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Can Chicago Bridge & Iron Resuscitate its Ailing Fortunes?

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Chicago Bridge & Iron Company N.V. (CBI - Free Report) has been plagued by formidable headwinds in recent times. The stock has actually tanked almost 40% in the past year.

Last month, the company reported dismal second-quarter 2017 operating results, which included a bleak guidance and some aggressive measures to counter balance-sheet weakness. The company plunged to eight-year lows in the aftermath of the results, as investors abandoned the stock in light of the miserable guidance and a dividend suspension.

This energy infrastructure services firm was forced to take desperate actions to shore up its financial position after reporting an immense drop in revenues and a huge loss. The company’s total backlog also fell 7.5% year over year.

The bottom line was under great pressure as operating expenses and interest expenses both flared up year over year. Consequently, the company reported a colossal GAAP loss of $3.02 per share, in stark contrast to the year-ago earnings of $1.09. The company’s margins were deeply impacted by a rise in cost at two gas turbine projects and two LNG export facility projects. Interestingly, this is the company’s third consecutive quarter of missing both top- and bottom-line estimates.

A key reason for the bottom-line loss was that the company booked substantial charges (roughly $548 million pretax) in relation to four Engineering projects. Lower-than-expected labor productivity, elevated costs for fabrication, and craft labor, weather-related delays, subcontractor, and indirect costs were responsible for the cost overruns.

With respect to guidance, Chicago Bridge & Iron now expects second-half earnings of $1.00-$1.25 a share on revenues of $3.7-$4.0 billion. Combined with revenues of $3.11 billion in the first half, the guidance implies 2017 expected sales of $6.81-$7.11 billion — which is well below the previous projection of $9.5-$10.5 billion for the year. Further, after racking up GAAP losses of almost $4 a share in the first half of 2017, there seems to be a slim chance that Chicago Bridge & Iron’s bottom line will be in the green this year.

The new CEO, Patrick Mullen, announced several measures to address the company’s chronically poor project execution, improve efficiency and strengthen the balance sheet.  Chicago Bridge & Iron intends to sell its crown jewel Technology licensing business for roughly $2 billion or more (net proceeds are likely to exceed the company’s entire net debt of about $1.5 billion). The company is also implementing a comprehensive corporate and operating cost-reduction program, which, it expects, will generate savings of $100 million on an annualized basis.

Also, the company announced that it would discontinue paying its dividend with immediate effect. The step reflects severe balance-sheet weakness, as it mentioned that the dividend cut was apparently necessary in order to satisfy creditors and ensure compliance with certain debt covenants at end of June. The suspension of the dividend is expected to result in annual cash savings of $28-$30 million.

With slumping revenues, bleak guidance, distress sale of a key operating unit and the need for extreme strategic action, we believe the future looks exceedingly uncertain for Chicago Bridge & Iron.

However, post sale of the technology licensing unit, the company’s operations will be more streamlined and will centre on large-scale engineering, procurement, and construction, and fabrication capabilities with dominant positions in petrochemical, refining, and liquefied natural gas end markets.

Also, the company has been on a contract-winning spree in the recent past.  Its consortium with Saipem S.p.A. won an EPC Package 3 contract with Duqm Refinery and Petrochemicals Industries Company L.L.C. Prior to that, the company secured a contract worth approximately $50 million for a storage project in Central Asia. In August too, it won two such contracts.

The company also secured technology contracts from four PetroChina refineries for the license, engineering design and proprietary equipment supply for an alkylation unit at each of the four sites. In addition, it won a contract from Técnicas Reunidas, S.A. for new product storage tanks for Saudi Aramco's refinery in Ras Tanura, Saudi Arabia.

Further, as the energy market recovers, it is likely that the company will secure even more of these contracts — which bode well for its growth. However, Chicago Bridge & Iron’s cash burn is likely to continue as it faces substantial risk stemming from further project degradation. Now that almost all of the company’s cards are on the table, the major risk for shareholders would be a recurrence of cost overruns or poor execution in the upcoming quarters.

Some other companies working in the same space as Chicago Bridge & Iron are MasTec, Inc. (MTZ - Free Report) , EMCOR Group, Inc. (EME - Free Report) and Sterling Construction Company Inc (STRL - Free Report) .

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