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Baron Funds Comments on MRC Global

February 06, 2013 | About:

During the quarter, the Fund initiated a position in MRC Global, Inc. (MRC) With approximately $6 billion in sales, MRC Global is the largest distributor of pipes, valves and fittings (PVF) to the energy end market. Though the company became public earlier in 2012, its predecessor businesses date back nearly a century. Based in Houston, MRC carries a broad portfolio of highly technical and mission-critical products found on a variety of energy infrastructure assets, ranging from pipelines to refineries to drilling rigs. The company's blue chip customer base includes Conoco, Exxon Mobil, BP and Royal Dutch Shell. These customers rely on value-added distributors like MRC to help them save costs, cut working capital and streamline their supply chains. In particular, MRC's 'one-stop-shop' approach allows global energy players the ability to consolidate their vendors and rely on one global supplier for all their PVF needs.

MRC has good visibility into its revenue stream, a factor that we find attractive. The majority of products MRC distributes are tied to maintenance and repair contracts, in which regular wear and tear at customer facilities generates recurring revenue. Customer renewal rates on these contracts run in excess of 90%. The company operates 400 facilities, including 200 service centers, 22 valve shops and 180 pipe yards that are strategically located near major shale and refining regions across the globe. We are optimistic about the company's growth prospects for several reasons, including strong end market demand driven by promising new shale discoveries, unconventional drilling techniques, and the need to upgrade aging energy transmission infrastructure. Furthermore, MRC's business is well-diversified across the three key segments of the energy market: upstream, midstream and downstream.

In addition to posting double-digit organic growth during the last three years, MRC has also done a fine job acquiring smaller PVF distributors and gaining operational efficiencies. We envision ongoing acquisitions, particularly overseas where margins are higher and competition more fragmented. International revenues represent just 20% of the business today, whereas an estimated 75% of total global energy spending occurs outside North America.

Finally, we believe that MRC possesses a high quality management team. CEO Andrew Lane has a long track record in the energy sector, serving most recently as the COO of Halliburton until 2008, when he joined MRC prior to its IPO, citing its compelling growth prospects and market share opportunities.

From Baron Funds' fourth quarter letter.


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