U.S. Markets open in 2 hrs 42 mins

Edited Transcript of MDR earnings conference call or presentation 29-Apr-19 12:30pm GMT

Q1 2019 McDermott International Inc Earnings Call

HOUSTON May 1, 2019 (Thomson StreetEvents) -- Edited Transcript of McDermott International Inc earnings conference call or presentation Monday, April 29, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Dickson

McDermott International, Inc. - President, CEO & Director

* Scott Lamb

McDermott International, Inc. - VP of IR

* Stuart A. Spence

McDermott International, Inc. - Executive VP & CFO

================================================================================

Conference Call Participants

================================================================================

* Andrew Alec Kaplowitz

Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head

* Chad Dillard

Deutsche Bank AG, Research Division - Research Associate

* Jamie Lyn Cook

Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst

* Martin Whittier Malloy

Johnson Rice & Company, L.L.C., Research Division - Director of Research

* Michael Stephan Dudas

Vertical Research Partners, LLC - Partner

* Tahira Afzal

KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to McDermott International's First Quarter 2019 Financial Results Conference Call.

(Operator Instructions) I will now turn the call over to Scott Lamb, McDermott Senior Vice President of Investor Relations. Please go ahead.

--------------------------------------------------------------------------------

Scott Lamb, McDermott International, Inc. - VP of IR [2]

--------------------------------------------------------------------------------

Thank you, operator, and good morning, everyone. Joining us on the call today are McDermott's President and Chief Financial Officer, David Dickson; and Executive VP and Chief Financial Officer, Stuart Spence.

I would like to remind you that we are recording this call and the replay will be available on our website, where you can also find a copy of our press release and our Form 10-Q. We've also posted a presentation of supplemental financial information.

Additionally, our comments today include forward-looking statements, including estimates. These forward-looking statements are subject to various risks, contingencies and uncertainties and reflect management's view as of today, April 29, 2019. Please refer to our filings with the SEC, which are available on our website, including our Form 10-K for the year ended December 31, 2018, and the Form 10-Q filed today, which provide discussion of some of the factors that may cause actual results to differ from management's projections, forecasts, estimates and expectations. Please note that, except to the extent required by applicable law, McDermott undertakes no obligation to update any forward-looking statements.

I'll now turn the call over to David.

--------------------------------------------------------------------------------

David Dickson, McDermott International, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Scott, and good morning, everyone.

Our performance in the first quarter of 2019 sets the stage for McDermott to fulfill the long-term promise of potential of our combination with CB&I. As we anticipated and conveyed to you at the year-end, we are benefiting from strong market positioning, favorable sector dynamics and a robust pipeline, all of which contributed to solid top line performance and will foster continued realization of the strategic rationale for the combination.

These factors manifested in a number of positive trends that we expect will continue to accelerate our growth trajectory into the year: The pace of new orders more than quadrupled as compared to Q4; backlog grew 41% sequentially to a level that exceeds the total of the 2 companies prior to the combination; we completed our integration efforts and the full actioning of the $475 million CPI program; and of course, delivered on our commitment to deliver disciplined execution of the Cameron and Freeport projects with no material increases in cost estimates.

At Cameron in particular, over the past year, we have taken an active management role in all aspects of the project. We have strengthened leadership, oversight, execution, forecasting and reporting. And more recently, we have stepped up further to do more of the heavy lifting in relation to the commissioning activities that began on Train 1 during the fourth quarter. This expanded oversight and direction has given us additional leverage to drive the project forward through the commissioning process, where the risks are narrowing to typical commissioning-related risks, which are generally fewer in number and much smaller in terms of potential impact.

I see many parallels between the McDermott of 2019 and the McDermott of 2014. When I first arrived at McDermott, the company was struggling to address a number of issues, including several loss contracts, organizational efficiency and an unfavorable capital structure. We used the McDermott Playbook to address our issues one by one as we build new backlog to unleash the earnings potential of the company.

For those of you not familiar with the McDermott Playbook, let me offer a concise definition. It consists of the fundamental building blocks, several years in the company's original transformation in the 2014 to 2016 period and includes: Identify and stemming losses on problem projects; repairing and strengthening customer and partner relationships; maintaining a standardized industry-leading approach to project execution; adhering to rigorous cost control; operating under one common culture; and most importantly, applying disciplined bidding and risk management processes, which for example, resulted in a more favorable risk profile on the recently awarded Golden Pass contract and also reinforced our approach to become even more selective in our bid process, which in part explains why we elected not to pursue the NextDecade project. The net result of all of this is what we expect -- is that we expect to have a more attractive backlog profile on a go-forward basis.

