Mcdermott International Inc (MDR) Q4 2018 Earnings Conference Call Transcript
Image source: The Motley Fool.
Mcdermott International Inc (NYSE: MDR)
Q4 2018 Earnings Conference Call
Feb. 25, 2019, 8:30 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning, everyone. Thank you for joining us. On the call today are McDermott's President and Chief Executive Officer, David Dickson; and Executive Vice President and Chief Financial Officer, Stuart Spence.
I'd 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-K. We've also posted a presentation of supplemental financial information. Additionally, our comments today include forward-looking statements and estimates. These forward-looking statements are subject to various risks, contingencies and uncertainties, and reflect management's view as of today, February 25, 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. These documents 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 -- President, Chief Executive Officer, Director
Thanks Scott and good morning, everyone. By now, I'm sure you have seen the headline numbers for our fourth quarter. For the most part, the loss was due to non-recurring, non-cash charges related to our combination with CB&I and other end of the year adjustments. A number of these adjustments were driven by accounting requirements and in our view, are not indicative of our underlying earnings potential or our strong market position going into 2019.
We have a number of reasons to be optimistic about 2019. The market outlook is exceptionally positive for McDermott and elements of our playbook of generating substantial results. Customer confidence in McDermott is as strong as it's ever been as demonstrated by robust order intake early in the first quarter of 2019 with approximately $5.5 billion of bookings to date and further awards anticipated before the quarter end as well as the 16% sequential quarter increase and our revenue opportunity pipeline in the fourth quarter of 2018 to approximately $93 billion, which is a record level for us.
The LNG cycle is here and continuing. The petrochemical cycle is emerging and the offshore cycle appears to be shifting into high gear as illustrated by the 30% sequential quarter increase in our offshore bids, change orders outstanding and targets as of the end of Q4. The momentum in the offshore market reflects in part the increased capital investment plans that have been discussed publicly by Aramco, QP and other NOCs in the region.
Our relationship with Baker Hughes GE is delivering great results as demonstrated by the deepwater KG-98/2 offshore award in India for a project that combined SURF plus SPS. This award comes on the heels of two other recent awards for our IO partnership with Baker Hughes GE, one for our project in Western Gas in Australia for the Equus Gas Project and another with Thales Energy (inaudible) few development in the Gulf of Mexico.
We are pleased to see the enthusiastic customer support for this partnership and we expect to see additional similar awards. These and other such offshore awards contributed to a 16% sequential quarter increase in our backlog of offshore subsea work. With these latest awards, we believe we have an industry-leading backlog for combined SURF and SPS work.
Above and beyond the improving market conditions, our optimism about 2019 takes us into account == takes into account the planned sale of the pipe fabrication and storage tank businesses and our total cash availability of $1.4 billion at the end of the fourth quarter. As a result of these and other factors, we are pleased to introduce earnings guidance for 2019 that reflects a sharp improvement in most of our key metrics, including an expectation of 2019 EBITDA of approximately $1 billion, which is broadly consistent with the expectations that were originally outlined in connection with a combination with CB&I.
This opportunity must be balanced however, with the reality of the occurring changes in estimates on the focused projects and the impact they have had on your view of our combination with CB&I. I'd like to take a little time today to address this issue and the approach we have taken in managing our risk exposure and more recent awards.
Since we closed the transaction in May of last year, the market's view of the underlying rationale of the transaction as understandably been colored by the charges we have taken on the focus projects.There is no denying that the charges -- that we've had to take since the second quarter of last year have been very disappointing for you and for us.
We knew that these projects were going to be challenging when we made the decision to pursue the transaction and while the magnitude of the financial impact has been greater than we anticipated, we also believe then and have since confirmed firstly, that CB&I's problems were limited to those projects. Secondly, that the rest of the portfolio is sound and thirdly, that under our management the mistakes made when these projects were bid, will not be repeated.
I think it's important to provide context, for where we are today and our evolution. Our business combination with CB&I has transform McDermott International into our top-tier integrated provider of technology, Engineering and Construction solutions for the energy industry. McDermott today is fundamentally different, a different company than it was at the end of 2017, much larger with a formidable new global presence and significant onshore markets and then enormously valuable franchise, is a world leader in the licensing of technology for refinery and petrochemical processes. As a result of our transformation, the company more than doubled its 2018 backlog, revenue and new orders to $10.9 billion, $6.7 billion at $5.6 billion respectively as compared to 2017.
The company is well positioned to generate long-term value for our shareholders, customers, employees and other stakeholders and we remain highly confident that McDermott playbook will deliver as it has done in the past. The first phase of our journey with CB&I has presented us with challenges that have sharpened our resolve, unprompted rigorous, creative and sophisticated responses. The most notable of these challenges was the need to address significant cost increases on the focus projects that we took on from CB&I.
