Fluor Corp. (FLR) reported earnings after the closing bell on Monday, and we believe the global engineering and construction company continues to offer compelling value.  Estimates called for earnings per share of 91 cents, which would have been an increase over the same period a year ago where FLR made 87 cents.  The company beat earnings by two cents, although revenue was just a little bit light at $5.3 billion.

There are a few reasons that we think that Fluor offers attractive value to long term investors.  First, the company has shown the ability to handily beat estimates in each quarter thus far in the 21 month long recession.  Part of the reason for this is many of Fluor’s projects are signed months in advance of start date.  So, the backlog of business has helped to keep Fluor busy at a time where most businesses were dealing with declining revenue.  With more than half of Fluor’s revenue coming from projects related to oil and gas, it is impressive to see the company continue to succeed as oil has been especially volatile over the last twelve months.  The return of higher energy prices might be able to reinvigorate this side of the business, as more projects have become profitable.  The bulk of the remainder of Fluor’s revenue likely comes from infrastructure projects which will likely remain a focal point of government/stimulus spending for the next few years at least.

Also, economies around the world have shown a good deal of improvement over the last few months, and this is a welcome development for Fluor.  Obviously, if private companies and government entities are not spending capital in order to preserve their balance sheets, then there will be less demand for Fluor’s services.  If growth can indeed return soon, then Fluor will benefit from a cyclical return to more aggressive capital spending activity. 

An example of this, just today Fluor announced it had signed a contract through its Russian joint venture Sakhalin Neftegas Technology LLC to expand an onshore processing facility.  Flour has booked $700 million in the first quarter of 2009, which for a company the size of Flour is a moderate size contract.  Just last month, Fluor signed a $7 billion deal over 5 years with the U.S. Army to do infrastructure work on 74 operational bases in northern Afghanistan.  All told, the backlog rose to $30.9 billion from $29.1 last quarter.  The total backlog was 6% lower than last year, which is to be expected from cancellations in the oil and gas segment.

Fluor has done a decent job of maintaining the business even through the huge downturn in cap ex., and should stand to benefit greatly as capital spending budgets start to flow more easily.  The stock has appreciated 72% since hitting its low in early March, but we still would not consider it expensive trading at 15 times expected fiscal 2009 profit.  The stock looks appealing on a price-to-cash basis, currently trading 10.8x whereas historically a range of 12.2x to 23.6x has been normal over the last ten years.  FLR is also attractive on a price-to-sales basis, with a current price of $57.49, FLR is a full 61% below its average price-to-sales ratio at comparable revenue levels.  Given the current fundamentals we would recommending buying shares up to a price level in the high sixties.

The stock is selling off just slightly in after hours because the revenue totals didn’t match targets.  We are reaffirming our Undervalued rating on FLR after today’s earnings report.  Investor sentiment, as gauged by the Motley Fool’s CAPS survey, is positive on Fluor as well.

Last night, Grey Wolf (GW) announced that the number of its shareholders electing to be paid in cash (rather than Precision Drilling Trust shares) has “substantially exceeded” the amount of cash available for cash elections.  Razor’s Edge readers will recall our August 25th, 2008 article (Grey Wolf Shareholders Should Hold Out for Better Offer!) which laid out the case for shareholders to reject the PDS offer based upon valuations.  Naturally, the decline in oil and oil infrastructure stocks had already begun in earnest, so it is not unreasonable that management would try to push the deal through despite the fact that there was a better offer earlier from Basic Energy Services (BAS).  Interestingly, despite a wild ride up and down over the last several months, the price of GW shares on the merger announcement date of August 25th was $6.61 per share and as of Friday, (before yesterday’s collapse of the stock) the price per share was $6.36.  With cash payment off the table for a large portion of institutional holders, the alternative of being given Precision Trust shares, which have fallen 60% since the merger announcement was not received well.  Shares plunged yesterday on the news as these institutions realized that they were getting a lump of coal instead of cash this year.  Grey Wolf’s shares fell $3.22, or 50 percent to $3.14 on the American Stock Exchange.

This is a sad development for Grey Wolf as it breathes its last breath as an independent company in the coming days.  It had a great opportunity on a shareholder value basis to make it through this painful downturn or to seek a better offer.  At this point, however, it appears that it is all over.

Not that it matters, but Moody’s also dropped a ratings cut on Precision Drilling yesterday as well…

The negative outlook reflects that Precision will remain exposed to potentially higher interest rates, fees and discounts on all of the secured debt as the syndication of the revolver and Term Loan A continues. Precision’s Ba2 CFR reflects its pro-forma size and scale, reasonable pro-forma leverage and history of conservative fiscal management, good operating margins, and the geographic diversity of its pro-forma drilling rig fleet throughout North America.  - MOODY’s RATINGS SERVICE

While we maintain our undervalued rating on Grey Wolf, that will cease to exist very quickly as the stock stops trading.  The ratios look good, but that only further demonstrates how externalities must be taken into consideration.  PDS also gets an undervalued rating at the moment, but with our patented “sticky note of death” attached.  So proceed with great caution.

Anadarko Petroleum (APC), an independent oil and gas exploration and production company, announced after the close yesterday its intention to buy back $5 billion of its stock. The buyback is substantial as it represents about 18% of the outstanding shares. Also included in the announcement, Anadarko will raise its capital spending next year. A share buyback is one of the main ways for management to show confidence in a company’s direction, which is great news for shareholders—not only because the stock is up more than 6% on the announcement—but also because the company has undergone an extensive restructuring over the last few years. This restructuring included the acquisitions of Kerr-McGee and Western Gas Reserves for a combined $23.3 billion in 2006; this and other management decisions now appear to be paying off. Clearly, as this move suggests, APC management still believes that the company’s best days are ahead of it.

Since Anadarko’s stock price peaked in mid-June above $80, the stock has essentially followed the price of oil and is off more than 20%. Even though oil and gas prices have fallen, they are still high from a historical standpoint and the company has taken advantage of the price spike. Anadarko was able to greatly reduce the debt it incurred making the above-referenced acquisitions. Its debt-to-capital ratio was as high as 67% immediately after the acquisitions, but thanks to historically high commodities prices, Anadarko’s CEO expects to whittle the company’s debt-to-capital number down to between 25% and 35% in short order. Management executed these moves at an opportune time right before oil and gas prices started to skyrocket and thus APC was able to buy both companies at a price that—while expensive— would now be considered a very good value.

Ockham Research has APC rated a Hold at this time and you will note in the chart we just downgraded it from a Buy on 8/16/08. Prior to the announcement, the company had a price-to-sales ratio of 1.99, which is on the low end of its historical range of 1.8 to 2.85 times sales. Similarly, price-to-cash flow is currently 17% below the average level. This buyback will raise earnings per share and other fundamentals will continue to improve as APC reduces its debt. The increase in capital spending could also yield good results if the company can ramp up exploration, since oil and gas prices are likely to remain high compared to what was the norm just a few years ago. The company has begun to shift its focus domestically to natural gas and liquefied natural gas possibly to offset the uncertainty that surrounds drilling for oil in potential geopolitical hotspots. For example, Anadarko has significant exposure to oil drilling in OPEC member Algeria. We see the share buyback and increase in capital spending as a justifiable course of action for the company at this time, and it is entirely possible that we will upgrade the company to a buy in the future.