Monica Broughton - Head, IR Andrew Lane - President, CEO James Braun - CEO and EVP.

Sean Meakim - JP Morgan David Manthey - Baird Will Steinwart - Stephens Walter Liptak - Seaport Global.

Greetings and welcome to MRC Global's Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Monica Broughton, Investor Relations. Thank you. You may begin..

Thank you, and good morning, everyone. Welcome to the MRC Global fourth quarter and year-end 2016 earnings conference call and webcast. We appreciate you joining us. On the call today, we have Andrew Lane, President and CEO; and Jim Braun, Executive Vice President and CFO.

There will be a replay of today's call available by webcast on our website, mrcglobal.com, as well as by phone until March 03, 2017. The dial-in information is in yesterday's release. We expect to file our 2016 annual report on Form 10-K later today and it will also be available on our website.

Please note that the information reported on this call speaks only as of today, February 17 2017, and therefore, you are advised that information may no longer be accurate as of the time of replay. In our remarks today, we will discuss adjusted gross profit percentage, adjusted EBITDA, and adjusted EBITDA margins.

You are encouraged to read our earnings release and securities filings to learn more about our use of these non-GAAP measures and to see a reconciliation of these measures to the related GAAP items.

In addition, the comments made by the management of MRC Global during this call may contain forward-looking statements within the meaning of the United States Federal Securities Laws.

These forward-looking statements reflect the current views of the management of MRC Global; however, MRC Global's actual results could differ materially from those expressed today. You are encouraged to read the Company's SEC filings for a more in-depth review of the risk factors concerning these forward-looking statements.

And now, I would like to turn the call over to our CEO, Mr. Andrew Lane..

Thank you, Monica. Good morning and thank you for joining us today and for your interest in MRC Global. This past Wednesday February 15, marked MRC Global’s 96th anniversary. While we’ve been a public company for almost five years, we have been continuously operating and serving our customers with innovative solutions for nearly a century.

This is a testament to the dedication and hard work of our current and former employees over the years. Today, I will review company performance, highlights, and then I’ll turn the call over to our CFO, Jim Braun for more a detailed review of the financial results. I’ll then finish with our current outlook.

In February of last year, we thought 2016 revenue would be down 25% to 30% from 2015. Excluding those CTG revenue and we landed at about the midpoint ending 2016 with $3.04 billion in annual revenue. We believe this marks the end of one of the worst downturns in oil and gas history.

For the four quarter we reported revenue of $719 million, down 9% sequentially in line with historical end of the year performance with November and December seeing both traditional seasonal activity declines and spending curtailments.

Compared to the same quarter a year ago, revenue was down 26%, driven by reduced customer spending across all segments and sectors, upstream declined the most at 41%, downstream by 17% and midstream by 15%. The decline in upstream includes the impact of selling those CTG which otherwise would have been a 29% decline.

Adjusted gross profit for the fourth quarter 2016 was $133 million or 18.5% of revenue, as compared to $172 million and 17.7% for the same period in 2015.

Some of this increase can be attributed to product mix as we sold the OCTG line in early 2016 and focused on higher margin products, Net loss attributable to common shareholders for the fourth quarter of 2016 was $24 million or $0.25 per diluted share.

Including after tax severance and restructuring charges of $7 million or $0.07 per diluted share as compared to net loss attributable to common shareholders of $399 million or $3.92 per diluted share for the same period last year, which included an after-tax charge for impairment of goodwill and intangible assets, and other items of $411 million or $4.04 per diluted share.

We continue to generate cash in the fourth quarter providing additional $23 million of cash from operations for a total of $253 million for the year. While we plan to generate modest operating cash in 2017, we expect to shift our resources to growth, investing more in working capital to support this growth.

Last quarter, the board authorized and increased the share repurchase program to $125 million and we continue to buy under that program. In the fourth quarter, we repurchased $7 million of stock at an average price of $15.94 per share.

Since the program was authorized, the company has purchased $107 million under the plan at an average price of $13.98 per share. The current authorization is scheduled to expire at the end of 2017. Even though the market conditions have been weak, we believe there are opportunities to position for maximum growth by capturing market share.

This has been a major focus of our strategy. Chevron awarded us their MRO on project work in Thailand, which is another scope addition from one of our major customers.

In downstream, LyondellBasell, one of the largest chemical companies in the world awarded us an extension to our PFF, MRO agreement for an additional three years adding stainless and alloy product to the scope.

LyondellBasell has two very large projects planned, one of which we have begun to see orders and the other is in early stages, and we are well-positioned to participate. Also in downstream, we were awarded additional scope in our agreement with PVF, an independent refiner, adding their two new refinery acquisition into our agreement.