In response, we have made major changes in the on-site and area management teams, broad in new talent, including a new Chief Operating Officer and overhauled numerous processes and procedures. We have also made significant progress in repairing and strengthening our relationships with our customers and partners. We understand and share your frustration with a continued pure performance on these projects. When we reported our results for the third quarter, we said -- I said that we did not expect any additional material charges on the projects. And yet, here we are with changes in estimates, and all three of the projects in Q4; Cameron, Freeport and Calpine.
So what happened? Let's take the projects one at a time starting with the Calpine gas turbine power project, where we recorded a change in estimate of $31 million. The change was due to increased labor cost associated with a commissioning activity, including the efforts to achieve first fire and substantial completion, which is expected, within the next few weeks. We have basically closed the bid on this one and we are glad to have it behind us.
Now let's turn to the Freeport LNG project where we reported a change in estimate of $102 million in the fourth quarter of 2018, which was primarily due to a reduction and our assumed recovery of costs associated with Hurricane Harvey and not due to any assumed change in schedule or cost. As we have previously indicated, we have been in ongoing discussions with a client for several quarters, related to these recoveries.
As of the end of the third quarter, the joint venture of Zachary, Chiyoda and McDermott was highly confident in our position and have determined that we had no reason to change our view of the likely recovery. However, the discussions intensified and became difficult over the course of the fourth quarter as the customer appear to adopt a much less cooperative posture.
As a result, we determined that a more prudent view of our position would be to resist our assumed recovery for this claim. These discussions have not yet reached a conclusion and we continue to take a positive view of the eventual recoveries, which of course would have a positive impact on project financials. That said, the good news on Freeport is that the productivity has remained at targeted levels. The project has progressed to approximately 88% complete and the schedule has not changed since our previous update.
Now let's turn to the Cameron project, but before I get into a discussion on the cost position, I'd like to note an important point that our joint venture is engaged in discussions with a client on performance-based commercial structures for execution and timely completion of the Cameron LNG project.
The parties are working together for successful delivery of the project. We hope to conclude such discussions by the end of April. At this point, we have not included any of this in our numbers. Now, as you know we pre-announced a $168 million change in estimate a couple of weeks ago. That pre-announcement was designed specifically to respond to the Cameron related disclosures made the same day by our joint venture partner Chiyoda.
As I've said previously in talking about Cameron, we have implemented a wide range of substantive improvements in the execution of this project. We have changed supervisors teams reporting structures, labor and mining plans, forecasting methodologies and the flow of communications with our consortium members and with our customer.
And on our third quarter conference call, I said that we had gained a different understanding of the cost position on the project, which was an accurate reflection of where we were at that time. Unfortunately over the course of the fourth quarter, we saw that some of the improvements we made at the site were taking longer than expected to achieve and we intend to have some issues in the commissioning activity for Train 1.
In our Cameron pre-announcement on February 13, we said that the $168 million change in cost estimate was due to unfavorable wavier of productivity and the increases in subcontract, commissioning and construction management costs. And again, bear in mind the vast majority of the change in estimate does not represent a cost that was fully incurred in the quarter.
Rather it reflects our estimate of the overall increase in project cost from Q4 with a completion of the project. Unfavorable labor productivity represented about $72 million or about 45% of the charge and reflected once again a reduction in our assumed productivity levels and an increase in forecasted manpower on Trains 2 and 3. Some of this reduction is related to the multiple near-term impacts of temporarily shifting labor resources to Train 1 and away from ongoing work on Trains 2 and 3 to keep Train 1 on schedule for first gas.
Increases in subcontract costs represented about $36 million or about 20% of the charge. We have terminated a number of sub-contractors and are renegotiating contract terms with others, but the expected increase in manpower requirements for the specialized activities will still require us to use a number of such firms over the remainder of the project. Increases in commissioning costs represented about $25 million or about 15% of the charge and was due to unforeseen issues that arose during the commissioning of Train 1 and the resulting increase in the assumed cost of commissioning Trains 2 and 3.
And lastly, increases in construction management costs represented about $35 million or about 20% of the charge and was related to indirect construction labor expense associated with ramped up activity levels across the project in an effort to maintain schedule. Our aim is to put these kinds of cost increases firmly behind us, to put an end to the pattern of quarterly charges. I realize that the only way we can demonstrate this to you is to prove this their performance in future periods and that's what we plan to do. I don't want to belabor the subject of Cameron, but as I've said before, many of the difficulties that have been experienced along the way are attributable to the fact that this was a serious bid miss from the onset.
Part of that miss was the original promise of a 41 month schedule including commissioning to substantial completion, which was simply not realistic. When the project is completed next year, it will have taken about 56 months, which ironically is broadly comparable to the schedule of our newly awarded Golden Pass Project for which our bid and execution plan reflect all the lessons learned on Cameron and Freeport.
One final thought here before I leave the subject, because of the multiple estimate changes on Cameron, going back to the period before our combination with CB&I, it's easy to overlook what a remarkable project this really is. When completed, this will be a water-scale facility incorporating proven technology designed to produce nearly 14 million tons per year of liquefied natural gas.
