June 19, 2012 - 11:12pm EST by
2012 2013
Price: 8.65 EPS $1.00 $1.75
Shares Out. (in M): 45 P/E 8.7x 5.0x
Market Cap (in $M): 370 P/FCF nm nm
Net Debt (in $M): 540 EBIT 129 159
TEV (in $M): 910 TEV/EBIT 7.9x 5.8x

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  • Oil Services
  • Distributor
  • Discount to Peers
  • Fragmented market


EDgen (EDG) is a distributor to the oil and gas industry. The company distributes pipes, plates, valves and other components (14k sku in total) to E&P companies as well as pipeline and energy infrastructure operations.  EDG is the result of a rollup of 10 distributors over the past decade. Today the company has 35 locations and is one of the largest players in the highly fragmented drilling equipment distribution business.  EDG can be considered a busted IPO, as the company was orgininally priced at 14/16 per share, came public at 11 and currently trades at 8.7 per share.
EDG's business is 75% project based and 25% maintenance. Project work can generally be thought of as new drilling sites/well and original construction of infrastructure like pipelines.  Project work is more cyclical than maintenance, but it offers the potential for outsized growth and requires less investment in working capital.  75% of the company's sales are in North Amercia and the remaining 25% is split between asia pacific and middle east.
EDG is attractive for 3 reasons: 1) potential for growth, 2) potential for margin expansion and 3) cheap valuation.
EDG should be expected to grow based on two drivers 1) organic growth in the oil exploration business and 2) acquistions. 
Exposure to projects (75% of revenue, think drilling) is attractive becasue the oil/gas industry faces increasingly difficult sources of hydrocarbons which increase drilling complexity and lead to an increased use of pipes,plates and valves per well. In addition, equipment is subject to greater wear and tear in deep water and fracking operations. COmplexity and drilling environment should lead to mid single digits growth in demand for parts distributed by EDG. One should keep in mind that the industry is cyclical (driven by number of wells, which is driven by price of oil/gas) - but undrlying demand should grow per well/rig in operation. 
EDG will continue to make acquisitions - which net of synergies can be completed at 4-5x EBITDA and overtime should lead to a stronger market postion and leverage fixed operating exp.
EDG's operating margin is currently around 5% - over the past 6 years, the margin has ranged from 5-15% -- at some point, EDG will experience a margin improvement (likely driven by weakness in steel prices), which will provide a tailwind for earnings.
EDG trades at 5.5x EBITDA and 9x earnings - a 20% discount to the closest competitor (MRC).  EDG also trades at a 20% discount to steel distributors (MUSA and RS) and a 40% discount to industrial distributors (ARG, WSO, HWCC, AIT).
EDG has the potential to more than double if the company moves back to average margins achieved over the past 6 years and trades inline with other distributors.


Jefferies 2ndary, market awareness
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