I’ve spent a fair amount of time in the last few months looking at the infrastructure complex, because of the group’s potential for relative outperformance. One interesting facet in particular is that CEOs of major players KBR, Fluor (FLR), and McDermott (MDR) have all stated that their customer mix of oil majors and governments (so-called “balance sheet financers” because they do not need to raise money in the capital markets) will prove to be resilient spenders. Another point of note: the areas singled out as weak on the conference calls, like mining, have quickly seen cutbacks in spending as evidenced by Freeport McMoRan’s (FCX) and their huge strategic shift a month back. Are the forecasts from the infrastructure companies money-good, or have the balance sheet financers merely weathered the storm so far and set up plenty of deferred pain down the road?

Argument number one that vulnerability exists comes from the price of oil, which all the oil majors and most of the Middle Eastern governments use to finance their capital spending. Crude prices have fallen about 40% since early November.

Exact figures are difficult to come by on how dependent Middle Eastern governments are on oil for economic activity, but a quick check estimates that 40% of the United Arab Emirates’ economy is directly related to petroleum – and that is one of the more diversified countries in its peer group. Petroleum is said to directly drive more than half of the economic activity in Kuwait, and the Kuwaiti government is estimated to derive 80% of its income from petroleum.

Numbers like that, combined with recent news that Kuwait is backing out of its joint venture with Dow Chemical (DOW), is leading me to believe that the balance sheet financers are not invulnerable to the economic pain being felt – only temporarily insulated. Projects are just starting to be canceled, and bad news must be assumed to come in bunches.
Looking beyond the Middle East, another major infrastructure spender is China; will the global economic problems have a Madoff-esque side effect of revealing structural instabilities there? Jim Chanos has argued that the Chinese economic readings are totally manipulated – something that, if proven true, should not surprise anyone in the least.

Next year will bring updated forecasts from energy companies on capital spending in the face of a new reality for oil prices, and those will help round out the picture of the stability (or lack thereof) of infrastructure spending. But, of course, the greatest sign of infrastructure spending could wind up coming from President-Elect Obama’s inauguration speech and subsequent flurry of actions. When stock prices seem hinged on government actions, it makes for a difficult decision-making process, and I’ll be looking elsewhere for potential buys.