We're doing essentially the same thing today, using the Playbook to successfully complete the execution of the Focus projects while at the same time steadily building a book of new business at more predictable margins that will provide the foundation for our future earnings and cash flows. We are improving organizational efficiency and have established a capital structure that serves our needs over the intermediate term. In this regard, I see 2019 as a year of stabilization and transition with 2020 as a year in which we'll begin to demonstrate our full potential. Based on what's in backlog today, we already have good visibility into our revenue stream beyond 2019, specifically with more than $9 billion of revenues for 2020 and thereafter.

Operationally, in the first quarter of 2019, with our steady progress on both Cameron and Freeport, McDermott has taken important steps to demonstrate disciplined execution on these projects. And within the past few weeks, we achieved important milestones on both projects.

At Cameron, where our relationship with the customer continues to strengthen, the recent introduction of feed gas was a major step forward in the commissioning of Train 1 and the common equipment that represents approximately 60% of all commissioning work and is a precursor for the production of liquefied natural gas. As I just mentioned, one of the underlying reasons for improved execution on the Cameron project is that we have taken a very active management role in all aspects of the project, including additional responsibility in directing the commissioning work. And in Freeport, we received FERC approval to bring in fuel gas for pre-commissioning of the pretreatment facility, another significant milestone.

So with the imminent completion of Cameron Train 1 as expected as well as initial work to commission Freeport Train 1, we're increasingly confident that the 2 facilities will come fully online in 2020 as world-class LNG plants.

Additionally at Cameron, we continue to make progress in our discussions with the customer regarding performance-based commercial structures for the continued execution and completion of the project. On our previous earnings call, we had told you that we are having these discussions and that we hope to reach an agreement in April. The negotiations are continuing in a collaborative and productive manner and we look to finalize an agreement within the next few weeks.

As for the company's bottom line performance in the first quarter of 2019, the net loss of $70 million was largely the result of $73 million of restructuring and integration and transaction cost, which also impacted operating income, offsetting otherwise sound performance across our operating segments and a sequential quarter reduction in SG&A expense.

Looking beyond the quarter, I continue to believe that McDermott is exceptionally well positioned to grow and prosper in all the world's key energy-producing regions. We take a decentralized approach to the market, operating through regional and local offices where we really know the market dynamics, where we cultivate stronger customer relationships and where we can offer -- we can often offer substantial local content, as supported by our recent announcements related to the development of additional fabrication capabilities in both Saudi Arabia and Qatar.

Now let me offer a summary view of each region. In the Americas, the dominant onshore themes are LNG and petrochemical spending in North America, both driven by low-cost feedstocks. Most of you are aware that U.S. LNG exports are expected to more than double by the end of this year with significant additional capacity still to come online. Of course, we are a participant in that market with the recently signed Golden Pass award as well as the Cameron and Freeport projects. And in the ethylene market, North American demand is expected to stay elevated with new derivative additions and export terminals being added.

The Gulf of Mexico remains a core deepwater player for the IOCs. We think the near-term focus will be on subsea tiebacks with the next wave of greenfield deepwater contracts driving medium- to long-term growth through 2025. And in Trinidad and Tobago, where we're already executing the Cassia C project, BP and others are targeting a number of new developments in the next 10 years.

In our EARC segment, the near-term excitement is LNG in Africa, with the 2 Mozambique developments expected to reach FID this year. We are part of a consortium that has already been designated as the EPC contractor upon FID for the Anadarko project and we have also submitted a bid for the adjacent Rovuma project being developed by ExxonMobil and Eni.

The offshore African market is picking up with renewed interest in developing fields offshore Senegal and Mauritania, where we recently began work on the BP Tortue EPCI project. That project represents a couple of firsts for us: Our first significant subsea EPCI project in West Africa and the first project using our state-of-the-art pipelay vessel, Amazon.

In the Middle East, where we have an extremely strong position, the IOCs are planning to invest large sums in energy infrastructure. Aramco alone has said it's looking to spend about $300 billion over 10 years with most of the expenditure likely to be incurred on upstream oil and gas projects, and much of that within the next 5 years. And other IOCs in the region are also investing on a robust pace. This is all very good news for us because of our competitive position, strong track record and close customer relationships in the region. Our recent track record in Saudi includes substantial completion of the Saudi Aramco LTA II project and ongoing work for projects in the Safaniya, Berri and Marjan fields. Elsewhere in the region, we're successfully executing major jobs in Qatar, Oman and Abu Dhabi.

In APAC, we are seeing the market really start to come back with several multibillion-dollar gas field development projects in Australia nearing FID. Operators there are planning to invest an estimated $30 billion on a number of large-scale developments, such as Scarborough, where we're executing a FEED that is designed to convert to EPCI after FID by Woodside and BHP in 2020. That contract is an example of a revenue synergy by which we mean an award that neither legacy McDermott nor legacy CB&I would have been able to win individually. But the new McDermott was able to win the bid because of its combined expertise in the areas of subsea and gas processing technology.

