... Business Diversity Helps Primoris Overcome Downturn

Business Diversity Helps Primoris Overcome Downturn

A Balanced Builder

The huge drop in oil prices since the summer of 2014 has led to several pipeline projects being delayed or canceled and to an increase in layoffs, corporate mergers and bankruptcies. However, Primoris Services Corp. (PSC) has bucked that industry trend. The company’s diverse business plan led to record revenues of $2.08 billion in 2014 — the first time the company exceeded the $2 billion mark — and only a slight decline in 2015 with earnings of more than
$1.9 billion.

PSC was formed in 2004 as the parent company of nine entities related to infrastructure construction, engineering and maintenance. Those related to the oil and gas pipeline and distribution space include ARB Inc., Primoris Energy Services, Q3 Contracting and Rockford Corp. PSC is also involved with power generation, chemical facilities, civil and transportation infrastructure, as well as water and wastewater.

The gas distribution, midstream and utility (which includes water and sewer) pipeline construction markets represent between 45 and 55 percent of Primoris’ overall business.

Headquartered in Dallas, the company performs work throughout North America and has corporate offices in 15 states and in Alberta, Canada. Depending on when various construction projects begin and end, Primoris employs between 8,000 and 10,000 people.

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Scott Summers

During his 20 years with the company, ARB president Scott Summers says the biggest challenges to the pipeline industry have been the increase in regulatory oversight, environmental compliance and operator qualifications.

As low oil prices have led to a slowdown in crude pipeline projects, gas midstream and distribution projects have accounted for the bulk of Primoris’ pipeline business, according to Scott Summers, president of ARB, Underground group — West Construction Services.

“Currently, less than 3 percent of the Primoris pipeline work is oil related,” Summers says. “The low oil prices have not had a material effect on our pipeline work for gas companies. While some midstream projects have been delayed, Primoris has focused on midstream projects serving gas companies. These projects have been less influenced by the change in commodity pricing.”

Summers has served as co-president of ARB since February 2006. From 1996 through February 2006, he served as senior vice president of ARB. Currently, Summers is responsible for the day-to-day operations of the Underground group. Additionally, he oversees international operations. In the past, he has also served as president of the Pipe Line Contractors Association (PLCA) in 2001 and the International Pipeline and Offshore Contractors Association (IPLOCA) in 2004.

During his 20 years with the company, Summers says the biggest challenges to the pipeline industry have been the increase in regulatory oversight, environmental compliance and operator qualifications. Despite these challenges, Primoris has continued to grow during his tenure.
Although the industry continues to be sluggish, Primoris has announced a number of oil and gas pipeline and distribution projects so far this year. The distribution sector has been forecasted to be strong in 2016, and that trend holds true for Primoris, according to Jay Osborn, president of Primoris Distribution, West Construction Services.

Jay Osborn

With more than 35 years’s experience in the industry, Primoris Distribution president Jay Osborn says governmental regulations are driving Primoris’ distribution business, focused on replacing aging cast iron and bare steel pipes.

“The first quarter is always seasonally soft for our distribution work, and 2016 was no different,” Osborn says. “The markets have since picked up, and I think it will end up being a strong year on the distribution side with the continued focus on pipeline integrity that is driving the replacement of the old infrastructure. New business has ramped up, but it is still below what we experienced in the past.”

Summers adds that he sees improvement on the pipeline side coming later this year.

“Given the anticipated start dates for our large midstream projects,” he says, “my sense is that the pipeline construction market will remain quiet in the first half of 2016 and will pick up in the last two quarters of 2016, resulting in a decent year for our pipeline crews.”

Governmental oversight has been a major factor in the increased distribution work, Osborn says. The regulatory environment has played a large role in driving the replacement of the aging infrastructure. The focus on safety and integrity of the pipelines buried in city rights of way has led to gas companies increasing budgets to emphasize replacing old cast iron and bare steel lines.
Osborn became president of Primoris Distribution in 2015. Before that, he was president of the wholly owned subsidiary Q3 Contracting, which Primoris acquired in 2012. He had been the president of Q3 since 1999. Osborn has more than 37 years of experience in the utility industry, with experience managing many large and complicated rebuild and replacement projects for the major metro-area utility companies.

“With the age of the existing infrastructure I think it would very hard for the gas companies to slow the replacement programs down on the bare steel and cast iron, but they may have more flexibility when it comes to the pre-1970 plastics if they needed to slow the replacement down,” Osborn says. “I believe that the lack of cast iron and bare steel replacement in the past has caught up with the utilities and they are now more proactive on replacing any potentially bad pipe whether it be coated steel or plastic pipe.”

By diversifying its business, Primoris has built a strong foundation of serving multiple infrastructure markets to avoid being dependent on just one area. This balanced approach has led to the company posting revenues of near or above $2 billion the last three years, and the future continues to look bright.