These are all great examples of how MRC Global is positioned to grow by gaining market share with new and existing customers. While this hasn’t been obvious in our results during the last two years of market contraction, we expected to see it as our customers begin increased spending again.

In addition to the large contract and project wins with major customers in 2016, we continue to focus on smaller targeted growth accounts that include the hundreds of regional fabricators in North America. Small capital projects through fabricators have been an important part of our North American business for many years.

Our end customers have a strong preference for regional fabricators that they have worked with for many years. We have valve and fitting sales to approximately 300 fabricators in Canada and the United States.

To put this in context, in 2016 we had PVF sales to fabricators in North America of over $300 million or approximately 13% of our North American sales. We are one of the largest PVF distributors to fabricators in the United States and our strategy continues to be neutral PVF supplier to the North American fabricator market.

We also continue to focus on new and expanded integrated supply arrangements across all three of our up, mid, and down sectors. Our growth in this area has been the greatest in the midstream, and we expect integrated supply revenue to be over $700 million in 2017.

This quarter, our SG&A cost were $120 million, excluding severance and restructuring charges, which is the lowest it has been since 2011 when the company was still privately held. While reducing cost is never easy, it was necessary and we responded to the market conditions quickly. In the fourth quarter we reduced headcount by about 40 positions.

However, in 2017 we expect to increase headcount modestly as the business grows. Since the middle of 2014, we have reduced headcount by approximately 1,500 or 30% of our workforce. We have continuously implemented cost-cutting measures since 2014 to improve profitability, and the side of the business to the current environment.

Since the middle of 2014, we have or consolidated 74% or 31% of our branch locations. While we continually review branch performance and open or close new facilities based on market conditions, in only across the business we expect to grow from our current branch and distributor center foundation as we enter a new phase of the cycle.

We aggressively manage working capital last year since the end of 2014 we have generated over $550 million of cash from the reduction of inventory.

However, we plan to increase inventory in 2017, while maintaining efficiency as measured by inventory turns and working capital as a percentage of revenue, which we expect to remain at our current best in class level.

We are among the most efficient managers of the working capital in the PVF space and we intend to remain the leader In 2016, we reduced total debt to $414 million or net debt to $305 million. This is the lowest debt level for the company since 2007. We have availability under our ABL of $425 million, which will grow as the business does.

We have no financial maintenance covenants. No near-term maturities and an average interest cost of 5%. We have a strong balance sheet with the capacity to grow organically as well as through acquisitions.

While we have been quiet on the acquisition front over the last two years, acquisition growth remains one of the major tenants in our long term strategy and we maintain an active list of potential targets. We expect opportunities in the future and we are positioned with very strong liquidity to execute when those opportunities present themselves.

We are focused on the strategy to increase market share growth through organic growth and the underlying market and through acquisitions. We will continue to be diligent in managing our working capital and cost to maintain the gains we achieved in the downturn as we begin growing.

You should expect to see us focus on high margin product offerings both in organic and acquisition growth. That includes growing our valve, automation, measurement, and instrumentation product offerings with a particular focus on downstream chemicals, which include stainless and higher alloy products.

We are on course to meet our strategic goal and have this product group be at least 40% of our total sales in 2017. I'll now turn the call over to Jim..

Thanks, Andrew, and good morning, everyone. Total sales for the fourth quarter 2016 were $719 million, which were 26% lower than the fourth quarter of last year, due to continued challenges in oil and gas end markets which has reduced customer spending across all geographies at all sectors.

Sequentially, revenues declined 9% due to a seasonal decline in activity. U.S. revenue was $550 million in the quarter, down 29% from the fourth quarter of last year. As activity across all sectors declined primarily due to lower drilling and completion and project activity. The U.S.

upstream sector declined the most at 36% excluding OCTG from the prior years. The U.S. downstream sector decreased by 24% and the U.S. midstream sector decreased by 15%. Of the product lines, line pipe in the US decreased the most at 40%, followed by valves at 26%. Sequentially U.S.

segment sales were down from the third quarter by 7% primarily due to a reduction in midstream sales followed by a decline in downstream. On a positive note, U.S. upstream sales experienced a sequential increase of 8%. This compares to a 23% sequential increase in the U.S. rig count as our U.S.

upstream sales will typically lag the rig count by a quarter or two. Canadian revenue was $55 million in the fourth quarter, down 17% from the fourth quarter of last year, in spite of a small Canadian rig count increase. A pullback of major customers projects and heavy oil to the decline.

Sequentially the Canadian segment was down 21% from the third quarter due to a decline in midstream sales as a result of large valve and line pipe orders in the third quarter that did not repeat in the fourth quarter. In the international segment, fourth quarter revenues were $114 million down 7% from a year ago.

