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From the Survey: McDermott International
Approximately two years ago, McDermott International’s (MDR) board of directors approved the spinoff of its power-generation systems and government-operations segments through the distribution of shares of The Babcock & Wilcox Company (BWC) (its former power-generation systems provider) to McDermott common stockholders. Once Babcock & Wilcox’s common stock was distributed, B&W became a separate, publicly-traded company, and McDermott did not retain any ownership interest.
As a result of the spinoff, MDR became a stand-alone engineering, procurement, construction, and installation (EPCI) company focused on the offshore upstream oil and gas market worldwide. In addition, management hopes that the spinoff will accelerate growth based on its distinct corporate strategy, market prospects, and customer relationships. What’s more, enhanced management focus, more efficient allocation of capital, and greater operational and strategic flexibility should all augur well for McDermott’s fortunes.
Naturally, given the separation, McDermott International’s top and bottom lines took a rather hefty initial hit, relative to the year-earlier performances. Nevertheless, we initially expected that the company would post roughly a 20% year-over-year earnings advance in 2011. But things took a turn for the worse during the June interim, and the situation only seemed to deteriorate further during the following quarter. Indeed, although top-line comparisons have been rather impressive, the bottom line is feeling the effects of margin pressure. This has come about as a result of lower revenues generated in the less-profitable Middle East segment, and MDR recognizing substantially less income from change orders, settlements, and closeouts. What’s more, during the final quarter of the year, the company’s share net was tempered by additional losses and increased contingency costs on projects in Brazil and Mexico.
Yet, the news is far from all bad. Notably, in late January, McDermott’s Australian subsidiary signed a letter of award for the Ichthys Gas-condensate Field Development subsea umbilical, riser, and flowline (SURF) project by INPEX. At approximately $2.0 billion, this is the largest single booking in the company’s history. The project includes
“EPCI” and pre-commissioning of production flowline systems, a MEG injection system, start-up condensate transfer and fuel gas transfer flowline systems, control systems and other associated SURF elements in water depths up to 275 meters. Moreover, there are a number of possible new award opportunities on the horizon, which would obviously augur well for the company’s future performance.
Separately, we do not think that the aforementioned Brazilian and Mexican projects are likely to hamper results going forward, as management has fully reflected the expected costs to complete the projects with sufficient contingency for the future. Therefore, strong demand for the company’s expertise, combined with an improving margin situation, ought to result in solid earning advances going forward.
Finally, once McDermott works its way through the turbulent waters it is now navigating, its strong balance sheet will enable it to make selective acquisitions, or possibly bolster shareholder value by paring its outstanding share count. To wit, MDR finished off 2011 with $570.9 million in cash on its ledger, up 41% from the year-ago figure, which is a rather impressive feat.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.