Operationally, the project is on track to reach a major milestone with feed gas into the facility later this quarter. The gas turbine solo run was completed ahead of schedule, cold circulation of hot oil in Train 1 was completed during the fourth quarter and flare ignition testing was successfully completed on all flares. All these are crucial steps in the commissioning of Train 1, and we have accomplished all of this while maintaining an impressive safety record, 64 million work hours without a lost time incident achieved as of the end of January. And to recap, we hope to conclude discussions with a client in April, regarding performance-based commercial structures for the execution and timely completion of the project.
Now turning to the rest of the portfolio, fourth quarter results were unfavorably impacted by a number of discrete operating items and an unanticipated combination of circumstances, including weather delays and a lower level of project closeouts. That said, I would also note that the onshore portfolio aside from the focused projects continues to perform well.
On the Abkatun offshore project in Mexico, we took a charge due to a schedule driven change in the fabrication plant that did work offshore, subsequent weather delays and lack of contractually promised accommodations for offshore crew. We are working hard to recover a portion of these costs. Nevertheless, the Abkatun charge represents the first material loss position and a contract in our offshore portfolio in the past 5 years, a portfolio that is otherwise generated attractive returns.
However, the principal message today is this, with the integration being largely completed, the management team is redirecting its undivided attention to the McDermott playbook to ensure that operating performance across the entire portfolio meet such standard of excellence and execution. For those of you who are not familiar with McDermott playbook, let me offer a concise definition, it consists of the fundamental building blocks that were used in the company's original transformation in the 2013 to 2016 period and includes identify and stemming losses of problem projects, repairing and strengthening customer and partner relationships, maintaining a standardized industry leading approach to project execution, applying discipline bidding and risk management processes, adhering to rigorous cost control and operating under one common culture.
Additionally, as I just said, we believe our relationships with customers are stronger than it has ever been, and the pace of new awards has accelerated as evidenced by the first quarter 2019 announcements to date of approximately $5.5 billion of bookings, including awards for the Golden Pass LNG project, (inaudible) offshore projects, the Pan Malaysia Field Development, multiple storage tank projects and several technology licenses.
Additionally, our first quarter award for the Scarborough offshore project is another example of what we see as a revenue synergy project that we want specifically as a result of the combined capabilities of McDermott and CB&I. Now some additional perspective on the Golden Pass award. Each partner on this project has a sharply defined scope, (inaudible) scope is engineer, which includes quantity risk. Zachary scope is for the lead role in construction with a proportionately sizable share of associated risks for labor productivity, McDermott scope is for a more narrowly defined role in construction, specifically for what we refer to as OSBL or outside battery limits, which essentially includes the supporting infrastructure with a proportionally reduced share of labor productivity risk .
In addition to these three defined scopes, the partner shared equally and other activities such as procurement, logistics and certain commissioning activities. So that's an overview of the roles and responsibilities on the project. But the real headline here is that we expect this job to be completed with an attractive margin and cash profile. We expect it to be significantly more favorable for us than the Cameron contract and three fundamental respects.
First the JVs cost estimate on Golden Pass was prepared using a bottoms-up approach grounded in benchmarking against other projects and our own recent lessons learned. Second, the schedule also was developed on a bottoms-up basis using detailed logic and man-hour based durations for various tests, it is a very detailed methodical and pragmatic schedule that's compatible to recent industry performance. Third McDermott's risk profile in Golden Pass is greatly reduced, and more narrowly focused on what we executed at Cameron.
On Golden pass, as I just mentioned our involvement in construction is for 0SBL and by definition includes far fewer man hours than on the rest of the facility. This translates into a much lower exposure to labor productivity risk. Over the past six or seven months as we went through a refinement of the bid and execution plan, we applied all of the many lessons learned on Cameron, particularly regarding trough labor and worked hard to ensure that our proposal -- our proposal was reasonable and financially sound. These exercises work done in alignment and close discussions with a customer to develop the most efficient execution plan possible.
And this process was certainly aided by the fact that we have very close and long-standing relationships with ExxonMobil and Qatar Petroleum. Let me go even further here to provide some important context. Our readiness to take on Golden Pass is and was vastly better than it was for CB&I at the beginning of the Cameron projects in 2014. Specifically, I want to emphasize that the basic facts and circumstances are on Cameron Golden Pass are dramatically different in two important ways.
First McDermott by way of legacy CB&I, has been involved in a design and construction of the original Golden Pass import terminal a number of years ago. This gave us a significant amount of institutional knowledge about soil and site conditions whereas at Cameron, CB&I had no such advance knowledge and indeed that issue had turned out to be an early, expensive problem in the project, that had knock on impact to the overall schedule.