Sales were down to lower upstream activity, partially offset by an increase in downstream activity. Regionally, the decline was in Australia, Singapore and Norway. Sequentially the international segment was down 14% from the third quarter primarily from declines in upstream. Turning to our results based on end market sector.

In the upstream sector, fourth quarter sales decreased 41% from the same quarter last year to $218 million from reduced customer spending in 2016 from 2015. Excluding OCTG from the 2015 sales, U.S. upstream sales were down 36% from a year ago. And market activity is measured by the U.S. rig count decreased 22% over the same time period.

Midstream sector sales were $268 million in the fourth quarter of 2016, a decrease of 15% from 2015. Among the sub sectors, sales to our gas utilities were lower by 22% and sales to our transmission and gathering customers decreased 7%.

Gas utility sales were down due primarily to the timing of customer project deliveries as we had large line pipe orders shipped in the fourth quarter of 2015 that did not repeat in 2016.

The decrease in the sales to transmission and gathering customers was due to continued weakness in gathering line work, direct line pipe sales and line pipe deflation.

The mix between our transmission and gathering customers and gas utility customers was weighed at 54% gas utilities and 46% for transmission and gathering for both the fourth quarter and the year. In the downstream sector fourth quarter 2016 revenues were $233 million, a decrease of 17% as compared to the fourth quarter of 2015.

The decline in downstream was in the U.S. and across all sub sectors. The rolling off of projects and refining chemicals contributed to the weakness in downstream. Now turning to margins. Gross profit percent decreased 110 basis points to 17% in the fourth quarter of 2016 from 18.1% in the fourth quarter of 2015.

The decrease was primarily due to the impact from LIFO. A LIFO benefit of $7 million was recorded in the fourth quarter of 2016 as compared to a benefit of $23 million in the fourth quarter of 2015. Excluding the impact of LIFO, gross profit percent increased 30 basis points to 16%.

The adjusted gross profit percentage which is gross profit plus depreciation and amortization, amortization of intangible and plus or minus the impact of LIFO inventory costing was 18.5% in the fourth quarter of 2016, up from 17.7% in the fourth quarter of 2015.

The increase in the adjusted gross profit percentage reflects the sale of our lower margin U.S. OCTG product line as well as mixed changes including lower line pipe sales and less project work. These items offset the negative impact from deflationary prices in line pipe and customer pricing pressures.

Specifically for line pipe, the product group where we tend to experience more pronounced changes in prices. Line high prices declined in 2016 hitting a bottom in October.

Based on the latest pipe logics, all items index, average line pipe spot prices in the fourth quarter of 2016 were lower than the fourth quarter of 2015 by 9% and were down 17% for the year. In 2017, we expect to experience pipe inflation as demand begins to pick up and mill capacity in some types and sizes has been reduced.

SG&A cost for the fourth quarter of 2016 were $128 million a decrease of $18 million or 12% from $146 million a year ago, due primarily to cost-cutting measures. Also included in the fourth quarter of 2016 and 2015 is severance and restructuring of $8 million and $5 million respectively.

We aggressively cut cost throughout the last two years, sizing the workforce and our brand structure to meet the market size.

In 2017, we SG&A expense will run about $125 million per quarter on average, however we expect the second and third quarter to run somewhat high above the average due to cost associated with the implementation of our new ERP system in Europe.

This average for the year is somewhat higher than the third and fourth quarter 2016 runrates, after excluding severance expense due to incentive accruals that begin the new year assuming your achievement or targets level of performance.

We expect measured cost increases throughout the year as we would expect to add modest headcount related to an increase in activity. Interest expense totaled $9 million in the fourth quarter of 2016, which was the same as the fourth quarter 2015.

We recorded a small tax expense of $1 million in the fourth quarter against a pretax loss, this is due primarily to our international operations, where we are generating pretax losses for which the recording of a tax benefit is not permitted. We expect the effective tax rate to be about 38% in 2017.

They start our budget budgeted geographic product profit mix, however, at relatively low pretax operating levels which we expect in 2017 the tax rate is subject to being volatile on a quarter-to-quarter basis and for the full year.

Our fourth quarter 2016 net loss attributable to common stockholders was $24 million or $0.25 per diluted share, compared to a loss of $399 million or $3.92 per diluted share in the fourth quarter of 2015.

The fourth quarter of 2016 net loss attributable to common stock shareholders include after-tax charges of $7 million related to severance and restructuring charges.

