FWLT (MM)

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.

 
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