Also in the Indian market, according to market reports, ONGC is expected to award offshore projects of $1 billion to $2 billion per year over the next several years. And as we're currently executing the integrated surplus SPS contract, we are consorting with Baker Hughes GE and Larsen & Toubro on the ONGC KG 98/2 project. We believe we are well positioned to win a meaningful share of this upcoming work.

And then taking a step back from a purely regional view of our markets and shifting to a global perspective, I would also tell you that our technology business has identified approximately $39 billion of potential EPC pull-through opportunities in the downstream market, which for us includes both petrochemical and refining.

So in light of market dynamics and our geographic presence in key regions, we have every reason to be optimistic about 2019 and beyond. Clearly, the company continues to exhibit commercial success in a steadily improving market. In particular, McDermott reported a book-to-bill ratio of 3x, a new award total of $6.7 billion and a record backlog of $15.4 billion, which is 20% higher than the total backlogs from the 2 companies prior to the combination. Included in our orders this quarter were some of the projects I just mentioned: Golden Pass, BP Tortue, Marjan TP-10, along with many others.

Additionally, we're continuing to enhance our FEED offering to the market. In particular, the amount of FEED work we are doing has increased since the combination. We are executing preFEEDs and FEEDs that represent potential EPC or EPCI projects having a contract value of $5 billion to $7 billion. Clearly, the level of new awards in the first quarter demonstrates customer confidence in the combined company, which is further supported by our $91 billion revenue opportunity pipeline.

With that I'll turn it over to Stuart for details on the first quarter financials.

--------------------------------------------------------------------------------

Stuart A. Spence, McDermott International, Inc. - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Thanks, David, and good morning, everyone. The company today reported revenues of $2.2 billion for the first quarter of 2019. As was the case in Q4, revenues were largely driven by the execution of LNG and downstream projects in our NCSA segment and by offshore projects in the Middle East.

Our net loss for the first quarter was $70 million or $0.39 per fully diluted share, impacted by $69 million of restructuring and integration costs which included change in control, severance, professional fees and a litigation settlement as well as $4 million of transaction costs associated with the ongoing process to sell the company's noncore storage tank and U.S. pipe fabrication businesses. The unfavorable impact of these items was partially offset by tax benefits of $34 million related to the settlement of a customer claim and a favorable court ruling.

The adjusted net income for the first quarter of 2019 was $3 million or $0.02 per fully diluted share, excluding the restructuring, integration and transaction costs.

Operating income for the first quarter of 2019 was $13 million or $86 million on an adjusted basis, excluding the previously mentioned restructuring, integration and transaction costs. Operating income for the first quarter was favorably impacted by the execution of various projects in MENA and NCSA as well as a continued strong performance in the Technology segment. Additionally, we saw a 23% sequential quarterly reduction in SG&A.

As we said in our earnings release, the Cameron and Freeport projects incurred no material changes in estimates during the quarter. As of quarter end, the Cameron project was about 90% complete with Phase 1 achieving mechanical completion during the period. Cameron Train 1 is scheduled for initial production of LNG this quarter. Initial production of LNG from Trains 2 and 3 at Cameron is set for Q1 of 2020 and Q2 of 2020, respectively. Our expectation of cash usage by Cameron for the full year 2019 is essentially in line with previous guidance of about $450 million.

The Freeport project progressed during the quarter, reaching 93% completion. The project achieved a milestone earlier this month with FERC approval to bring in fuel gas for pre-commissioning of the pretreatment facility. Freeport is scheduled for initial production of LNG as follows: Trains 1, 2 and 3 in Q3 2019, Q4 2019 and Q1 2020, respectively. Our expectation of cash usage by the Freeport project in 2019 is $33 million, which is modestly less favorable than previous guidance and is due largely to revised estimates of the timing of milestone payments. Said another way, the cash usage in Q1 was higher than expected, but we are forecasting the project to generate cash over the remaining 9 months of this year.

Now let me offer a few summary comments on our segment performance. Our NCSA segment had revenues of $1.4 billion, primarily driven by the Cameron LNG, Freeport LNG, Entergy power and Total ethane cracker projects. Operating income and margin for NCSA were $73 million and 5.3% during the quarter. Key contributors to operating income were the Total ethane cracker, LACC ethylene cracker, LA-MEG petrochemical, Shintech ethylene cracker, Entergy Lake Charles power and Entergy Montgomery County power projects.

Our next segment is EARC. Here, revenues of $148 million were primarily driven by engineering and procurement progress on the Total Tyra Offshore project, procurement on the Afipsky refining project and construction on the Lukoil refining project. Operating income and margin for EARC were $7 million and 4.7% during the quarter. Key contributors were the Total Tyra and Afipsky projects.