While 2015 includes after-tax charges related to the impairment of goodwill and other intangibles of $402 million, severance of $4 million, litigation of $2 million and a loss on the disposition of the OCTG product line of $3.2 million. Adjusted EBITDA in the fourth quarter was $17 million versus $34 million a year ago, down 50%.

Adjusted EBITDA margins for the quarter were 2.4% down from 3.5% a year ago, due to lower revenues as described above, partially offset by cost reduction measures. Our operations generated $23 million in the fourth quarter of 2016 and a total of $253 million for the year.

Our working capital at the end of 2016 was $684 million, 29% lower than it was at the end of 2015. We officially managed the balance sheet as our working capital excluding cash as a percentage of sales was 19% at the end of 2016.

We increased our inventory turns throughout the year to 4.2 times in the fourth quarter of 2016, up from 3.5 times in the fourth quarter of 2015. And finally, we made significant progress in closing the gap to three days between days sales outstanding at 51 days and days payable outstanding of 48 days.

Our debt outstanding at year end was $414 million, compared to $519 million at the end of 2015. While our leverage ratio based on net debt of $305 million increased to four times, this is expected to reverse as EBITDA grows in 2017. We are no financial maintenance governance in our debt structure and our nearest maturity is July 2019.

The availability on our ABL facility was $425 million at the end of the year, which gives us ample flexibility and it too will grow as working capital grows. At the end of the year, we had nothing drawn on the ABL and had a $109 million in cash. Capital expenditures were $33 million in 2016. This is a decrease of 15% over 2015.

We continue to implement a new SAP ERP system in our international segment, which has elevated capital expenditures from historical levels. The first phase of this implementation went live in mid 2016, and the next phase incorporating Europe is expected to go live in mid-2007.

Including regular capital spending needs and plans, the total capital budget for 2017 is expected to be approximately $32 million. And now I’ll turn it back to Andrew for closing comments..

Thanks Jim. Now let’s wrap up with our current outlook. After two years of severe market contraction, the macro oil and gas outlook has finally improved and customers are announcing they will spend more in 2017 from 2016, particularly in North America where some surveys have increases of around 20% in the U.S.

as oil prices have stabilized above $50 per barrel. The market is optimistic that the OPEC production cuts announced last November are underway.

While the independent and small E&P are generally expected to have higher percentage increases in plans spending than the integrated companies, the bulk of the spending is still concentrated among the IOCs, to which we are more highly levered.

We expect global E&P globally be spending to be up 5% and we expect activity and spending to be stronger in the second 2017 as the recovery continues. Also from an upstream perspective, about half the drill rigs added since the bottom of the cycle are concentrated in the Permian, so that is where the action will be and we are well-positioned there.

In 2015 and 2016, with a low commodity price environment, and significant curtailment of customer spending, the overall pipe, valves and fitting distribution market contracted approximately 50%. As we said on our last call, we position the company for growth of market share gains during this downturn.

Historically, we have estimated our share of the North American PVF distribution sales at 25% to 30%. We now estimate our share at 30% to 35% as many small PVF distributors have struggled significantly due to the downturn with a lack of access to capital, and we competed very well on adding scope and products to our MRO contracts.

As we discussed, we continue to perform at a high level with both PVF MRO contract renewals and extensions as well as new multiyear MRO contracts. We expect to continue to have some significant market share gains that we will announce in the first half of 2017.

So we feel very good about our current competitive position in the market as the macroeconomics improve. Giving that as a backdrop, we currently expect 2017 revenue to be higher across all sectors and segments. As compared to 2016, we expect total revenue to be 10% to 20% higher in 2017.

By sector, we expect upstream to be 15% to 25% higher, midstream 10% to 20% higher, and downstream to be 5% to 15% higher. Upstream benefits from improved commodity pricing, resulting in higher customer drilling and completion spending.

Midstream benefits from increases in upstream activity adding demand for gathering systems, line pipe inflation and growth with gas utilities and a more positive regulatory environment for oil and gas pipelines.

Downstream benefits from new project spend, market share gains with several new customers, as well as a better turnaround season this spring. This spring turnaround season is expected to be larger than normal contributing incremental $10million to $15 million in revenue which is incorporated in our annual outlook.

Last quarter we discussed the new supply relationship with Cameron, a Schlumberger company, to sell additional valve lines and their measurement and instrumentation products. We've been in the process of rolling out both product groups with good results.

So far, we have increased valve sales with the expanded valve offerings and sales from the measurement and instrumentation business. We expect these private groups to provide between $125 million and $150 million of revenue in 2017 which has been incorporated into our outlook. By segment, we expect the U.S.

and International to grow the most followed by Canada. In the U.S. we expect double-digit growth with increased rig count and spending levels, while International E&P spending generally is expected to be flat. Our visibility on customer projects contributes to an expected International increase of double-digits for our business.

