The Wall Street Perspective of the Valves Industry

Transcription

1 January 2014 The Wall Street Perspective of the Valves Industry R. Scott Graham Jefferies LLC

2 The Global Valves Market Market data (per Freedonia): page 1 Size: $75B Expected growth through 2017: ~+4% Drivers of Growth: Commodities processing industries BRICs Economy recovery in US and Europe Increasingly complex applications Smart valves Primary Players: Pentair (Tyco Flow business) Cameron Emerson Crane Flowserve KSB Parker-Hannifin SPX Weir Watts Water Alfa Laval Circor Power 13% Others 2 Chemical 17% Sources:: Freedonia. Oil & Gas 33% Water & Wastewater 18%

3 Key End-Markets page 2

4 Oil & Gas We track >$600B of O&G capital spending globally, all streams Long-term Drivers: Transportation, industrial, power and heating applications Changing demographics in BRICs / rising middle classes Complex recovery, such as Tar Sands and Brazil Sub-salt Newer resources, such as shale Energy independence Specialized markets, such as Floating LNG, Regasification and Liquefaction Market Outlook: 2013E Capex: +4% E Capex: +5%-plus Expect continued, but slower growth going forward as cycle progresses We do not expect another Super Cycle But possibly an elongated cycle page 3

5 Oil & Gas 2013E global capex: +4% Growth accelerates from 1H s +3% Spending highest with Int l Integrateds, slower at Int l E&Ps Spending in NA decline 2014E global capex: +5%-plus Company budgets: +5%; Jefferies Analysts: +4%-6% Rig count forecasts: NA: Flat; Int l: +5% (per Spears) Crude forecast: $104/bbl, -4% (per EIA) 2014 would be 5 th straight up year $650 25% $700 $ % Capital Spending ($Bil.) $600 $550 $500 $ % 1 5% Capital Spending ($Bil.) $600 $550 $500 $450 $400 $350 $300 $250 $ % 2 15% 1 5% -5% -1 $150-15% $400 $100-2 Global Petroleum Capex - TTM Sources: Bloomberg; Company reports, Jefferies LLC. page 4 YoY % Chg. - TTM Global Petroleum Capex YoY % Chg.

6 2,800 Oil & Gas NA Rig Count International Rig Count 1, % 2,700 35% 2, ,300 1 Global Rig Count 2,500 2,400 2,300 2,200 2,100 2,000 1,900 1,800 1,700 25% 2 15% 1 5% -5% -1-15% Global Rig Count 1,250 1,200 1,150 1,100 8% 6% 4% 2% 1, ,050 15% 1 5% -5% -1 International Rig Count Int'l Rig Count - YoY % Chg. Petroleum Capex By Regions US and Europe Petroleum IP -5% -4% Integrated Domestic NA Rig Count 6% 12% Integrated International NA Rig Count - YoY % Chg. -7% -6% E&P Domestic 9% 3% E&P International -2% -3% Independent Refiners Industrial Production Index % 6% 4% 2% -2% -4% -6% -8% -1-12% 2Q13 3Q13 Sources: Bloomberg; Company reports, Baker Hughes; U.S. Census Bureau; Eurostat; Jefferies LLC. page 5 U.S. Petrol IP EU Energy IP US Petrol IP YoY % Chg. EU Energy IP YoY % Chg.

7 Water & Wastewater Global water is a $500B market; $800B-$1T by 2035 Long-term Drivers: Mature markets Repair and rehab of aging infrastructures, storm damage and sewer overflow Ag and Industrial increasing Population growth and sprawl Stringent EPA clean water regulations; EPA budget: ~4 water Protection of surface and aquifer supplies Rising use of desalination, which has become less expensive ~45% of the country s pipes will be rated poor, very poor, or beyond repair by 2020 Emerging markets Rise of middle classes and their sprawl need basic drinking water and wastewater infrastructure Stockholm International Water Institute: By 2050, the world's urban population is estimated to be 6B, or the same size as today demand for water could outstrip supply by 4 in 20 years Global Information: 37% of the global population will face absolute water stress by 2020 Market Outlook: 2013E: Flat 2014E: Up Low-single digit U.S. water to improve, but not until 2H14, Europe to remain weak U.S. resi and Muni budgets improving, unemployment declining; Europe gov t spending expected to remain sluggish ROW water infra spending demands significant, expect +5%-plus growth BRIC countries growth rates 2x-3x higher than the industry Sources: Xylem, Inc; Dow Chemical; GWI; Jefferies LLC. page 6