In our MENA segment, we reported revenues of $380 million primarily driven by procurement, fabrication, marine and hookup activity on several offshore projects, including Saudi Aramco's Safaniya Phase 5 and 6, QP Bul Hanine and Saudi Aramco LTA II; as well as engineering, procurement and construction on several onshore projects, including the ADNOC crude flexibility refinery, the SASREF Refinery and the Liwa petrochemical EPC lump-sum work. Operating income and margin from MENA were $66 million and 17.4%.

In our APAC segment, revenues were $155 million driven by substantial completion of the offshore campaign for reliance KG-D6 subsea project in India and various other projects across the region. Operating income and margin for APAC were $13 million and 8.4% during the quarter primarily driven by various projects and closeouts.

In our Technology segment, revenues were $148 million primarily driven by licensing and proprietary supply including catalysts in the petrochemicals and refining markets. Operating income and margin for Technology were $35 million and 23.6% during the quarter primarily driven by catalyst shipments, execution progress, earned fees and process performance.

In our Corporate segment, expenses were $181 million, mainly attributable to selling, general, administrative and other expenses of $48 million; $54 million of unallocated operating costs related to the under-absorption of certain of our operating assets; and as I mentioned earlier, $69 million of costs for restructuring and integration; and $4 million of transaction-related cost associated with the ongoing process to sell the company's noncore storage tank and U.S. pipe fabrication businesses.

At the end of the first quarter, we had fully actioned our $475 million Combination Profitability Initiative. However, implementation of certain program elements, such as Information Technology systems, is still ongoing. McDermott's operating results for the 3 months ended March 31, 2019, included approximately $66 million of CPI savings. The full benefit of annualized run rate savings is expected in 2020, partially offset by inflation, competitive pricing and the impact of percentage of completion accounting. We will continue to invest in opportunities to capture additional efficiencies and cost savings over time.

McDermott's cash used in operating activities during the first quarter of 2019 was $244 million, which is consistent with our expectation that the continued funding of previously announced cost increases on the Focus projects will be weighed to the first half of the year. Total cash availability was $1.1 billion at the end of the period, consisting of $413 million of unrestricted cash and $714 million available under the revolver.

Turning to letter of credit capacity. McDermott had $1.7 billion of combined availability under its principal letter of credit facilities, uncommitted bilateral credit facilities and surety arrangements. The company was in compliance with all financial covenants under its financing arrangements as of March 31, 2019.

Our net working capital at the end of the fourth quarter was negative $2 billion, which is relatively unchanged from the fourth quarter as the funding of the Focus projects was largely offset by normal project-related working capital movements and roughly $100 million of the current portion of long-term lease obligations now included on the balance sheet as a result of the new lease accounting standard. We still believe that our net working capital position will shrink over the course of the year, moving to approximately negative $1.3 billion by the end of 2019.

Now just a quick summary of where we are with our previously announced plans to sell our U.S. pipe fabrication business and our industrial storage tank business. The sales processes have generated a high level of interest for both businesses. Second round bids for the pipe fabrication business and first round bids for the storage tank business were received in April. And as many of you know, our financing arrangements require that if we sell any individual asset or business for more than $500 million, the proceeds must be used for debt reduction. There is no change to our expectations for completing the transactions. The sale of the pipe fabrication business is expected to close in Q2 2019 and the sale of the tank business is expected to close in Q3 2019.

Turning now to our view of 2019. We are updating our guidance, which as a reminder, is based on our current portfolio of businesses. Once we complete the sale of the pipe fabrication business and the storage tank businesses, we will update the guidance appropriately.

Let me recap the highlights. We're expecting revenues of about $10 billion, most of which is already in backlog. Specifically with the $2.2 billion of Q1 reported revenues and an expected backlog roll-off of $6.2 billion over the next 3 quarters, we have coverage of 80% or more.

We expect our adjusted operating income for 2019 to be about $800 million and adjusted EBITDA of about $1.1 billion, all of which points to adjusted net income of about $310 million or $1.65 per diluted share, essentially unchanged from our prior guidance.

We expect negative cash flow from operations of about $310 million. This is an unfavorable movement relative to previous guidance and is based largely on timing. In particular, the expected award of 1 mega contract for a petrochemical prospect and its corresponding advance payment has slipped into 2020. Additionally, we've seen some routine slippage on milestone payments and a slight increase in estimated cash outflow on the Freeport, combined with the higher level of Q1 spending this year on restructuring and integration. After an expected level of CapEx around $160 million, we expect negative free cash flow of about $470 million.

We are comfortable with the company's liquidity profile over the course of 2019, supported by the $1.1 billion of cash and revolver availability that we had as of the end of Q1. Again, as a reminder, the proceeds from the anticipated sales of the pipe fabrication and storage tank businesses are not reflected in the guidance.