Canada is expected to have a modest mid-single digit increase. Regarding tempo, we expect the pace of growth to be measured in the first half of 2017 and be weighted more towards the back half of the year, but expect that every quarter will have an increase over the prior year.

Of course, this is highly dependent on customer plans that can change quickly where projects can flip a quarter or more. Sequentially, we expect first quarter 2017 to be up high single-digits to low double digits from the fourth quarter of 2016.

While there is only one month we are encouraged as January results are up 12% sequentially from December, and up 6% over last January. We also expect adjusted gross margins in 2015 -- 2017 to average 18.5% with the first two quarters coming in below average.

Margin tailwinds will include the continued move to higher margin valves and instrumentation and general inflation, offset by the negative product mix dynamics of more line pipe and project work.

Our backlog was $749 million at the end of 2016 excluding OCTG from 2015 our backlog is up $249 million or 50% from a year ago, primarily due to increases in projects spend, of that increase 62% is from one midstream customer. Excluding that customer backlog is up 22% with the majority from International.

The backlog has continued to increase reaching $786 million as of the end of January 2017 indicative of growing activity levels. We are looking forward to returning to year of growth. MRC Global has successfully navigated through arguably the worst oil and gas downturn in recent memory.

We have come out stronger with a more streamlined organizational structure and footprint levered to all the right areas where growth is expected. We have managed our balance sheet efficiently and well poised to maintain those efficiencies while going in the upturn.

The results from our valuable market share gains and expanded product offerings are expected to become more apparent as we continue through the improving cycle.

MRC Global has maintained its position as the market leader through the downturn, and we intend to continue that tradition through the upturn with continued market share gains through new contracts in 2017. So with that, we will now take your questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Sean Meakim with JP Morgan. Please proceed with your question..

Hey, good morning..

Good morning, Sean..

Andy, I was just hoping to maybe drill in a little bit more on the guidance. You guys gave us a lot of detail. Obviously, I appreciate that.

Just thinking about those ranges you gave across the streams -- and I suppose for the geography as well, where do you see the most flex, I guess kind of both to the upside, and then points of concern as you think about how we could progress through the year?.

Yes, Sean. Let’s talk upstream first, because I think that’s the biggest variable and maybe where we need the most clarification on where we participate in that market. So if you look at the U.S. upstream end market, it contributes to our production when we play in when wells are completed.

So an increase in drilling rig count adds very little to our revenue at upfront. And we have no sales to the rigs themselves. We have no sale to drilling contractors. We have very little if any sales to service companies. So, a lot of drilling activity doesn't translate into upstream revenue for us.

And as we talked about it wells have to be completed, tied into a tank battery production facility for us to recognize the revenue. So drilling wells that increase -- drilled uncompleted count do not add any revenue to us. So our upstream revenue lags one to two quarters and this has been traditional historical recognition for us.

So, you’re going to see that lag. And increasing rig count as we’re seeing we’re now up to 760 rigs, very positive, looks like a trend towards 8 or 8.50 by the end of the year. So our revenues will pick up in the upstream as we lag that by a quarter to two when the wells are completed. So that’s a big part of our business.

So, we expected to be much stronger in the second half, and we were encouraged, we were up 8% in the U.S. upstream business in the fourth quarter sequentially, even though a lot of the drilled activity didn’t translate in the completion activity. Some did and we took advantage of that.

Our upstream business was down 3% but it all came from International slowdowns. So I would say, we expect the strong upstream business especially midyear and in the back half of the year.

I would say we are pretty confident that’s going to be a stable downstream market as we projected, as we said in the prepared remarks 10% to 15% we’re going to have a nice spring turnaround season above normal average, but I think that will be pretty consistent with what we guided to.

The upside will come from midstream and by regulatory environment changing dramatically in the last month. So, we’ve seen six new major pipelines approved just in February. So, I think two things there; the demand will be much stronger and projects going for now and also we seen the bottoming of line pipe pricing in October or November last year.

We’ve seen over 10% inflation just in the first part of 2017. So we’re going to have both inflationary environments as mills try ramp back up for this improved line pipe demand. So we have both demand and inflation pricing to help us.

So I think midstream, we’re guiding there and I think there would be upside both there and upside in the upstream second half of the year..

Thank you for that. It all sounds very constructive. The other question I had -- I think the guidance of positive cash from ops as you are going to be reinvesting in working capital this year -- that caught my eye. I thought that was pretty interesting and you gave some guidance around where you think working capital sales will be.

It would be great if you could kind of just give us a little bit more of the flex around that guidance and how you see that cash flow staying positive this year?.

