 Glenwood Ave. Suite 200 Raleigh, NC Tel: Cell: cdaum@fminet.com Website: Prior to joining FMI, Chris served as global financial services leader for an industrial company with operations throughout North and South America and Europe, and he began his career in public accounting with KPMG. Chris has a Bachelor of Science in business with a major in accounting from Virginia Tech. He is a licensed certified public accountant (inactive) in the state of North Carolina and holds FINRA securities licenses 24, 79 and 63.