Noel Watson, chairman and chief executive of Jacobs Engineering Group Inc., is not one for hyperbole, but he couldn’t help himself in describing the Pasadena-based company’s energy customers.
“This market is extremely strong right now,” he told analysts during a recent conference call. “The clients that we serve in this market are making more money than they have in a couple of decades, and it looks like it’s going to continue. This is fueling a really strong spending plan.”
Jacobs, which received almost a third of its $4.6 billion in revenues last year from energy-related work, is getting new contracts nearly every week, some of them worth billions of dollars, as world oil production stretches to meet rising demand. Contract backlog was $8.2 billion as of March 31, up 13 percent from $7.2 billion one year earlier.
That helps explain why Wall Street seems unconcerned about ho-hum second-quarter earnings that barely budged from the like period a year earlier. “There’s a worldwide challenge for meeting the world energy supply,” said Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University in Dallas. “So if (Jacobs) works on building or modifying refineries, there’s future business for them.”
Jacobs can count on those big-budget contracts not only because there are only so many companies that can build refineries and water treatment plants, but because of the focus on long-term relationships up to 80 percent of the business, according to Watson. “We develop an envelope of trust with the clients so they keep coming back,” he said.
Not in Iraq
Despite the occasional legal embarrassment such as two mid-level executives pleading guilty last year to making false statements to prosecutors in connection with a bid-rigging probe Fortune magazine recently named Jacobs one of America’s most admired corporations.
Certainly, it’s among the most careful. Jacobs has a strategy of avoiding competitive bidding for project-based contracts, which means it has missed out on the bonanza in Afghanistan and Iraq, where the U.S. to date has doled out contracts worth $48.7 billion to 150 companies, according to the Center for Public Integrity.
It also means that Jacobs has avoided some of the security nightmares that hit contractors like Kellog Brown & Root. The Halliburton Co. subsidiary has gotten defense contracts in Iraq and Afghanistan exceeding $11 billion, but it had dozens of workers killed in Iraq, and also faces delays and cost overruns related to the violence.
Jacobs Engineering was founded by Brooklyn-born Joseph Jacobs, the youngest of seven children whose family had made a fortune in the early 1900s selling straight razors. Then came the invention of the safety razor and so went the fortune. Jacobs was forced to take odd jobs to finance his degree in chemical engineering from the Polytechnic Institute of Brooklyn.
He moved to California, where he became a chemical engineering consultant and a representative of process equipment. The company got into design and construction work in 1960 when it got its first major contract building a flotation plant for potash, a salt used as fertilizer.
Its first large overseas project, a major chemical plant in Ireland, came after Jacobs’ 1974 merger with Houston-based Pace Co., a petrochemical engineering firm. (Jacobs was chairman until his death last October at the age of 88.)
These days, Jacobs is more likely to profit from increased domestic spending on cleaner fuels, new fuel sources and expanded refining capacity.
One encouraging area: Canada, where the company is working to extract oil out of sponge-like layers of sediment. The process is so expensive that it isn’t feasible unless oil is at $50 a barrel or more.
“The oil stands are going to be a very promising area as long as oil prices stay where they are,” Jacobs President Craig Martin said in a January conference call. “We have a growing business in a market that has lots and lots and lots of activity.”
And this time around, oil prices aren’t expected to fall, said Jerry Holloway, a spokesman for Aliso Viejo-based competitor Fluor Corp., which also has oil-sands contracts in Canada. “There’s nothing that people see on the immediate horizon that’s going to change those basic drivers of energy demand.”
Stricter government emissions standards also mean more work removing sulfur from crude oil. “It means more oil sources can be suitable for our refineries, the ones that run sour (high-sulfur) crude,” Baxter said.
What analysts especially like is the geographic diversity. Watson says that Jacobs could be the largest American contractor in Western Europe. (Among current projects are a hospital renovation in Marseille and an expansion of Pfizer’s Irish production plant.) Around a third of the revenues last year came outside the United States and that number should top 40 percent this year. India is another stronghold.
Value Line analyst Perry Roth, who expects market conditions for engineering and construction services in the United States to be difficult, still expects Jacobs’ bottom line to increase 10-12 percent in 2005 about what the stock is up so far this year.