Sean, we expect to maintain our roughly 20% working capital as a percentage revenue, so as the ramp up in your models and using our guidance, you can expect the working capital needs to run about 20% and then with the improved EBITDA slightly better than that we’ll have some modest cash from operations generated in 2017..

So on, like, the low end of the range, say, 10% revenue build would be something like $60 million in working capital.

Does that sound like its reasonable?.

That’s correct..

Okay. Fair enough. Thank you, guys. I appreciate it..

Thanks, Sean..

Our next question comes from the line of David Manthey with Baird. Please proceed with your questions..

Hi, guys. Good morning..

Good morning, David..

First question, with the 10% to 20% growth you expect in your midstream business, will that require a broadening out from just the Permian on the transmission side? And then, second, you already – you’d mentioned a little bit about your gas utility outlook.

Could you just give us a little more color on how you see that playing out in 2017?.

Yes, Dave. So, yet on the transmission side I would say its two components. It’s infrastructure around the oil and Permian. As you mentioned is the lead driver for volume there. But we also have a lot of work going into 2017 and a lot of work as we mentioned in our backlog, all related to gas infrastructure in the Marcellus in the East side.

So I’d say it’s pretty balanced there. We also have infrastructure in Apache Alpine High and the new start-up there. So that brings us some midstream work, too. So I think transmission, demand is definitely going to be higher. We know we have a strong backlog, much higher than we had going into 2016.

Inflationary pricing that we mentioned, line pipe will help us also there. And then gas utility continues to be a real bright spot for us. It slowed in the last two months of the year.

I think this is the case and that was part of our midstream drop in the fourth quarter sequentially both chemical refining and gas utilities all slowed in the last two months of the year. I think it was a case of budgets being spent in an accelerated manner early in the year. You remember we had mild winter last year at the start of the year.

So gas utilities did a lot of projects earlier in the year than budgeted. So really I think it was a budget funds slowdown, not any loss of business or loss of projects. So I see that picking back up with new budgets and we’re very confident and very optimistic about the gas utility business we have. We do real well there..

Okay.

And of that 10 to 20 about how much do you see as price?.

Well, Jim..

I was going to say in terms of price we think the biggest piece will be volume. We think it will be maybe two to three points of price coming out of that. And again I think that will be later in the year, as the inflations starts to work through the pipe system..

Yes. Okay, got it. And then finally, your view on the turnarounds for 2017, I assume that's both energy and other process industries. But Andrew, I think you said above average there.

And I'm wondering, how is your visibility? Why do you think that -- we've heard some mixed reviews as it relates to turnarounds in 2017?.

Yes, Dave. We have a very good view of that. And we’re in most if not all refineries in the United States more than 90% of them for sure. And so we have a good view on orders already in hand. The refining business is roughly $300 million business for us. We do around 40 million – 40 million to 50 million in turnarounds than a normal year.

And so take that normal load of 10 million to 15 million a quarter and we see an additional 10 million to 15 million in the spring this year, a lot of that is what we talked about in previous call of carryover from last year.

We saw utilization refineries ramp back up in the fourth quarter, jut taking advantage of the warmer start of the winter early and so it was running 92% in the fourth quarter. So, we do see the turnaround happening with our customer base.

We’re confident in the guidance we’re giving it that will be for our customers and our refinery customers, a good pickup for us..

All right. It sounds encouraging. Thank you..

Thanks, Dave..

Our next question comes from the line of Vaibhav Vaishnav with Cowen & Company. Please proceed with your questions..

Hey, guys. This is [John] on for Vebs..

Good morning, John..

Good morning. So, first question, how are you thinking about the U.S.

and Canada upstream revenue growth in 2017 within the 15% to 25% global revenue guidance increase that you gave?.

Yes. So, in the U.S. upstream, we’re certainly looking at double-digit, Southern Canada is going to be a little bit more reserved for us. We had kind of the mid single-digits there. As Andy mentioned, there may be some upside in the U.S. depending on how budgets get worked out over the course of the year. But we certainly think the U.S. particular the U.S.

upstream will be strong..

And is it fair to say that the U.S.

accounts for 55% of upstream revenues and Canada is about 20%?.

That sounds about right. The 55 certainly sounds right. I think you’re close on Canada..

Okay. And then another one as it relates to the U.S., so if U.S. D&C spending ends up being up say 50% in 2017, should we think about your U.S.

upstream revenue growing by the by the same amount or is there any lag or perhaps outperformance there?.

Well, there will certainly be a little bit of lag, as we mentioned earlier. And I think the other thing we have to look at carefully is who the customers are and where that spending is coming from. Early on in this recovery we’re seeing a lot of rig count adds and a lot of completion work that’s to come.