A second important difference is that CB&I ensure they had done the FEED work for the Golden Pass liquifation export facility. As always, participating in the FEED work enables a contractor to gain substantive insight into most aspects of the potential EPC scope of work. Doing the FEED also enables as a contractor to have a thoroughly detailed understanding of the schedule and cost. Contrast such as Cameron, where the FEED work have been done by another firm and unfortunately the flaws in that FEED in part contributed to CB&I's underestimation of the cost and schedule of the project. In short, you can rest assured that Golden Pass will be a water class facility instructed by way of a Water Plus execution plan.
Now just a quick summary of where we are with our previously announced plan to sell our pipe fabrication and storage tank business. We are making steady progress here. The sale processes are under way for both businesses. For pipe fabrication, we have distributed the marketing material and a high level of interest from potential buyers. We have signed nondisclosure agreements and expressed an interest in continuing to participate in the process. For the storage tank business, the marketing material is expected to go out by the end of February and we expect a high level -- high level interest levels from potential buyers. We expect total proceeds in excess of $1 billion in total for the two businesses.
As we have said previously, the company plans to use the majority of the proceeds for debt reduction. 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.
With that, I will turn it over to Stuart for details on the third quarter financials.
Stuart Spence -- Chief Financial Officer
Thanks David and good morning, everyone. The company today reported revenues of $2.1 billion for the fourth quarter of 2018, largely driven by the execution of downstream projects in North, Central and South America and offshore projects in the Middle East and North Africa. Our net loss was $2.8 billion or $15.33 per diluted share for the fourth quarter. The net loss for the fourth quarter was primarily the result when number of significant non-cash charges, including the following.
First, a non-cash $2.2 billion impairment charge due in part to a change in our cost of capital and risk premium assumptions included in the discount rates utilized to revive the present value of our cash flows. Second, a non-cash reduction in the carrying value of our deferred tax assets of $190 million due to the impact of a full valuation allowance against all net deferred tax asset, as a result of the goodwill impairment creating a three-year cumulative loss.
Third, a non-cash impairment charge of $58 million on two of the company's older diving marine vessels, primarily related to lower levels of planned future utilization. Fourth, a non-cash charge of $47 million related to the company's pension obligations. And finally, we had transaction, restructuring and integration costs of $32 million. Adjusting for these items as shown in our press release reconciliation table, McDermott's net loss for the fourth quarter was $208 million or $1.55 per share.
The company's operating loss for the fourth quarter was $2.5 billion. The adjusted operating loss as shown in our press release reconciliation table was $241 million. The operating results include approximately $339 million of discrete operating items. Let me take you through a brief description of each of the major items that impacted operating income. $168 million change in estimated cost on the Cameron LNG project, $31 million change in estimated cost on the Calpine power project, $54 million of expense on the Abkatun offshore project, $25 million of corporate expense reported as unallocated, direct, operating expense or cost incurred to make alternate arrangements for a third-party vessel charter as a result of the previously designated vessel being withdrawn from the market, $33 million of increased SG&A expense associated with information technology costs, self-insurance programs and other items. And $28 million due in part to unplanned warranty repair, increased bid expenses and costs associated with commencement of new projects in our Asia Pacific segment. Absent these items, our adjusted operating income would have been almost $100 million.
For the full year 2018, the company reported a net loss of $2.7 billion or $17.94 per diluted share, due primarily to the same factors that impacted fourth quarter results. As detailed in our press release tables, the adjusted net loss for 2018 was $148 million or diluted loss per share of $0.99. The results for the full year included legacy McDermott from January 1 through May 10, 2018 and the combined McDermott and CB&I organization for the period May 11, 2018 through December 31, 2018.
We continue to make very good progress in the implementation of our combination profitability initiative. McDermott's integration is largely complete with primarily IT system updates remaining. CPI is nearing full implementation with $444 million of the targeted $475 million of annualized cost synergies auctioned as of December 31 2018.
McDermott's operating results for the three months ended December 31, 2018 include approximately $62 million of such savings, the CPI Target annualized run rate is expected to be fully action by the end of 2019. Cost of $29 million were recognized in the fourth quarter of 2018 and were $134 million cumulatively. Although the benefits of CPI are being masked to some extent in our P&L, the program continues to generate savings, mitigate risk and ultimately make us more competitive.
Now for a quick summary on the focus projects. I'll start with Cameron and Calpine, because those are the two projects that directly impacted our fourth quarter operating income. The Cameron project schedule is consistent with what we had reported at the end of Q3. As of the end of the fourth quarter of 2018, project was 85% complete and had approximately $445 million of McDermott's portion of expected revenues remaining until expected completion. During the quarter the Cameron LNG project contributed $116 million to revenues and used $39 million of cash flows from operations. Phase 1 of the Cameron project is scheduled for completion in Q2 2019, Train 2 and 3 are expected to be completed in Q4 2019, Q1 2020 respectively.
