Engineers and constructors10 November 2016
Share price trends over the past five years are discussed for five engineering/construction companies active in the power plant business: Abengoa; Amec Foster Wheeler; Areva; Fluor; and WS Atkins. David Flin
Abengoa is a Spain-based company in the engineering sector. It is structured into three main business divisions. The Industrial Engineering and Construction division focuses on the execution of turnkey power generation projects and electricity transmission lines. The Concession Infrastructure division includes the operation of desalination and power generation plants. The Industrial Production division comprises activities related to the production of biofuels and waste treatment.
Risky ventures in biofuels and Spain’s cuts to renewable energy subsidies during an economic downturn has pushed the company to the edge of bankruptcy.
In November 2015, Abengoa filed for protection under insolvency law to enable it to conduct negotiations with lenders for guarantees. In March, the company submitted a “standstill agreement” pursuant to which financial creditors agree to give Abengoa until 27 October 2016 to finalise its restructuring plan. Under the terms of a restructuring plan, Abengoa plans to cut costs, shed non-core assets, and emerge as a slimmer business valued at €5.4 billion, with €4.9 billion in debt. Ownership of the restructured company would largely fall to existing creditors and new money lenders, although the plan envisions current shareholders retaining about 5% its equity.
Creditors that have pledged preliminary support for the restructuring include Banco Popular, Banco Santander, and Bankia, as well as bondholders like Centerbridge Partners, DE Shaw, Elliott Management, and KKR & Co. The latter group has considered offering over $1 billion in new financing to reinvigorate Abengoa in connection with its restructuring. The company has announced that it has reached preliminary agreement on the main terms of the restructuring deal with the banks and bondholders.
Abengoa’s plan for restructuring involves disposing of non-core businesses, and focusing on engineering and construction turnkey projects, with some concession projects. The company said that it planned to “install greater risk discipline and control.” The company plans to greatly reduce its financing needs.
Amec Foster Wheeler
Year on year, Amec Foster Wheeler has seen net income fall from £82 million in 2014 to a loss of £256 million in 2015, despite a 36% increase in revenues from £3.99 billion to £5.46 billion. Net income has been falling over the last five years.
Amec acquired Foster Wheeler in 2014, when the price of oil was over $100/barrel. It has been tackling the integration of the two companies while the fall in oil prices created a significant challenge to the markets it operates in. The company expects these tough market conditions to continue for longer than originally expected.
The company is making efforts to reduce costs and streamline its business. The oil and gas market accounts for 54% of the company’s revenue, and so the company faces tough operating conditions while the price of oil remains low. The company claims to have won over 1000 new projects, although the start dates on many of these contracts have been delayed by market conditions. Orders are up on 2014, without taking into account work won with no confirmed start date.
The company’s debt rose sharply when it acquired Foster Wheeler. It has announced plans to cut its net debt by 50% over the next 15 months through the disposal of non-core assets, starting with the sale of its Global Power Group. It is generally considered that while the oil price remains low, and until the company manages to reduce its debt burden, its share price will remain low.
In June 2016, Amec Foster Wheeler appointed Jonathon Lewis, formerly Vice President with Halliburton, as Chief Executive, replacing the interim Chief Executive Ian McHoul, who stood in following the resignation of Samir Brikho in January 2016.
French nuclear power group Areva has been struggling with the downturn in the nuclear industry following the 2011 Fukushima incident, as well a big losses on high-profile projects, such as the Olkiluoto project in Finland. Over the last five years, the company, 87% owned by the French government has been running at a significant loss and has been negotiating a government-backed rescue package that will see it raise up to €5 billion in cash.
The deal is expected to close in the second half of 2017. However, in July 2016, the European Commission launched an investigation into whether the state aid to Areva would distort competition, or if it would breach EU rules on state aid, and whether the group’s post-recapitalisation would be sufficiently viable to prevent the need for further bail-outs. If this causes a delay in the aid package, Areva said that it would request a loan. Philippe Knoche, CEO of Areva, said: “These transactions will be carried out in compliance with European regulations.”
In addition, Areva is planning to sell a majority stake in its reactor construction division Areva NP, valued at €2.5 billion, to EDF.
The Olkiluoto 3 nuclear power plant in Finland is already 10 years late and €5 billion over budget, and Areva is in negotiations with TVO of Finland to resolve legal claims arising from the cost overruns. This has raised fears in some quarters that, without clarity on the future of the Olkiluoto project, Areva may be unable to sell its NP reactor division to EDF, seen as a crucial part of Areva’s restructuring.
Fluor operates in five segments: Oil & Gas; Industrial & Infrastructure; Government; Global Services; and Power. In 2015, the segments made the following contributions to company revenue: Oil & Gas, 57.2%; Industrial & Infrastructure, 22.4%; Government, 12.5%; Power, 5.3%; Global Services, 2.6%.
Despite its exposure to the oil and gas sector, with the low price of oil causing producers to cut back on expenditures, Fluor has managed to maintain revenues and net income over the last five years.
A drop in revenue in 2014 and 2015 ties in with the dramatic fall in the price of oil. Nonetheless, Fluor has maintained its net income, in stark contrast to some other companies struggling in this sector. The total debt, and the debt/ equity ratio rose in 2014, but remains well under control.
Fluor acquired Stork in March 2016, and the Stork business is primarily based on ongoing operating budgets that are less impacted by capital spending plans and volatile commodity prices. As a result, this should further protect Fluor from the vagaries of the price of oil.
The company has seen a reduction in contributions from its Power segment, and a number of major clients have been delaying capital investments because of commodity prices and foreign currency issues. However, Fluor has a robust level of backlogs, and lucrative award wins in Government and Infrastructure to set against these and help drive future growth.
The company operates through five segments: UK and Europe; North America; Middle East; Asia Pacific; and Energy. In the Energy segment, it focuses on nuclear, oil and gas, conventional power generation, and renewables. The percentage of business by sector in 2015 was as follows: Rail, 24%;
Road, 18%; Energy, 14%; Defence and security, 9%; Water and environment, 7%; Aerospace and aviation, 6%; Urban development, 6%; Buildings, 5%; Education, 3%; Other, 8%.
Year on year, the company has been showing consistent levels of revenue and net income, with tight control over operating expenses. As a result, it has shown considerable stability during some uncertain times, and has been a preferred haven for risk-averse investors.
The company’s Energy segment has seen good performance over the last two years in nuclear, power, and renewables, but the low price of oil has seen the deferral and cancellation of a number of projects in the oil and gas market, leading to challenging conditions for its operations in this field.
In April 2016, WS Atkins completed the acquisition of PP&T, a nuclear business that delivers technical engineering and programme management services for decontamination and decommissioning of nuclear facilities. This acquisition is intended to enhance the company’s position in the nuclear sector, with a focus on decommissioning work on ageing facilities.
Following the acquisition of PP&T, the company expects nearly 70% of Energy’s revenues will come from the nuclear industry, with an increasing contribution from renewables projects.