As far as the cadence of our earnings in 2019, we expect that the second half is likely to be much stronger than the first half with expected earnings ramping up sharply in the fourth quarter. This is in part due to higher revenues driven by the execution of recently booked backlog, which in turn will drive higher utilization. Additionally, we expect to see reduced revenue contribution from the 0-margin Focus projects and the benefit of cost synergies under CPI.

And with that, I will turn the call back over to David.

--------------------------------------------------------------------------------

David Dickson, McDermott International, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, Stuart. In summary, the key take away from today's call is that we are using the McDermott Playbook to successfully complete the execution of the Focus projects while at the same time steadily building a book of new business that will provide the foundation for our future earnings and cash flows. Clearly, the company continues to exhibit remarkably strong commercial success in what we see is a steadily improving market. We see 2019 as a year of stabilization and transition with 2020 as the year in which we'll begin to demonstrate our full potential with a continued laser focus on excellence and execution.

Having completed the integration and now clearly witnessing the combined market power of the 2 companies, we have continued to validate and strengthen the strategic rationale for putting McDermott and CB&I together. As a reminder, that rationale was built upon 3 drivers: Firstly, adding a technology capability that would enable us to tap into a significant pull-through opportunity; secondly, diversifying beyond offshore and subsea and more specifically establishing an onshore presence in the growing LNG and petrochemical markets; and thirdly, gaining significant scale to enhance and broaden our competitive position.

We are very optimistic about the company's path forward, the backlog visibility we have into 2020 and beyond and excited about the opportunities to create long-term value for shareholders, investors, customers and employees.

And on that note, we'll open the line for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Martin Malloy with Johnson Rice.

--------------------------------------------------------------------------------

Martin Whittier Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [2]

--------------------------------------------------------------------------------

Could you talk maybe a little bit more about the Cameron project and the schedule? It looks like the completion dates for Trains 2 and 3 slipped by about a quarter and maybe the implications related to the commercial discussions, how that's all rolled into that?

--------------------------------------------------------------------------------

David Dickson, McDermott International, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Yes. Marty, it's David. So on Cameron, the schedule is -- we're now focused with the customer on what we call ready to load first cargo. And as the number of dates have been kicked out there with regards to certain stages of completion, the schedule that we have today and what we've mentioned this morning is in line with the schedule that we took at the end of Q4. So there are no more project charges. So this is what was already based. And what I can say is that since we put that schedule together is that the project has performed against that schedule today. So things are progressing fairly well. We always throw out the caveat that we are in commissioning mode, so we always have to be careful of the unknowns that could occur as we get through the commissioning process.

With regards to discussion on the amendment, those discussions are ongoing. They're ongoing as we speak. And as we said in the prepared remarks, we're hoping that we can come to a conclusion with a customer over the next few weeks. But as yet, it's too early to disclose any details.

--------------------------------------------------------------------------------

Martin Whittier Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [4]

--------------------------------------------------------------------------------

Okay. And then as you look forward, judging from the discussion on Technip's call on Friday of last week and then your call this morning, it seems like a number of the end markets -- important end markets for you, look to be tightening up substantially in 2020 in terms of capacity. Can you maybe talk about the risk-sharing pendulum and maybe how that's moved with respect to discussions with customers about new contracts?

--------------------------------------------------------------------------------

David Dickson, McDermott International, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Yes. I think the end markets are all at different stages. So what's happened in the LNG space is different probably from what's happening in the shallow water offshore, which is different what's happening as in the deepwater subsea. I would say today, the deepwater subsea is the market which is -- although we're seeing some uptick into the market, which today is obviously moving probably the slowest back to recovery, I would say that the shallow water offshore market has really seen quite a big pickup mainly driven by what's happening in the Middle East, and a lot of that is obviously in the press. And you can see there's also an increased activity with the IOCs in places like Mexico.

I think the big focus we have today is obviously is on the big onshore contracts where, again in my prepared remarks, touched on the fact that we are a lot more focused obviously in our bidding discipline, but we're also now starting to become a little bit more selective in which projects that we'll chase. And as part of that, we are having discussions with customers around the risk profile that we are prepared, as contractor, to take versus what the customer is to take. And I would say that since the news on Cameron and Freeport broke back 2 quarters ago, is that we have seen a change in some of the discussions that we're having with customers with regards to these large multibillion dollar type onshore projects.

So I'll say we're at the early stages of that, but I think it's clear that our customers can see the challenges of the scale of these projects and the quantum of the risk versus the size of the balance sheets of the EPC contractors. So I think this will happen over the next 12 months. I think we'll see a change.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question will come from the line of Jamie Cook, Crédit Suisse.

--------------------------------------------------------------------------------

Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [7]

--------------------------------------------------------------------------------

I guess just a couple questions. One, it sounded like you guys talked about fairly good visibility in revenues in 2020 already. So just given the competitive dynamics out there and assuming you guys are back on track in terms of execution, is there any way you could frame sort of normalized margins for us?

