McDermott impairment charges, project costs result in $2.8B loss in Q4
Operational and other losses peppered engineering and construction company McDermott International’s fourth-quarter and 2018 earnings report released at the end of last month, forcing company officials to announce a net loss of $2.8 billion for Q4 and a $2.7 billion net loss for the full year.
“Although the headline numbers distract from the company’s underlying fundamental strength, McDermott is continuing to progress toward the realization of its full potential as a premier, fully integrated provider of technology, engineering and construction solutions,” said David Dickson, president and CEO.
In the fourth quarter, the company took a one-time, $2.2 billion goodwill impairment charge and other nonrecurring charges totaling about $327 million.
Extra costs on three projects — the Cameron LNG project in Louisiana, the Calpine gas turbine power project in Pennsylvania and the Abkatun-A2 offshore oil platform in Mexico — also contributed to McDermott's fourth quarter operational losses.
On the Cameron project, there were $168 million in extra costs associated with what the company called "unfavorable labor productivity” plus extra subcontract, commission and construction management expenses. However, at the end of Q4, the project was 85% complete, was expected to hit major milestones early this year and still has $445 million of revenue left for McDermott.
Last year, McDermott was one of several contractors who warned LNG developers that they needed to be more realistic in their approaches to determining final costs for projects. All touted early collaboration as a way to achieve schedule, budget and quality targets. Some had even turned down project opportunities because they believed the cost estimates were too low.
The Calpine project had $31 million in extra costs due in part to costs associated with the facility’s first fire. At the end of 2018, the project was 95% complete. Fabrication and offshore delivery issues, weather delays and unanticipated accommodation expenses for offshore crew added $54 million to the Abkatun-A2 project.
McDermott also recorded a $102 million charge related to Hurricane Harvey damage at the Freeport LNG project in Texas, although those costs did not impact the income statement.
But McDermott said it had “closed the book" on 2018 and pointed to the positives coming up in 2019.
The company expects to close on the sales of its pipe fabrication and tank businesses later this year, transactions that will bring about $1 billion into the company.
In addition, McDermott reported a revenue opportunity pipeline of $93 billion, primarily driven by its North Central and South America (NCSA) division, as well as its Middle East and North Africa unit. This figure includes bids, current backlog, outstanding change orders and target projects, which McDermott expects to be awarded within the next five quarters.
Already this year, McDermott has announced that it won a “mega contract” for the Golden Pass LNG project in Sabine Pass, Texas, and would be providing engineering, procurement and construction (EPC) services in collaboration with JV partners Chiyoda International Corp. and Zachry Group. McDermott did not report the value of the contract, only that it exceeds $1 billion. It will take approximately 9,000 construction workers five years to build out the new export facility.
For the full year 2019, McDermott expects to book operating income of approximately $725 million to $775 million and net income of between $250 million to $275 million.
"The market outlook is exceptionally robust for McDermott,” Dickson said, "and elements of our playbook are generating substantial results."
- McDermott International McDermott Reports Fourth Quarter and Full Year 2018 Financial and Operational Results
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