Successful Foundation

Although Primoris was formed in 2004, it grew out of ARB Inc., which was founded in 1960. Starting in the 1980s, ARB grew rapidly and began acquiring a variety of construction firms. At the time, the company earned about $15 million in annual revenue. Under the leadership of Brian Pratt, who became president in 1983, the company has grown exponentially and Primoris now ranks among the Fortune 1000.

Primoris became a publicly traded entity in 2008 and shortly thereafter acquired two more companies related to oil and gas pipeline and distribution construction: Rockford in 2010 for $82.6 million and then the aforementioned Q3 in 2012 for $48.1 million.

Pratt stepped down as president and CEO in August 2015 but remains chairman of the board and senior strategic advisor of Primoris. David King was promoted to president and CEO from his former role as chief operating officer. King’s former role was filled by the hiring of 30-year industry veteran Thomas McCormick in April.

Despite a downturn in the oil and gas pipeline sector during the last two years, the company maintained revenues of around $2 billion. In a Feb. 25 company statement regarding its 2015 earnings, King praised the company’s ability to “weather the storm” as oil prices plummeted and led to project delays in the pipeline sector.

“We have finished a year during which the headline news seemed to foretell doom for part of our industry,” says King in the statement. “I am pleased that Primoris is proving that our strategic business model, with a focus on diverse end markets, can weather the storm. We remained profitable in each quarter, and we ended the year in a strong financial position.”

King added that he sees “multiple avenues of growth for Primoris in 2016,” including the pipeline sector.

“We remain confident of a mid-year start to projects in the large diameter pipeline market, kicking off a multi-year expansion cycle delivering natural gas to utility customers along the East Coast,” King says. “The industrial, power, LNG and heavy civil markets all have opportunities for organic growth in the year.”

Rebounding Market

During the first quarter of this year, Primoris has secured contracts to several pipeline and distribution projects valuing more than $220 million.

The company announced Feb. 4 three underground projects with a combined value of more than $20 million. The contracts were secured by Primoris Energy Services’ Primoris Pipeline, part of the Energy segment. The projects include the replacement of approximately 5 miles of 32- and 36-in. petroleum products pipeline in central Virginia, as well as the installation of a 2.7-mile, 36-in. pipeline to connect an existing crude oil line to a tank farm near Port Arthur, Texas.

Primoris expects the projects to be completed by end of the third quarter this year.

Primoris then announced Feb. 16 an underground project valued at approximately $18 million. The contract was also secured by Primoris Pipeline and involves the installation of 82 miles of 12-in. liquid natural gas (LNG) pipeline and one pump station in West Texas. The project is expected to be completed by the third quarter this year.

Finally, the company announced March 10 two new pipeline construction projects with a combined value of more than $185 million. The contracts were secured by Rockford Corp., part of the West Construction Services segment. The first award is for a new 79-mile, 36-in. diameter natural gas pipeline located in central Florida for a midstream customer to transport natural gas for power generation needs. The scope of work includes 42 road bores, five directional drills and six mainline test sections. Construction is expected to be completed in the first quarter 2017. The second award is for a new 3.7-mile, 24-in. natural gas pipeline to a power plant in southern Pennsylvania for an independent power producer to give an existing coal-fired plant the option to burn natural gas. Construction is expected to be completed this summer.

With these projects already announced and a strong first quarter, 2016 is already looking strong for Primoris. On May 5, the company reported first quarter earnings of more than $430 million, a 9.6 percent increase over revenues reported for the first quarter 2015. King says the growth stemmed from the company’s industrial work in the Gulf Coast and the increased revenues stemming from service agreements with its utility customers. He added that Primoris was “preparing for summer start dates for two large pipeline projects, which will kick off an extremely robust pipeline season.”

While the oil and gas pipeline segment appears like it will be stronger this year, Summers stresses that Primoris’ balanced approach to the infrastructure construction business means that the company will not be reliant on just one market area.

“As a diversified company involved in many end markets, not just pipeline, Primoris is purposely built to avoid dependence on any individual end market,” Summers says. “While the timing on the 2015 decline in revenue and subsequent 2016 first quarter rebound appears to show a direct link between oil prices and Primoris revenue, there were other factors at play, such historic floods in Texas and project timing due to delayed permits.”

Leading the Charge

With more than half a century’s worth of experience in the oil and gas pipeline and distribution business, Primoris views itself as a pioneer in the industry. The company has worked to set a positive example in the industry by meeting such challenges as improving safety performance every year, developing skilled construction labor, mentoring construction supervision and management, and working with industry associations to standardize regulatory requirements such as operator qualification (OQ) training and reporting.

“The main practice within Primoris to become a leader and innovator in the industry is the development of our safety culture,” Summers says. “In advance of regulatory requirements, we update and upgrade our equipment fleet to meet new standards prior to enactment. Primoris companies continue to be active in industry associations to stay well-informed on current industry developments. We also continue to add company services to diversify and soften the blows that come with the fluctuations of the industry. Organic growth creates an opportunity for those who put forth an effort to succeed.”

Bradley Kramer is managing editor of North American Oil & Gas Pipelines. Contact him at bkramer@benjaminmedia.com.

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