It’s going to be small operators, private equity sponsored. That is less of our customer base than the large integrated. So for us we really look to see how those major operators are spending their budgets. They’ve all got some increases budget and plan, but certainly none of them that we seen they been in 50% plus range..

Okay. And then another one from me, you guys mentioned kind of a little bit of softness towards the back half of the fourth quarter and gathering transmission business. It seems like it was down about 25% sequentially in the fourth quarter.

Am I right in that estimate? And then, can you help us think about how much the transmission business declined in the fourth quarter.

Any color you can provide around that?.

So, the midstream down sequentially overall it was down 18%, but lot of that was in the U.S. as well as Canada. We had some big midstream work in line pipe and valves in Canada that came off.

And then, as is typical with our gas utility business and some of our transmission business, we see a slowdown in the fourth quarter and we certainly saw that again with some of our large customers, as their activities were slowdown both because of holidays and generally by weather..

Okay, great. Thank you, guys. I’ll turn it back..

Okay..

[Operator Instructions] Our next question comes from the line of Matt Duncan with Stephens. Please proceed with your question..

Hey, Good morning, guys. This is Will Steinwart..

Good morning, Matt..

Hey, It’s Will. Good morning, Andrew..

Good morning, Will..

Okay.

Was there anything you saw in the fourth quarter that contributed to the sequential decline -- outside of what you had mentioned in your remarks and a little bit here in the Q&A with customers operating under constrained budgets and seasonality that might have slowed into year-end more than you had expected? Or was that 9% decline about what you had pictured?.

Yes. I mean, on the last call we said it would have traditional decline. I mentioned on that call, October was that the run rate in third quarter which it was, but we saw softness coming in November, December. So, you had the normal seasonal impact. You had slowdown in transmission and gas utility that Jim just talked about 18% that was expected for us.

And then there was a slowdown in both chemical and refining of average about 10%. So, I think that was a case where there wasn’t a lot of motivation for budgets, budgets had been spent some earlier, some were summer curtailing expecting higher budgets and better commodity pricing environment in 2017.

So, and then we talked earlier about the lag between you're going to see a quarter two out before we see the impact of a big drilling rig count pick up. So those aspects all came together.

It's normal for us, I think we’ve said on the last call five out of six last year’s we had a slowdown in the fourth quarter and I think expectations of that high – the headlines around the drilling rig in the U.S. pickup doesn’t translate to us to first and second quarter of 2017, so nothing surprising and we try to guide to that..

Okay. And moving on to the guidance, can you talk more about the adjusted gross margin target at 18.5%, which looks to be essentially flat? Kind of deconstruct the moving pieces between what you are expecting to realize from the line pipe increases you mentioned and mix with the project work coming on.

If you could just talk about how that might trend -- or how you see it trending throughout the year and deconstruct that a little bit, that would be great?.

Sure, Will. So, as we mentioned 2016 as we look back was a year where a lot of projects got delayed. They completed, there were no new projects rolling off. We saw a big drop off in line pipe which is typically lower margin relative to others that both in gas transmission and the gathering.

As we look to 2017 we certainly see those picking up and we see them picking up nicely, as such we’re going to see the mix impact of that come back a little bit. We’ll see it in line pipe. We got a very aggressive line pipe budget for our guys. We also have visibility on some project worth is coming in 2017, so we understand and we know what’s there.

We do have prospect to inflationary impacts throughout the year, perhaps we’ve been little bit conservative in some of -- building those into our budges, our plans.

I think the final thing I would say, we come through two years over the toughest downturn in market correction in the oil and gas industry, and as such we’ve to be very responsive and proactive in dealing with our customers, our clients in terms of our contract extensions, contract renewals in terms of your pricing expectation.

So, we certainly we have to make adjustments along the way for that, but those are the big pieces that kind of direct or guide our outlook on terms of margins..

Very helpful. Thank you, Jim. And lastly from me is you mentioned M&A in the prepared remarks, Andy.

Can you talk more about your primary targets geographically and from a product standpoint?.

Yes, Will. I would say the M&A market is getting to a point where it's a lot more attractive for us than it has been for the last two years. Companies are starting to recover on their earnings, but not fully yet. I think from valuation standpoint the gaps closing.

We’re very keen on valves and everything associated with that, whether its automation, instrumentation, measurement, expansion in control valves, expansion in services related to valves, you’re going to see that be a heavy focus because as we mentioned we expect 40% of our revenues in 2017 to come from that product family.

So that would be the priority for sure 2017 and we’ll have the same intent that we had in upcycle when we were very active in acquisitions. It needs to expand our geographic footprint or expand our product offering that add a new dimension to our company. That’s what we target and that’s we targeted on this round of bolt-ons.