At Calpine, during the fourth quarter the project contributed $3 millions to revenues and used $28 million of cash flows from operations. As of the end of the fourth quarter of 2018, the project was 95% complete and substantial completion is expected within a few weeks. Cameron and Calpine had a combined negative impact of $199 million on operating income in the fourth quarter. Separately, the $102 million change in estimate on the Freeport LNG project had no direct impact on the income statement. The reason is that the change in estimate on Freeport relates to a claim that was outstanding at the time of the combination and thus was recorded as an adjustment under purchase accounting.
At the end of the fourth quarter of 2018 the project was approximately 88% complete and had approximately $411 million of McDermott's portion of expected revenues remaining completion. During the quarter the Freeport LNG project contributed $175 million to revenues and used $186 million of cash flows from operations. Trains 1, 2 and 3 are expected to be completed in Q3 2019, Q1 2020, Q2 2020 respectively.
McDermott's cash used in operating activities during the fourth quarter of 2018 was $285 million due largely to the continued funding of previously announced changes in estimates on the Cameron, Freeport and Calpine projects. Total cash availability was $1.4 billion at the end of the period, composed of $520 million of unrestricted cash and $889 million available under the revolver. Additionally McDermott had $2 billion of combined availability under its principal letter of credit facility, uncommitted bilateral credit facilities, surety line and cash secured letter of credit facility.
The company's cash and liquidity position includes proceeds in the fourth quarter 2018 private placement of $300 million of redeemable preferred stock and reflects a $230 million increase in our primary letter of credit facility. The company was in compliance with all financial covenants as of the end of the fourth quarter of 2018. Our net working capital at the end of the fourth quarter was negative $2 billion, which is about $500 million greater than our previous expectation with the fourth quarter project charges and advance payments accounting for most of the delta.
Turning now to our view of 2019, I'm pleased to say that McDermott is introducing guidance for the year that shows improvement in our key metric versus 2018. This guidance is based on the business portfolio as it currently exists and once we complete the sale of the pipe fabrication business and the tank storage business, we will update the guidance as appropriate.
Let me recap the highlights, we're expecting revenues of between $9.5 billion and $10.5 billion, about 70% of this amount was in our backlog as of year-end 2018. We expect the balance of revenues to be generated by new awards, especially the projects we have already booked in early Q1 as well as prospective bookings and execution of short cycle work.
We expect our adjusted operating income for 2019 to be between $765 million and $825 million and adjusted EBITDA of between $1.04 billion and $1.1 billion, all of which points to adjusted net income $290 million to $325 million or $1.65 to $1.75 per diluted share. As for cash from operations, we are expecting it to be negative for the year in the range of minus $50 million to minus $100 million and we expect to end 2019 with between $510 million and $560 million of cash, restricted cash and cash equivalents.
We expect capital expenditures to be approximately $165 million, which is a bit higher than what we would see as a normal run rate reflecting incremental spending in 2019 on the marine fleet including the upgrade of the Amazon deepwater vessel. We are comfortable with the company's liquidity profile over the course of 2019 supported by the $1.4 billion of cash and revolver availability that we had as we entered January of this year.
The cash flow guidance includes routine assumptions of cash advances on expected new orders for onshore work. The proceeds from the sales of the pipe fabrication and tank storage businesses are not reflected in the guidance. As for the cadence of earnings in 2019, we expect that Q1 is likely to be the softest quarter of the year and that the second half is likely to be stronger than the first half. This is in part due to 3 factors first, the cumulative benefit of cost synergies will grow increasingly evident as the year progresses. Second, we will also expect to see diminishing revenues from the zero margin focus projects as the year progresses. And third, the contribution from new awards that we booked earlier this quarter, Operating cash flow is similarly, expected to be stronger in the second half as we begin to see reduced outflows on the focus projects. Other assumptions embedded in our guidance include an assumption of no material project charges, sound execution on the project portfolio and the healthy pace of new orders as supported by our revenue opportunity pipeline.
And with that I will turn the call back over to David.
David Dickson -- President, Chief Executive Officer, Director
Thanks Stuart. In summary, let me recap today's key messages. Project charges and operating results are disappointing and we're doing everything we can to eliminate the underlying reasons for such surprises, but as I said earlier, there are many reasons for optimism. Our revenue pipeline is robust, customer confidence is high, integration is nearly complete, our cost synergies are almost fully implemented and the processes for our planned business sales are proceeding well. Industrial logic of combining the two companies is as sound as it ever was. Our enhanced offering of products and services has positioned us to take advantage of growth opportunities across all of our served markets.
We also believe that the geographic orientation of our business units will continue to help us meet our growth targets by ensuring that we maintain a strong presence and closer, customer types in each of the major regions, which we operate. As we identify and pursue new prospective contract awards, we will continue to impose our rigorous bidding discipline on new prospects under our one McDermott way, which is designed to ensure that all bids we submit will be based on acceptable risk profiles, execution plans and margin targets with Golden Pass being a perfect example. As I've said before, we will never chase backlog simply for the sake of winning new awards. The good news is that the energy infrastructure market is strong enough for us to grow profitably, while maintaining our bidding discipline.
