Conference Call Notes: Fluor, McDermott, DynCorp

Includes: DCP, FLR, KBR, MDR
by: James Cullen

Fluor (NYSE:FLR) reported strong quarterly results that set records for new business bookings and total backlog, on top of increasing operating margins (and a moderate gain on sale) that more than doubled net income. Earnings growth was driven by the Oil & Gas business, as well as a substantial boost in earnings from the Industrial & Infrastructure segment.

On their conference call, CEO Alan Boeckmann suggested that the recent large decline in fossil fuel prices was not going to stop infrastructure build-out, because their clients base capital projects on long-term estimates of the price of crude. There was plenty of new business booked on the Oil & Gas side, so a rapid drop in those projects is unlikely, because those types of projects are taken under the assumption that $50 or $60 crude will be realized on average. Even as lower commodity costs might seem to threaten spending to bring additional resources online, they also help on the input side with things like reduced costs for metals, steel, and petroleum distillates. In particular, Fluor cited consistently high capital spending from integrated majors Exxon Mobil (NYSE:XOM) and ConocoPhillips (NYSE:COP) as supportive of upstream work, while noting that downstream was more uncertain given that big players like Valero (NYSE:VLO) are deferring projects out a year.

Mining is described as one of the more economically sensitive lines of work, and mining majors are worried by slowing demand out of China in particular. While existing work has been fully financed and thus has solid standing in the backlog, newer deal volumes are expected to slow because of cautiousness from Rio Tinto (RTP) and BHP Billiton (NYSE:BHP). This morning, Freeport McMoRan (NYSE:FCX) announced that they were halting work necessary to restart their molybdenum mine in Colorado – a $500 million capital project that is about one-third complete at present.

Fluor is also starting to see work from the US Army’s LogCAP IV contract, on which the company competes with DynCorp (DCP) and KBR (NYSE:KBR) for individual projects. Average margins on LogCAP IV revenues are expected to be in the 4% to 4.5% range for the work Fluor will be doing; for comparison, KBR’s operating margins on its Government & Infrastructure segment this year have been 4.8%.

Turning to McDermott (NYSE:MDR), the earnings news was not so upbeat. The company announced problems with a few of its pipeline laying projects in the Middle East, and said that because of workforce issues, poor weather, and generally lower productivity there was no real hope of those projects being profitable.

While most of the discussion on the conference call related to how McDermott would adapt to the adverse profitability on the rest of its pipeline backlog work, new CEO John Fees did offer some insights into the relative stability of various segments in terms of pushing forward with planned work. He reiterated what Boeckmann and KBR CEO Bill Utt said, in that the oil majors and national oil companies can finance these projects off of their existing balance sheets and do not require capital market access – likewise with government spending, which is (surprise!) not expected to decrease. Utilities companies were singled out as the most credit-sensitive of McDermott’s customers, although it was estimated that a majority of their spending on new plants will have to wait until there is visibility on emissions legislation.

DynCorp’s conference call helps shed some light on the outlook for Government & Infrastructure work in Iraq and Afghanistan. CEO Bill Ballhaus said that he expects President-elect Obama to stick with the current plan for Iraq, targeting a drawdown there by the end of 2011. This implies that Iraq will continue to be a sizable opportunity for G&I contractors for several years, and that work there is likely to temporarily increase in the scenario of a withdrawal. Further, Obama is anticipated to be more friendly toward increased involvement in Afghanistan, and prospects there look good through 2010 with the possibility for more work to be done to accommodate an increase in force levels.

While there has been talk about reducing contractor levels in Iraq, in particular, DynCorp believes that to be essentially empty talk. Ballhaus said that with the existing commitments stretching military manpower capacity, contractors add value by letting the military focus on security operations.

See how it all relates: KBR, a Hedge Fund Liquidation Play.

Disclosure: none