| MS report this morning:
Oilfield Distributors: We Prefer EDG Over MRC
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Initiating coverage of oilfield distributors EDG (Overweight, 100% upside) and MRC (Underweight, 35% upside). We like EDG's more pronounced exposure to shale and offshore secular trends. However, EDG may see near-term volatility due to high leverage and our expectation for a soft 2Q.
EDG is exposed to the most promising trends. We favor EDG's more specialized approach, focusing on just 14k SKUs vs. 150k offered by MRC. About 25% of EDG's sales comes from int'l upstream offshore projects, driven by demand for drilling and new jackup rigs amidst a seasoned fleet with an average age of 30 years. Another ~60% of EDG's sales comes from US upstream and midstream end-markets, of which 85% is related to shales. This compares to MRC which derives just 50% of its US upstream and midstream from shales, with minimal offshore exposure.
EDG offers more favorable risk-reward, with 100% upside to our price target vs. 35% for MRC. While there are no direct comps to EDG and MRC, we used industrial distributors with similar margin profiles and cyclicality, which have historically traded at an average multiple of 7.5x 12-mo forward EBITDA. We value MRC at $27 (30% upside) by applying a multiple of 7x, a modest discount due to MRC's higher debt profile. We value EDG at $15 (100% upside) by applying a multiple of 6.2x to account for even higher leverage and greater exposure to more cyclical project work.
Potential for near-term volatility: Since EDG's EV is over 2.5x its market cap, a small move in EBITDA or the multiple could largely swing its equity value. High debt levels coupled with macro uncertainty and a soft Q2 could cause the stock to go down before it goes up. We have explored the bear-case by assuming a trough EV/sales multiple of 0.35x for EDG and 0.4x for MRC. This leaves 33% downside for EDG and 40% downside for MRC in the case of a macro meltdown.
Download the complete report (35 pgs)
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