8 Water & Wastewater 2013E U.S water spending: -1% U.S. Construction spending weak in 1H13; Estimated to increase in 2H E company budgets: U.S. +33%; Municipal spending forecast: -3% Water construction spending below historical level and has bottomed 2014E U.S. water spending: Up Low-single digit Aged systems Residential markets Regulation $38 2 $120 2 $37 15% $100 15% Construction Spending ($ Bil.) $36 $35 $34 $33 $32 $31 1 5% -5% -1-15% Construction Spending; $ Bils. $80 $60 $40 $20 1 5% -5% Year Over Year Percentage Change $30-2 $0-1 Water & WW Construction Spending Sources: U.S. Census Bureau; Bloomberg; Jefferies LLC. page 7 YoY % Chg. Water Supply and Sewerage Construction YoY % Chg.

9 Water & Wastewater Significant pent-up demand in the US EPA s 2013 Drinking Water Infrastructure Needs Survey and Assessment report indicates the U.S. needs ~$384B investments in its drinking water infrastructure through About $250B of the investment will be geared toward replacement or refurbishment of aging water distribution and transmission lines MA drafted initial recommendations to address a $21.4B long-term gap in water funding The U.S. House of Representatives passed an $8.2B water bill which will be geared toward flood protection projects, port expansion and shoreline protection projects The Las Vegas Valley Water District plans to increase water rates peaking to an 18% increase by This will fund the infrastructure expansion projects around the City of Las Vegas The City of Chicago plans to fund its infrastructure upgrade and expansion through water and sewer rate increase of 15% NJ State Board of Public Utilities approved a price increase of 6.8% for water bills across the state. This increase will fund filtering equipment upgrade, monitoring and wastewater upgrades for Texas votes approved a plan to appropriate $2B from Texas economic stabilization fund to the state water plan page 8

10 Water & Wastewater 2013E International spending: Up Low to mid-single digit Europe: ~-4%; Europe water utilities capex growth estimates Rest of World: ~+5% 2014E International spending: Up Low to mid-single digit Europe: Up low-single digit; company budgets; U.K E capex CAGR ~-1% Rest of World: ~+5%; China water capex +5% (incl. drinking, wastewater and muni) 4,500 1 $90 3 4,400 8% $80 25% Tax Receipts (E Bils.) 4,300 4,200 4,100 4,000 3,900 3,800 6% 4% 2% -2% -4% Capex in $ Billions $70 $60 $50 $ % 1 5% 3,700-6% $ E 2013E 2014E Eurozone Total Tax Receipts Sources: Eurostat; Dow Chemical; GWI. page 9 YOY % Chg. Total Water Capex - China YoY% Chg.

11 Water & Wastewater Emerging markets pent-up demand Brazil: To invest ~$156B in waterworks over the next 20 years, or $8B per year vs. current $4B Saudi Arabia: State-owned National Water Company plans to invest $13B over the next 5 years to expand the water and wastewater infrastructure in the country Russia: It plans to spend $9B in water and sanitation projects in St. Petersburg through 2025 Bahrain: It plans ~$4B spend on power and water desalination projects from Peru: To invest $3B in water and sanitation projects in Lima by 2017 Kenya: The Coast Water Services Board plans $1.2B spending on projects to improve water supply Thailand: The Ministry of Finance announced plans to invest $1.1B-$1.5B on watersystem projects Ireland: The government plans to more than double its investment in the country s water system to $790M/year. The focus will be installation of new water systems and improving water quality Egypt: The Egyptian government plans water-related infrastructure investments of $3B over the next 10 years Middle East: Israel, Jordan and Palestinian Authority signed an agreement to build a desalination plant on the Gulf of Aqaba page 10