But certainly the second half of 2017, I wouldn't expect anything in the first half of 2017, second half of 2017 and definitely in 2018 will be more active..

I’ll leave there. Thanks a lot guys and good luck this year..

Thank you, Will..

Our next question comes from the line of Walter Liptak with Seaport Global. Please proceed with your questions..

Thanks. Good morning, guys..

Thanks, Walter..

I wanted to ask about the working capital. You mentioned DSOs at 51 days. And I wonder if we can get some color on that.

I think it's fair to say you guys have been focused around better capitalized customers, and I wonder if at some point you can loosen credit to some of the smaller customers to try and capture more share?.

That’s a good point. That’s something that that’s a dynamic situation, we’re looking it at all the time, lot of the customers for the last two years had trouble and we put on tight credit hold have either survived or come back in another corporate form with other owners.

And as their balance sheet won’t losing up some credit we’ll certainly do that to provide us the opportunity to sell to them..

Okay. Okay, thanks for that. I also want to ask about -- you mentioned the market share is now up to 30% to 35%.

I'm wondering if you could clarify for me, was that all-in for all streams within energy? And if you gain market share in one stream in particular, I wonder if you can call that out for us?.

Yes. It’s all in, all streams, our recent wins have been in downstream. There are couple that we mentioned in the prepared remarks, but I would say that’s been a highest growth area for us.

In upstream very competitive, there is really when you look at the activity levels we’re gaining share because of the scope in our contracts, of course in the integrated supply area of upstream there’s only two companies that really compete in that space either on a buy sell agreement or return base agreement, us and our major competitor.

There's been some exchange of customers. Previously we won CRC on the West Coast, California Resources. We during the last two quarters we added [Tidelands and Toms] and Ventura to that scope, so we feel very good about that. In the recent last two quarters we’ve had losses at Hess and Marathon Oil n an integrated supply model.

So when you look at that, the growth from CRC and the losses in the other two, we really just swap revenues, no change in market share at all there for us. So there is that dynamic. It’s very competitive.

People are still trying to gain share but outside of that integrated supply upstream market I feel very good and as we said we expected in a first half of 2017 they have some major announcements on the wins that will be much larger scale than those I just talked about..

Okay, all right. Sounds great.

Does the downstream market share improve the pricing environment at all? Or is it still very competitive?.

Downstream still – we’re in a very good position there, but it’s competitive in the stainless area for sure. It’s competitive in valves.

But we like our share and we like our customer mix, and then as I mentioned I expect some of our wins that we’re going to announce will be a further wins in that downstream area which today we’re 33% downstream and 38% midstream.

So, you’ll see gains with us on these new projects and pipelines that are put forward, continue gains in the utilities and then downstream is a real focus for us to either get a little higher market share there..

Okay, great. All right. Thanks you..

Thank you..

Our next question is a follow-up question from the line of Vaibhav Vaishnav with Cowen. Please proceed with your questions. Mr. Vaishnav, your line is live..

Hi, guys. Thanks for let me back in. Just clarification to your on the margin guidance, thanks for all the color you have provided so far. But if I look at gross margin sequentially from 4Q to 1Q, it typically increased about 100 basis points.

Is there any reason to think that they should not be up the same amount in 1Q?.

John, I think you might see based on some of the projects we see and some of the big orders we have coming in the first half of the year, you may see that no hold true this year..

Okay. And then, one on Canada as well, could you provide some color around the Canadian forecasted growth of only 5% despite Canadian activity off a very strong start.

And are you assuming Canadian revenues decline further in the first quarter and are there any other large upstream or midstream projects completing that kind of change the organic revenue?.

Yes. We forecast the pretty normal year for Canada. Of course everyone looks at the big increase, it had a very slow fourth quarter from historical terms, Canada -- most of the activity is the fourth quarter and in the first quarter.

So we started from very slow point, so there’s a big headline percentage increase in the first quarter and we’ll benefit from that. We’ll have a good first quarter in Canada. But then, we still expect the normal spring break up. You don't have a big emphasis on gas pricing driving a lot of activity there.

And then we’re weighted towards heavy oil and heavy oil is not that going to be a big bright spot when you look at other resources that are much lower cost to produce, so we have exposure in [SEGD], but when you say all that I still believe mid single-digits growth and maybe we’re being conservative there, may be the fourth quarter of 2017 is stronger we are forecasting, but I don’t see a lot of downside there..

Okay, great. Thanks guys. I’ll turn it back..

Thank you. We have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments..

Thank you for joining us and for your interest in MRC Global. This concludes our call today..

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..