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Fluor-JGC Joint Venture Inks $14-Billion LNG Canada Contract

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A joint venture between Fluor Corporation (FLR - Free Report) and JGC Corp., a Japan-based global engineering firm, has secured a $14-billion contract from LNG Canada to design and build its liquefied natural gas (“LNG”) export facility in Kitimat, British Columbia, Canada.

The C$40-billion LNG Canada project, which incorporates the construction of two LNG processing units and facilities for export, has a shipping capacity of around 26 million tons of LNG a year. The current partners in the project include Anglo-Dutch giant Shell (RDS.A - Free Report) , Chinese energy giant PetroChina Company Limited (PTR - Free Report) , diversified conglomerate Mitsubishi Corporation and South Korea's state-run Korea Gas Corporation (KOGAS). Shell is the largest shareholder of the project with 40% interest, while Petronas holds 25%. PetroChina and Mitsubishi own 15% stake each. The remaining 5% interest is held by KOGAS.

Under the first phase of the project, Fluor-JGC JV will construct two liquefaction units (trains) for a total of approximately 14 million tons per year of LNG. LNG Canada has the option to expand to four trains in the future. The JV will initiate construction this year, with first LNG delivery expected around the middle of next decade. Notably, Fluor will book its $8.4-billion share of the $14-billion contract value in the fourth quarter of 2018.

Fluor has been serving Canada since 1940, which marked the company’s first project delivery of a refinery in British Columbia. Thereafter, Fluor has been an important part of key projects in Canada.

Solid Record of Contract Wins

Fluor enjoys a solid track record of contracts, and management remains optimistic about the continuation of this trend in the future, which is expected to drive the company’s growth.

Fluor is also tracking multiple large projects, including derivative and LNG plants in North America, along with upstream projects that include pipelines and downstream projects in the Middle East. The company remains optimistic about investment projects, particularly LNG projects in North America, including the LNG Canada project for Shell, chemical facilities as well as pipeline projects in the United States. It also expects healthy prospects for the refining and chemical projects in the Middle East and Asia. Meanwhile, Fluor has made remarkable progress on three gas-fired power plants by completing one of them and is on track to complete the other two projects by the end of 2018.

Notably, over the past few quarters, Fluor has been witnessing continuous backlog erosion that continued at the end of 2017 as well. Slow burn on a couple of key projects and the absence of new awards at a reasonable pace are making matters worse for the company.

Although Flour’s total backlog increased sequentially (marking the first increase since 2016) at the end of second-quarter 2018, it dropped 22.1% on a year-over-year basis. Meanwhile, the latest $14-billion contract win is expected to provide it with significant impetus for the remaining of 2018.

Share Price Performance

Shares of Fluor, a Zacks Rank #1 (Strong Buy) company, have outperformed the industry so far this year. Its shares have gained 16.7% in the said time frame against the industry’s decline of more than 4%. The outperformance was backed by a solid earnings surprise history, beating the consensus mark in three of the past four quarters, with the average being 3.3%. Earnings estimates for 2018 and 2019 have also been trending upward over the past 60 days, reflecting analysts’ optimism surrounding the company’s growth prospects. You can see the complete list of today’s Zacks #1 Rank stocks here.


 

Despite intense competition from industry peers like Jacobs Engineering Group Inc. (JEC - Free Report) and others, long-term prospects of Fluor remain impressive on the back of strong end-market potential.

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