12 Chemical We track ~$80B of Chemical capital spending globally Long-term Drivers: Global GDP growth Production moving closer to feedstock, especially in developing regions Chemical majors signal significant investment in US ethylene based on low-cost ethane feedstock available from gas shale Many projects will be located with/near refineries Market Outlook: 2013E Capex: +3% E Capex: +3% Strong growth, yet slower as cycle progresses Global ethylene demand is expected to grow at a CAGR of 3% until 2022 page 11

13 2013E global capex: +3% Chemical Growth moderated from 1H13 s +9% U.S. and Europe spending decelerated ROW spending turned positive 2014E global capex: +3% U.S.: +12%; Company budgets: +14%; Jefferies Analyst: Up mid-single digit Europe: -1; Company budgets: decline mid-teens; Jefferies Analyst: -6% ROW: +5% to +7%; Emerging market downstream build; Jefferies Analyst: Flat $100 35% $85 4 $90 3 $75 3 Capital Spending ($Bil.) $80 $70 $60 $50 $40 25% 2 15% 1 5% Capital Spending ($Bils.) $65 $55 $45 $35 $ $30 $15-3 page 12 Global Chemical Capex - TTM Sources: Bloomberg; Company reports; Jefferies LLC. YoY % Chg. - TTM Global Chemical Capex YoY % Chg.

14 Chemical 200 Global Ethylene Demand 94% 90 U.S. Chemical IP 3% Ethylene Demand in Million Metric Tons % 9 88% 86% 84% 82% 8 Operating Rate in Percent Industrial Production Index % 1% -1% 40 78% 80-2% Germany Chemical Orders Index Global Ethylene Demand Operating Rate 106 U.S. Chemical IP YOY % Chg. Europe Chemical IP 8% % Index Industrial Production Index % 2% -2% -4% % ifo Germany Chemical Orders Index Sources: Bloomberg; Federal Reserve; Eurostat; IHS Inc. page 13 Eurozone Chemical IP YOY % Chg.

15 Power We track >$230B of Power capital spending globally Long-term Drivers: Demand for urbanization Demand for industrial, process, structure uses Meeting minimum reserve requirements Increased use of combined cycle/gas Increasing environmental regulations IAEA projects slower nuclear post-fukushima But numerous countries proceed with nuclear development plans Market Outlook: 2013 Capex: -2% E Capex: +2% Slower global GDP reduced electricity consumption, which affected builds and lowticket spending Closure of coal-fired plants in developed markets Electricity usage per capita for developed markets to grow at a CAGR of +0.1% by 2040 Electricity usage per capita for emerging markets to grow at a CAGR of +2% by 2040 page 14

16 Power 2013E global capex: -2% Growth moderated from 1H13 s -1% U.S. capex declined on project delays and closure of coal-fired plants Europe spending hurt by lower electricity demand ROW capex declined due to lower spend in LatAm, China and Japan 2014E global capex: +2% U.S.: -1% to -3%; Company budgets: -1%; SNL forecast: -6%; EEI forecast: -3% Europe: -4%; Company budgets: -4%; Large utilities completing programs ROW: +1-plus; EPCs see significant builds $240 6% $250 3 $235 5% $225 25% Capital Spending ($Bils) $230 $225 $220 $215 $210 $205 4% 3% 2% 1% -1% Capital Spending ($Bils.) $200 $175 $150 $125 $100 $ % 1 5% -5% $200-2% $50 $ % Sources: Bloomberg; Company reports; Jefferies LLC. page 15 Global Power Capex - TTM YoY % Chg. - TTM Global Power Capex YoY % Chg.