And then my other question is just on cash flow, the assumptions for 2019. What are you assuming in terms of advanced payments on what you've already won or what's pending to come?

And then last question. I'm hearing on some of the projects that you have won, there's been a change in terms of risk dynamics between you and your joint venture partners. So could you just talk about whether there's been any changes in who's taking all of the construction risk?

--------------------------------------------------------------------------------

David Dickson, McDermott International, Inc. - President, CEO & Director [8]

--------------------------------------------------------------------------------

So we'll split that between the myself and Stuart, Jamie. I think I heard 3 questions there. So on the margins, again, different for each of the end markets that we're working and whether it's LNG, pet chem, shallow water offshore or deepwater offshore. So I would say today that deepwater offshore is still where margins are still compressed. There still is quite a lot of capacity in the marketplace. And as I said earlier, that we're still not seeing that market coming back to the levels of where it was 3 or 4 years ago. So I think we'll stay in that position for the foreseeable future.

I think on the shallow water offshore, with the level of bidding that we have today, we're starting to see a pickup and in particular touching on the Middle East with the large volume of potential awards, particularly with Saudi Aramco.

I think on the LNG, I think today we're focused on 2 things. We're obviously focused on margin, but also the margin needs to reflect the level of risk. So I'd say that today we are more focused on what the risk profile is over the margin, depends on how much of it would be lump-sum, turnkey and obviously how much of it would be reimbursable. So we've got to look at both margin and risk in parallel.

I'll pass the cash flow. Stuart, you want to do the one with cash flow?

--------------------------------------------------------------------------------

Stuart A. Spence, McDermott International, Inc. - Executive VP & CFO [9]

--------------------------------------------------------------------------------

Yes. Thanks, David. And Jamie, yes, on the cash flow for 2019, we've obviously built in the advance and milestone profiles of all of the Q1 awards. We also are still expecting a substantial amount of new awards coming in over the balance of the year, and those advances have also kind of been baked into guidance.

I would say that we just haven't seen any structural change in our working capital terms around our contracts as yet. But as the cycle recovers, we're obviously pushing to try and get the contracts more cash positive than previously.

Also on the margin profile for 2020, just picking up from David's comments, it's just a little bit too early, Jamie, to kind of give insight into 2020. Although I would maybe add to David's is that the pricing environment still remains competitive around the globe as we and our peer group continue to rebuild our backlog, as a substantial portion of the backlog has reduced over the last 3 to 4 years.

--------------------------------------------------------------------------------

David Dickson, McDermott International, Inc. - President, CEO & Director [10]

--------------------------------------------------------------------------------

Yes. And Jamie, and then on the last question. Following our experiences on Cameron and Freeport, as we look forward to these large LNG contracts where we're partnering, we have looked to restructure our agreements. We don't disclose any of that, but certainly we've looked at the agreements from a risk allocation basis amongst the partners.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Our next question will come from the line of Tahira Afzal, KeyBanc.

--------------------------------------------------------------------------------

Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst [12]

--------------------------------------------------------------------------------

So David, last quarter, you talked a bit about potentially some recoveries and settlements from Sempra that could go in your favor. When you talk about reaching some commercial segment, what have you, do you they still include some optimism around that?

--------------------------------------------------------------------------------

David Dickson, McDermott International, Inc. - President, CEO & Director [13]

--------------------------------------------------------------------------------

Yes. I think I answered that with Marty, and we talked about in the prepared remarks. We have really strengthened our relation with Sempra and with the other owners of Cameron. And we've also demonstrated now for a few months that we are -- we've got our arms around the project. Although we're -- I've always used that caveat with regards to things that could come up on commissioning. So I would say that relationship between the EPC contractors and customers has strengthened significantly. And we have been in dialogue around an amendment. We had hoped to finalize all that by April but discussions are still ongoing. And I guess as I said earlier, is that we hope to conclude them, those discussions, over the next -- this next few weeks.

--------------------------------------------------------------------------------

Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst [14]

--------------------------------------------------------------------------------

Got it. Okay. And David, I know we are supposed to see the completion of the fab yard sale pretty shortly, but we've got 2 months left in this quarter, so can you maybe size up your optimism? Is it more back-end loaded or front-end loaded? Or what could be the moving parts that move it closer to now than really the end of June?

--------------------------------------------------------------------------------

Stuart A. Spence, McDermott International, Inc. - Executive VP & CFO [15]

--------------------------------------------------------------------------------

Yes, Tahira. It's Stuart here. On the U.S. pipe fabrication sale, we've had great interest in that business. We do have the second round offers in and we're moving quickly through that process. Right now we are forecasting we'd close that transaction by the end of June.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Our next question will come from the line of Andy Kaplowitz, Citi.