And on that note, we'll open the line for questions.
Questions and Answers:
Operator
(Operator Instructions) Your first question comes from the line of Martin Malloy from Johnson Rice. Please ask your question sir.
Martin Malloy -- Johnson Rice -- Analyst
Good morning.
David Dickson -- President, Chief Executive Officer, Director
Good morning, Martin.
Martin Malloy -- Johnson Rice -- Analyst
On the $20 billion roughly in bids outstanding, could you give us a breakdown in terms of the end markets there, LNG versus refining petrochemical and offshore and anything else significant?
Stuart Spence -- Chief Financial Officer
Yes, Mark, it's Stuart here. Our $20 billion really is a reflection of all of our end markets at the moment. We are seeing a real pick up near-term activity in the LNG market, our offshore business is looking really active especially driven by our Middle East and we're also really encouraged by the signs in our petrochemical business. So really the -- all of our end markets are healthy and reflected in our bids outstanding.
David Dickson -- President, Chief Executive Officer, Director
And just to add to that Marty is, you saw this morning the announcement on the Aramco awards. So 2018 was a slow year for Saudi Aramco and awarded projects, but over the last few months we've now built up a healthy what I'd say is backlog of bids that are sitting with Saudi Aramco. In addition to that, as well as the LTA type projects are now starting to see a lot of movement on the incremental projects. So these are these large developments that Aramco have spoken about previously.
Martin Malloy -- Johnson Rice -- Analyst
Okay. And then I just wanted to ask if I could about Chiyoda and I'm not sure what you could say here, but the solvency has been called under question and there it noticeably absent from the last quarterly release and to our discussion about a solution there. I think in the past last fall, they did talk about by the end of March, finding a solution. And I was wondering if you could maybe offer any comments that you have about your confidence that they're going to find a solution for their liquidity needs, what the potential I guess downside risk for McDermott is if they don't?
Stuart Spence -- Chief Financial Officer
Yeah so Marty, obviously its difficult for us to make any comment with regards to Chiyoda and their financial situation. What I can say is that we are in regular more or less constant dialog with the executives of Chiyoda who have given us assurances that they are working through their plan to obviously solve their liquidity issue and that's also a result of obviously a number of projects and they've had some challenges. We are in constant dialog. Obviously we've just signed recently Golden Pass, which they a partner. So does that give some confidence that they are moving ahead? I think it does, but again we at McDermott, we can't really make any comment on their progress on putting in their new capital structure.
Martin Malloy -- Johnson Rice -- Analyst
Okay. Thank you.
David Dickson -- President, Chief Executive Officer, Director
Thank you.
Operator
Your next question comes from the line of Jamie Cook from Credit Suisse. Sir, your line is open.
Jamie Cook -- Credit Suisse -- Analyst
Hi, good morning. And thanks for color on the call. I guess I appreciate your color, you talked about Golden Pass in terms of how you're positioned on that project. But as you look forward in our bidding projects, can you talk about your ability to capture less risk or get better terms and conditions in particular given the circumstance that you are in at this point with balance sheet concerns and whether or not future projects, you're taking, just talk about the different risks I guess you're taking relative to what you would have done before.
And then, Stuart just on any color, I appreciate your free cash flow guidance and you said, it seems good execution, but you also said good healthy pace of new awards. So can you just give us some more color on the cash flow and whether you're assuming advance payments in that guide? Thanks.
David Dickson -- President, Chief Executive Officer, Director
Jamie. So yes, obviously we wanted to paint the color with regards to where we are on Golden Pass. As we look at the market moving forward, there are a large number obviously of prospects that are out there. I would say at this time is that we are not chasing everything. We are taking any disciplined approach everything from looking at the customer through to the partners that we're going to work with, geographical location.
So I would say at this stage that as we go through our bidding process nor are we just looking obviously at the financials, but we're certainly looking at the risk profile associated with these projects. And as I said, we're not going to chase backlog for the sake of chasing backlog. So I would say at this team, very disciplined, very comfortable with Golden Pass and highlighting the fact that the customer there is Exxon and QP where we have strong relationships with both of those customers.
You may have seen last week that we signed another agreement with QP in the country. So very closely aligned with that customer. So that's a big part as we look at these projects moving forward and one of the things that has to happen is that in these large projects, is that it needs to be a stronger and more transparent relationship between the EPC companies and the customers and that's something that we're currently working on. Its certainly risk profile with these large projects is something which is critical in our decision making and our decision to proceed with the bid.
Stuart Spence -- Chief Financial Officer
And Jamie on your question about free cash flow, similar to the main comments on our earnings, on our results overall, we expect free cash flow to be negative in the first half and then turn in the second half. Our business models remain unchanged, so that means in our onshore business, we are still getting customer advances and we still buildup negative working capital in our new awards and that is fundamentally part of our plan. Overall with our free cash flow being negative in the first half, we're still very comfortable with our overall cash position, as I mentioned the $1.4 billion of cash available and we still have significant capacity for a letter of credit obligations to customers as well on new bids.
