This has been a tough year for engineering and construction (E&C) firm CB&I (NYSE:CBI). Although the stock has already bounced strongly from it's late October low, it is down significantly for the year as the company struggles with various delays and cost overruns.
Cost overruns, delays and subcontractor issues are common problems for all E&C companies, but CB&I has had some particular problems with a large liquefied natural gas (LNG) project in the U.K. On top of that, though, CB&I has come under pressure as a large percentage of the company's business revolves around energy-related projects (LNG terminals, for instance), and the fast drop in energy prices has led investors to wonder and worry about project delays or cancellations.
When 'One Time' Means 'Every Time'
CB&I's third quarter is a good microcosm of these challenges. Although reported revenue rose 33% from last year, the quarter was heavily impacted by a charge for cost overruns at that U.K. LNG project.
Now it might be normal to exclude such a charge as a "one-time item", but there were similar charges both in the prior quarter and in the year-ago period, and that strains my notion of an unusual or one-time expense. So, while it may be true that the company's operating income would have grown nicely without the charge, it may also be irrelevant to many investors.
Elsewhere, you can find cause for concern in the company's order book and backlog. New awards during the quarter fell 2% from last year and fell by more than half from the second quarter, with the North American segment down sharply. The company's overall backlog dropped 3% from the year-ago level, and though the company reported no cancellations this quarter, I've got to wonder if that's about to change. (To learn more, check out Analyzing Operating Margins.)
Whither The Backlog?
It's tough to know quite what to make of the company's backlog. On one hand, the company made a point of including quotes from the CEOs of ExxonMobil (NYSE:XOM), ConocoPhilips (NYSE:COP) and Chevron (NYSE:CVX); all to the effect that the decline in energy prices wasn't going to lead these giant companies to cancel projects.
What's more, the company has projects underway for companies like Suncor Energy (NYSE:SU), Nexen (NYSE:NXY) and El Paso (NYSE:EP) and although there have been concerns about the economic efficiency of oil sands and LNG at current prices, I suspect these companies have a long-term view of the markets and projects.
Even so, I won't be surprised if CB&I has a hard time meeting its target for new project awards. Should that happen, future revenue targets become more challenging. Likewise, I'm always a little concerned when I see companies with large percentages of fixed-price contracts - if the company fails to execute (as we've seen with the U.K. LNG project), it can hit the bottom line and the stock price rather hard. (For more reading about oil sands be sure to check out Oil Sands Discovery Centre.)
The Bottom Line
It's hard to refute the fact that CB&I has attractive market positions in areas like LNG terminals, nuclear power (about 75% of the nuclear containment vessels in the U.S. were built by CB&I), and energy development. I think it's also difficult to refute that there's going to be more of all of these built in the future.
I am not terribly enthusiastic about this company, but it's difficult to argue with the valuation and the market opportunities. As investors have seen in recent years in mining and energy services, a strong overall market can pull along even the inferior players. To that end, maybe some aggressive investors want to consider CB&I on the dips, as future energy infrastructure construction seems all but certain and this company is likely to get a share.