--------------------------------------------------------------------------------

Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [17]

--------------------------------------------------------------------------------

David, Stuart, I want to follow up on Jamie's question around cash flow for a second. She asked about advance payments. But you did mention that Freeport cash slipped a little. And given you had modestly more difficult contract conversations last quarter around Hurricane Harvey and announced a little bit of a milestone slippage in Freeport, can you talk about the relationship you have with that customer? And how much risk there is of a little more cash bleed on the Freeport project going forward?

--------------------------------------------------------------------------------

David Dickson, McDermott International, Inc. - President, CEO & Director [18]

--------------------------------------------------------------------------------

Yes, Andy. We continue -- Freeport project continue to progress well. Again, we're moving into the commissioning phase. So also we're happy how things have progressed there. The negotiations on Hurricane Harvey, we did get an outcome that's probably not the outcome that we were -- obviously we were striving for, but we did receive -- did reach mutual agreement with the customer. Stuart, do you want to touch on that?

--------------------------------------------------------------------------------

Stuart A. Spence, McDermott International, Inc. - Executive VP & CFO [19]

--------------------------------------------------------------------------------

Yes, sure. Just on the milestones, Andy, you'll note from the progress that Freeport is further along in its construction phases on all 3 trains. That was the preferred execution path of us and the customer. And because the construction is further advanced, the risk of milestone slippages and changes becomes less because we're now more focused on the overall commissioning of the 3 trains.

--------------------------------------------------------------------------------

Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [20]

--------------------------------------------------------------------------------

That's helpful, guys. And David, I wanted to ask you about backlog and bids and change orders. Obviously, very strong performance on backlog. If I look at the bids and change orders and targets outstanding, they went down by about the amount of backlog. And so I guess, if I'm being -- if I'm picking at stuff, I'd say it seems like the bookings in the quarter, we found it was delayed works in the second half of '18. But given the rise in oil prices and maybe a little more confidence out there, I would have expected your bids, change orders targets to go up by more than the backlog went down. So I mean, I guess, how would you respond to that? I think it's a picky question, but you understand what I mean.

--------------------------------------------------------------------------------

David Dickson, McDermott International, Inc. - President, CEO & Director [21]

--------------------------------------------------------------------------------

Yes, yes. I think it's just a timing issue, Andy. I'm not overly concerned about it. When you're talking of a revenue opportunity pipeline of $91 billion, it's still a reflection of how strong the markets are looking out there. We think that the next wave of -- we talked about the petrochemical business and the number of those pull-through opportunities probably at this stage are not coming into that $91 billion because we only look at the 5 quarters out. And I think a lot of the petrochemical stuff is going to happen sometime late 2020. So as we're sitting here today, we're not concerned whatsoever with regards to the slight drop in our revenue pipeline.

--------------------------------------------------------------------------------

Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [22]

--------------------------------------------------------------------------------

So outside of Anadarko, would you expect backlog to grow over the next few quarters?

--------------------------------------------------------------------------------

David Dickson, McDermott International, Inc. - President, CEO & Director [23]

--------------------------------------------------------------------------------

Yes. I mean, I think that the outstanding bids that we have today, we have a significant number of bids outstanding. Just the Saudi Aramco alone on the offshore and obviously our history would say that we would expect to pick up some portion of that work. Obviously, the news on Anadarko, we're selected and that we're waiting on FID. Obviously, the number of questions around the sale of Anadarko to Chevron or more recently Occidental. But what we're hearing from Anadarko is that it shouldn't impact moving this project ahead. So I think there's visibility and optimism, is that we should look to continue to book some good awards over this next coming quarter.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Our next question will come from the line of Chad Dillard of Deutsche Bank.

--------------------------------------------------------------------------------

Chad Dillard, Deutsche Bank AG, Research Division - Research Associate [25]

--------------------------------------------------------------------------------

So I just wanted to dig in. In the Q, it was mentioned that Freeport took a $27 million charge. So I was just hoping you could give a little more color on that. And just understanding, was it more on Train 1 or was it on the subsequents? Just trying to figure out how much risk there is here.

--------------------------------------------------------------------------------

David Dickson, McDermott International, Inc. - President, CEO & Director [26]

--------------------------------------------------------------------------------

Sorry, Chad. Could you just repeat the question for us?

--------------------------------------------------------------------------------

Chad Dillard, Deutsche Bank AG, Research Division - Research Associate [27]

--------------------------------------------------------------------------------

Yes. So I just wanted to dig in on the Q, which mentioned that Freeport, I think it took a $27 million charge. So I just wanted to get a little more color on that and whether it was more of an issue on Train 1 or any of the subsequent trains.