Jamie Cook -- Credit Suisse -- Analyst
Thank you. I'll let someone else get in queue.
Operator
Your next question comes from the line of the Tahira Afzal from KeyBanc. Your line is open.
Tahira Afzal -- KeyBanc -- Analyst
Hi, there.
David Dickson -- President, Chief Executive Officer, Director
Hi Tahira.
Tahira Afzal -- KeyBanc -- Analyst
Hi David, first question is, when you look at Train 1 for Cameron when you started off the fourth quarter you had a tall order, so maybe perhaps you can run through how your productivity has changed at the beginning of fourth quarter to what its been running at since the last month let's say?
David Dickson -- President, Chief Executive Officer, Director
Yeah, so on Train 1 the thing is, there is not a large amount of construction activity is commissioned. So it is a process of working through obviously many checks and many operations. So it's less of the productivity factor and in commission obviously that's the time where you can find that there are submission. So as with Q4 and Q1, we find some issues that we had to carry out some repairs or rework obviously that we didn't anticipate.
What I would say today is that is under control and as you heard from Stuart where our time to complete Train 1 is more or less in line or as said before, but as a result has come with additional cost. We have taken those lessons learned from Train 1 and also apply that to Trains 2 and 3 and again, as was said in my prepared remarks as we've taken those issues appeared in Train 1 and taken out into Trains 2 and 3 and that's part of the charge that we've taken.
I would also highlight the same thing here is from the change from where we are in the fourth quarter where we are today is we brought in another team and we've taken a different look at the project and a different methodology of calculating the cost to go looking at more a quantity-based methodology rather than applying in a straightforward productivity factor, which gives us a lot more confidence in the numbers that we have today and the cost to go.
Tahira Afzal -- KeyBanc -- Analyst
Got it, OK David and I guess as a second question, just within your guidance as you said, it's a lot more back-end loaded and the reasons seem pretty understandable. I mean as we exit the year based on that, given your adjusted EBIT margin of 7.5% to 8.5%, we can see it going at let's say 9%, 9.5% left by the end of the year potentially?
Stuart Spence -- Chief Financial Officer
Yes, here it's Stuart here obviously the math supports the general direction of an increasing profitability trend toward the back end of the year and assuming a consistent and ever-increasing level of new awards as we pace through the year that does set us up I think for future profitability that's a lot higher than 2019.
Tahira Afzal -- KeyBanc -- Analyst
Got it. Thank you very much guys.
David Dickson -- President, Chief Executive Officer, Director
Thank you.
Operator
Your next question comes from the line of Andy Kaplowitz from Citi. Your line is open.
Andrew Kaplowitz -- Citi -- Analyst
Hey, good morning guys.
David Dickson -- President, Chief Executive Officer, Director
Good Morning.
Andrew Kaplowitz -- Citi -- Analyst
David, so the focus projects are what they are, but I guess it's a little disturbing that you had about $80 million in legacy expense increases in Mexico and Asia that you called out and the concern is that given the larger more complex McDermott then maybe there is a bit of management distraction going on here. I know you have a new CEO in place but the noise in the business that are going up, not down, so what's the confidence that this really is you in the year and it should get better from here.
David Dickson -- President, Chief Executive Officer, Director
Yeah, I mean the main charge really is from this project Abkatun in Mexico, which is a disappointment because it's our first kind of black mark in our offshore business since going back to 2013 and it really has been driven by what I would say is unusual level of weather plus I highlighted in my call is there is a contractual obligation, the customer to provide is with some resources and we haven't received that and so we are in discussion with a customer to recover obviously some of those moneys. I believe we've taken I would call it prudent view of the status of our project based on there also has been significant changes in Mexico both with the government, but also in Pemex.
And as you know, we work with Pemex for a number of years, have had a good relationship. But, those discussions are a little bit different than where we've been before. So we felt at that this time prudent to take that position while we continue to work with PEMEX to recover some of the monies on the charge that we have taken.
Outside of that, the offshore portfolio continues to perform well. The positive news is the fact that Middle East really is beginning to pick up and as you know, for many years as Middle East has been very core to McDermott, disappointed last year but the number of awards typically as you know, we tend to see around Aramco was at the back end of the year that never materialized but now we're starting to see Aramco make a lot of progress in 2019.
So a lot of activity happening there but generally over the offshore portfolio happy, you're absolutely correct that our new Chief Operating Officer, has been focused on the focus projects, which obviously is a priority for us, but I firmly believe that over the next few months is that, that will start to change and as we said in the prepared remarks, get more focus in getting the management team, focus across all of our portfolio.