17 Power 12 Global Electricity Usage 106 U.S. Power IP 6% CAGR= 0.2% % Usage in 1000 KWh per Capita CAGR= 0.1% CAGR= 2.1% CAGR= 2.3% CAGR= 2.2% CAGR= 1.4% Industrial Production Index % -2% -4% -6% 0 NA Europe Middle East Asia Pacific LatAm ROW Electricity Usage Electricity Usage Europe Electricity Generation % % 16% -8% U.S. Power IP YOY % Chg. China Electricity Consumption Generation in Gigawatt-hour % % % % % 12% 1 8% 6% 4% 2% Eurozone27 Electricity Generation YOY % Chg. Sources: Bloomberg; ExxonMobil 2014 Outlook for Energy report; Eurostat; National Bureau of Statistics of China. page 16 China Electricity Consumption

18 Appendix page 17

19 $ E global E&P capex: -3% Oil & Gas Global E&P U.S. capex -6% in 3Q13 due to lower U.S. rig count Improved rig efficiency and companies focus on free cash flow also affected U.S. spending Int l capex +3% in 3Q13 due to higher rig count 2014E global E&P capex: ~+5% Company budgets: U.S. +1; Int l +1% U.S. spending to benefit from stable rig count and lower B/Es on gas Int l spending to benefit from project activity in emerging markets 6 $36 6 $110 5 $34 5 Capital Spending ($Bil.) $100 $90 $80 $70 $60 $ Capital Spending ($Bil.) $32 $30 $28 $26 $ $40-2 $22-1 E&P Domestic - TTM YoY % Chg. - TTM E&P International - TTM YoY % Chg. - TTM Sources: FactSet; Company reports; Jefferies LLC. page 18

20 Oil & Gas Global Integrated 2013E global integrated capex: +6% U.S. capex -4% due to lower U.S. rig count Int l capex +12% 2014E global integrated capex: ~+4% Company budgets: U.S. +7%; Int l +4% U.S. integrated spending to benefit from higher spend in Gulf of Mexico and shales Int l to benefit from increase in rig count and project activity in emerging markets $45 4 $500 35% $40 3 $450 3 Capital Spending ($Bil.) $35 $30 $25 $ Capital Spending ($Bil.) $400 $350 $300 $250 $200 25% 2 15% 1 5% $15-1 $150 U.S. Integrated - TTM YoY % Chg. - TTM International Integrated - TTM YoY % Chg. - TTM Sources: FactSet; Company reports; Jefferies LLC. page 19

21 Oil & Gas Global Refining 2013E global refining capex: -2% Refining spending has bottomed Refining margins currently pressured but up significantly from (avg. 9%) 2014E global refining capex: ~+7% Based on the company budgets U.S. brownfield project activity driven by natural gas liquids Int l spending driven by increasing demand for refined products $ Capital Spending ($ Bils.) $15 $14 $13 $ Margin Percent $ page 20 Global Capex - Refiners Sources: FactSet; Bloomberg; Company reports; Jefferies LLC. YoY % Chg. - TTM WTI Refining Margin %

22 Oil & Gas Global Midstream 2013E global midstream capex: +16% U.S. growth driven by pipeline and gathering systems demand in shale regions Improving U.S. exports for natural gas and natural gas liquids 2014E global midstream capex: -9% Based on the company budgets $40 45% $30 8 Capital Spending ($Bil.) $35 $30 $25 $20 $ % 3 25% 2 Capital Spending ($Bil.) $25 $20 $15 $ $10 15% $5-2 $5 1 $0-4 Global Midstream Capex - TTM YoY % Chg. - TTM Global Midstream Capex YoY % Chg. page 21 Sources: FactSet; Bloomberg; Company reports; Jefferies LLC.

23 Stocks Disclosure Company Name Ticker Price Rating Target Price Pentair Ltd. PNR $77.30 Buy $82 Cameron International Corp. CAM $58.21 Buy $72 Flowserve Corp. FLS $77.03 Hold $72 Parker-Hannifin Corp. PH $ Buy $135 Weir Group Plc WEIR-LON Hold 25 page 22 Sources: Jefferies LLC.

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