[This article is the first of a two-part series focusing on the construction industry. Part Two, “How to Position Your Construction Company for a Successful Sale,” can be found here.]
The construction industry is comprised of an array of diverse sectors, and construction companies vary widely in their marketability and valuation. As a group, however, it’s no surprise that valuations declined across the industry during the economic downturn of 2008-2010, due to the companies’ inability to retain healthy margins and generate cash. As the economy begins to turn around, some sectors will continue to struggle, while others are positioned for solid growth.
General Building and Heavy Civil
For example, in 2011 the General Building and Heavy Civil sectors experienced a sluggish-to-stagnant growth rate of just .25%. This dismal business environment was caused by a lack of credit available for project financing, thus creating a cutthroat environment as companies competed for scarce projects. A majority of firms in this sector suffered severe devaluation, sparking some consolidation amongst the larger construction companies that had strong financial backing or surplus cash.
Oil and Gas
On the other end of the spectrum, in 2011 the domestic Oil and Gas related sectors of the construction industry experienced remarkable growth, caused by the escalating demand for natural resources. Companies specializing in transmission pipelines, right of way excavation, gathering and processing facilities, drilling sites, distribution facilities, and LNG export terminals increased in both valuation and acquisition activity. According to the IBISWorld Oil & Gas Pipeline Construction Market Research Report, the oil and gas sector grew at 14.4% in 2011 and is projected to reach 15.8% by the end of 2012, with a steady 5% growth rate through 2017. Judging by the amount of backlogged work and projects underway, many industry experts believe this could be a record-breaking era for oil and gas construction.
The key factor contributing to this positive outlook is the adoption of new and unconventional oil and gas recovery methods such as hydraulic fracturing. These new methods allow for the exploration and production of oil, gas and liquefied natural gas within certain formations in remote areas of the United States: the Bakken shale in North Dakota, the Niobara and Denver Basin in North East Colorado and South East Wyoming, and the Marcellus shale in Pennsylvania. There is a great deal of demand for new infrastructure to support the greatly increased amounts of oil and natural gas they are now producing.
The construction industry as a whole has always been cyclical, and it is no surprise that the recent economic instability hit construction companies harder than most. However, sectors like oil and gas are still positioned to be successful over the next few years.
This post was written by our construction industry tag-team of Dan Flick and Jeff Flick.