--------------------------------------------------------------------------------

Stuart A. Spence, McDermott International, Inc. - Executive VP & CFO [28]

--------------------------------------------------------------------------------

Yes. So if you look at the details in the Q, as you know, on the Freeport project, we're in a different consortium on Trains 1 and 2 to Train 3. As we refined our estimates in the quarter, we increased marginally some cost on Trains 1 and 2, but given the productivity that we're seeing and the progress that we're seeing, we reduced our estimates on Train 3. So overall as a project, there was no change in cost, total cost to complete for the entire project, albeit with some POC accounting, with Trains 1 and 2 in a loss, you take that amount and Train 3 gets kind of percentage of completion. So there was just a very, very minor immaterial net change for the quarter and the P&L, albeit for the entire project, we did not change our cost estimate for the project.

--------------------------------------------------------------------------------

Chad Dillard, Deutsche Bank AG, Research Division - Research Associate [29]

--------------------------------------------------------------------------------

Got you. That's helpful. And then just on the cost synergies. I think you've mentioned there was about $66 million realized in the first quarter. Just trying to think through just what the total cash amount realized would be for the full year. And then I guess maybe like what would the net impact be if we had to take into consideration pricing and maybe some additional cost on the business?

--------------------------------------------------------------------------------

Stuart A. Spence, McDermott International, Inc. - Executive VP & CFO [30]

--------------------------------------------------------------------------------

Yes, sure. So we haven't given precise breakdown of the guidance for the full year of how much we've included for our CPI program, both P&L or cash, Chad. We've kind of given it -- we just give it as a quarterly update. In general, as we look through the savings, they are all real and they're all real from a cash perspective. Some of them have been consumed by competitive pricing on new awards. They're also used to offset other general project risks in the portfolio so you're not seeing all of them come down to the bottom line. And lastly, also as we go into this recovery cycle, we are seeing that little bit of inflation on our supply chain side. And again, our CPI helps us offset that.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

And we have time for one more question. It comes from the line of Michael Dudas with Vertical Research.

--------------------------------------------------------------------------------

Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [32]

--------------------------------------------------------------------------------

Maybe just a little bit broader on your bidding practice. You mentioned in the preFEED and FEED work that you've been accelerating, there's $5 billion to $7 billion in the pipeline, you mentioned $39 billion of pull-through opportunities and also indicated that next decade is -- I mean, you guys should decide not to go through with that competition. What -- is it the market cycle and pricing and risk mitigation that's driving what you anticipate you're going to add to your backlog and revenue flow over next 12 to 18 months? Or is there some internal return requirements that you're spreading out, whether it's regional or project specific? Just so we can get a better sense of how the improvement in the markets can flow through to the risk-adjusted margins that you may generate over the next couple of years.

--------------------------------------------------------------------------------

David Dickson, McDermott International, Inc. - President, CEO & Director [33]

--------------------------------------------------------------------------------

Yes. So Michael, all of those things you mentioned, we take that into consideration when we're looking at bids today. And again, we look at things differently depending on which of the end markets. I would say today, now that we've gone through a whole process of benchmarking, et cetera, et cetera, for the large LNG, our big focus is on execution. And that -- excuse me.

And so one of the things that we're looking at now for future bids really is the capacity that we have to take on more of these large contracts. There are a number of other LNG projects that are coming up, but we need to take a good look at our capacity from an engineering basis, from a project management basis. And in some cases, we will fabricate in modules like in our fabrication, overall capacity.

So as we look at these things, we're looking at everything from the level of competition, geographical location, the customer ability to win it, the margin. But real big focus today is really is our ability to actually execute it with the capability and the capacity that we have.

--------------------------------------------------------------------------------

Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [34]

--------------------------------------------------------------------------------

And let me -- just to follow up. How do you characterize your current capacity, seeing the fab module yards, and how that's starting to dissipate as you're booking more business and how it looks for maybe 2020-type opportunities? And you think about, on LNG, you've been talking about how many large projects. Define what you mean by large, and how many you think McDermott's has the capacity to execute once Cameron and Freeport roll off, in addition obviously of Golden Pass, that's scheduled to come through.

--------------------------------------------------------------------------------

David Dickson, McDermott International, Inc. - President, CEO & Director [35]

--------------------------------------------------------------------------------

Yes. So Michael, a lot of the questions you asked there is obviously commercially sensitive. So obviously be reluctant to answer. What I would say is that with the projects we're looking at and the whole concept of modularization is that 2020 is looking good for our utilization perspective of or facilities. And in some cases, we'll probably look to expand those facilities where we can expand easily and that they're already prepared for expansion. So the way I'd look at it today is looking at the revenue pipeline that we have, the existing backlog that we're being awarded, is that if I look at utilization for next year, are things are trending in the right direction.

--------------------------------------------------------------------------------

Scott Lamb, McDermott International, Inc. - VP of IR [36]

--------------------------------------------------------------------------------

All right. Well thank you, everyone, for taking the time to listen to our call. As a reminder, a recording of the call will be available for replay for 7 days on our website, McDermott.com.

Operator, that concludes our call.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Thank you for joining us for today's conference call. This concludes the call. You may now disconnect.