MRC: Despite Sector Challenges, Delivering Sequential Revenue & Cash Flow

MRC Global (MRC) 2Q24 Financial Results, Analysis & Outlook

2Q24 Recap

MRC’s 2Q24 financial results underscore the company's resilience and operational effectiveness amidst a challenging market environment. Net income post Minority Interest reached $24MM, or $0.28 per diluted share, representing a 32% YoY increase from $18MM, or $0.21 per diluted share, in 2Q23. This growth reflects MRC’s ability to drive profitability despite softer market conditions in the oil and gas, and gas utilities sectors.

Sales for the quarter came in at $832MM, representing a 4% YoY decline, though a 3% sequential improvement from 1Q24. Of particular note, adjusted gross profit, which excludes certain items such as the impact of LIFO inventory accounting, reached $184MM, or 22% of Revenue, which serves as a new company record, demonstrating operational efficiencies gains through the first half of 2024.

As a byproduct of MRC’s operational efficiencies for the quarter was its robust cash flow generation. The company reported $63MM in cash flow from operations for 2Q and $101MM for 1H24, positioning it well to meet or exceed its FY24 target of $200MM. The strong cash flow enabled MRC to repay its Term Loan B and reduce net debt to an all-time low of $103MM, achieving a net debt leverage ratio of 0.4x. This deleveraging significantly enhances MRC’s financial flexibility, setting the stage for potential future capital allocation opportunities.

Segment performance was mixed, with the Downstream, Industrial, and Energy Transition (DIET) sector showing resilience, growing 9% YoY due to increased project activity in mining, refining and chemicals. However, the Gas Utilities, Production and Transmission Infrastructure (PTI) sectors experienced declines, reflecting softer sector spending.

MRC’s adjusted EBITDA was $65MM, or 8% of Revenue, up from $63MM, or 7% of Revenue in 2Q23. The distributor’s SG&A expenses also delivered quarterly improvements, declining to $126MM from $130MM in 2Q23, which further reinforces MRC’s operational efficiency gains on a YoY basis.

Crude Calcs and Forecasts

As previously highlighted in my initial revenue assessment (link), MRC’s forecasted revenue versus historical results is less tightly bound to my national-level upstream capital forecast due to the distributor’s sales focus towards downstream and gas utility activity. Additionally, major project activity, particularly amongst its more prominent global clients such as ExxonMobil (XOM) (link) would also impact my forecasted revenue methodology due to the peaks and valleys of project-specific procurement. Yet despite these drivers for forecasted variance, my revenue forecast maintains a strong correlation (R-squared = 0.88) and remains directionally intact when compared to DNOW, Inc.’s (DNOW) quarterly forecast for 3Q and 4Q24 (link). In turn, my 3Q24 forecasted revenue estimate for MRC’s US-based segment totals ~$665MM, a -2% sequential decline from 2Q24, before rebounding to the ~$675MM mark for 4Q24. This quarterly revenue decline outlook is primarily driven by the continued erosion in natural gas prices, particularly in the Permian where Waha regional gas pricing is trends towards even steeper differentials than previously seen in 2Q. While this upstream decline in expected, gas-weighted D&C activity could potentially be offset by MRC’s downstream market share I expect 3Q24 to experience further pullback in D&C activity with natural gas-related completions deferred to year-end or early 2025.

For revenue spend by product segment, I anticipate MRC’s total 2H24 revenue to reach ~$1.6B, with valves accounting for upwards of 35% of total revenue and Pipe, Valves, Fittings & Flanges (PVF) collectively representing over two-thirds of total revenue. By comparison, DNOW’s PVF segment spend for FY24 is estimated to account for ~56% of its estimated revenue of ~$2.5B.

MRC Actuals & Forecasted Financial Statement Model Estimates

Companies Mentioned

• ExxonMobil (XOM)

• MRC Global (MRC)

• DNOW, Inc. (DNOW)

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