McDermott Misses on Both Lines - Analyst Blog
March 01 2012 - 2:45AM
Zacks
Energy-focused engineering and
construction company McDermott International (MDR)
reported weaker-than-expected fourth quarter and full year 2011
results, hurt by higher operating costs and poor performances from
various projects.
The company reported earnings per
share from continuing operations of 4 cents in the quarter, below
the Zacks Consensus Estimate as well as the prior-year quarter
result of 19 cents. The underperformance can be attributed to
steeper operating expenses primarily due to additional charges on
two Atlantic projects.
For the full year, earnings per
share from continuing operations were 64 cents, missing our
projection of 79 cents per share. Comparing year over year,
reported result declined 36.0% from $1.00 per share.
McDermott generated revenues of
$816.2 million in the quarter, up an impressive 51.2% from fourth
quarter 2010. The quarterly performance was buoyed by strong
contributions from the Asia-Pacific belt (attributable to increased
marine activity on large engineering, procurement, construction and
installation or EPCI projects) along with higher activity in the
Middle East and Atlantic regions. However, reported revenues failed
to meet our estimate of $905 million.
McDermott generated revenues of
$3,445.1 million in fiscal 2011, compared with $2,403.7 million in
2010.
The company’s operating income was
$31.4 million (down 47.0% year over year) in the quarter and $250.7
million in 2011 (versus $314.9 million in 2010). These results were
adversely affected by losses from various projects.
Backlog
At the end 2011, McDermott had a
backlog of $3,881.1 million, compared with $5,038.9 million in the
prior year. As of September 30, 2011, backlog was $4,255.4
million.
Balance Sheet
As of December 31, 2011, the
company had $570.9 million cash on hand and long-term debt
(including current maturities) of $93.7 million, representing a
debt-to-capitalization ratio of 5.1%.
Outlook
McDermott expects to reap strong
benefits from the Inpex Ichthys project and other lucrative
ventures in 2012. The Inpex Ichthys subsea contract was awarded to
the Australian unit of the company in late January. With an
estimated value of $2.0 billion, this is the biggest subsea
contract for McDermott.
Our
Recommendation
We, however, believe that the
company’s performance remains highly susceptible to the volatile
and cyclical oil and gas sector. A potential drop in oil and gas
prices could curtail deepwater drilling and dampen subsea equipment
demand, adversely affecting bookings.
Additionally, following The
Babcock & Wilcox Company (BWC) spin-off, McDermott is
now less diversified with a greater business risk profile. The
company also faces stiff competition from peers such as
Chicago Bridge & Iron Company N.V. (CBI) and
Foster Wheeler AG (FWLT).
Houston, Texas-based McDermott
International operates as a global engineering, procurement,
construction, and installation company that focuses on designing
and executing complex offshore oil and gas projects. The company
has access to most major offshore oil and gas producing regions,
including the U.S., Mexico, Canada, the Middle East, India, the
Caspian Sea and Asia Pacific.
Hence, we see little reason for
investors to own the stock and maintain our long-term Underperform
recommendation.
BABCOCK&WILCOX (BWC): Free Stock Analysis Report
CHICAGO BRIDGE (CBI): Free Stock Analysis Report
FOSTER WHELR AG (FWLT): Free Stock Analysis Report
MCDERMOTT INTL (MDR): Free Stock Analysis Report
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