Andrew Kaplowitz -- Citi -- Analyst
David that's helpful as you know there, there are a couple more big LNG projects out there. What is McDermott's appetite and capacity to book new large LNG projects and maybe better yet, do you think your customers will be comfortable with McDermott executing on couple new large LNG projects at the same time or you're still finishing Cameron and Freeport?
David Dickson -- President, Chief Executive Officer, Director
Yeah, and one of the things that was clear when we went through the motions of Golden Pass as one of the things we do bring to the table is the fact that we have gone through this painful experience on Cameron and I'm going to particularly say Cameron. I mean, come back to again I said in the prepared remarks, when you look at Cameron today, the actual cost to complete that project and the time to complete that project actually is in industry norms.
The issue here was, it was significantly under bid. So today, the company is also in a lot stronger position. We have those lessons learned and we've never given out a number on Golden Pass, but there is also a lot of numbers in the market that will tell you that it's is a lot higher than what Cameron was saying for.
I would say, internationally what has been encouraging and again I said in prepared remarks is the number of invitations we had from customers to participate in their LNG bids. Now this is a bid that we have to be disciplined with McDermott, is we can't go chase on all LNG projects. We know our capabilities with regards to our capacity and competency of our resources.
So the LNG projects that we're going to bid will be a result of internal review of capability, capacity and competency and also obviously the risk profile with regards to from the customer to geography and also the terms of the contract. So we are taking a very disciplined approach to these future LNG opportunities, which there are many off.
Andrew Kaplowitz -- Citi -- Analyst
I guess I would just say, though if you're -- would you say you are very focused on places like Mozambique in Qatar and those are sort of the focus areas at this point.
David Dickson -- President, Chief Executive Officer, Director
Yeah. I mean obviously Mozambique we are selected for Anadarko and what gives me comfort around that is the fact that this has been ongoing with the CB&I Chiyoda, Saipem combination have been working on this with Anadarko for a number of years. So again being building up the feed as a result, building up the cost estimates, so in those types of projects, that gives me a lot more confidence.
We have a very good relationship with Anadarko, Anadarko very good customer. There are other opportunities that we need to take a look at and also look at, can we be competitive or not because there are some areas in the world where there are incumbents that will take a look at it once the bid comes out, but we can't chase every bid that's out there.
Andrew Kaplowitz -- Citi -- Analyst
Thanks, David.
Operator
We have time for one more question. It comes from the line of Michael Dudas from Vertical Research. Please ask your question.
Michael S. Dudas -- Vertical Research -- Analyst
Thanks for squeezing me in. Good morning, everyone. Wanted to start little bit discussion for technology, how are you looked at that asset growth that when you acquired it, some of the positives, negatives over the last several months and the growth outlook there and looking at margin potential of that because you are anticipating about over the next few years, are those continuing to be achievable and overall marketplace for some good growth in that busieness.
David Dickson -- President, Chief Executive Officer, Director
So Michael its just a bit quiet on the call. So if I think it picked up your question, it really was related around the technology business. What I'd say today is that the technology businesses are in very, very good shape I mentioned in my prepared remarks that we're seeing an emerging petrochemical market and a big part of the technology company really is in the pet chem space. And as you know, one of the strategic reasons for this combination is to have our EPC part of the business benefit from the technology and the technology group has had a very good 2018, 2019 has started off in the same trend and so we see more and more of this type of work come in. So again the whole strategic rationale of getting the pull through is still solid and obviously we see that as a strong part of the company moving forward.
Michael S. Dudas -- Vertical Research -- Analyst
If -- of the $20 billion in bids in outstanding, if you take out the LNG facet of it, is the majority of some of the pull-through opportunities that perhaps if you see over the last couple of years and what you're anticipating going forward?
David Dickson -- President, Chief Executive Officer, Director
Yeah. We have some active bids outstanding that related to technology pull-through. We've been a combined entity for about eight, nine months now. Our strategy of looking at that pull-through globally is really just starting to take some traction. So we would expect the percentage of pull-through opportunities to increase going forward into 2019 and beyond.
Michael S. Dudas -- Vertical Research -- Analyst
Thanks, David.
Scott Lamb -- Vice President of Investor Relations
All right, well thank you everyone for taking the time to listen to our call today. As a reminder, a recording of the call will be available for replay for seven days on our website at mcdermott.com. Operator, that concludes our call.
Operator
Thank you. That does conclude our conference. You may all disconnect.
Duration: 63 minutes
Call participants:
David Dickson -- President, Chief Executive Officer, Director
Stuart Spence -- Chief Financial Officer
Martin Malloy -- Johnson Rice -- Analyst
Jamie Cook -- Credit Suisse -- Analyst
Tahira Afzal -- KeyBanc -- Analyst
Andrew Kaplowitz -- Citi -- Analyst
Michael S. Dudas -- Vertical Research -- Analyst
Scott Lamb -- Vice President of Investor Relations
Transcript powered by AlphaStreet
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
More From The Motley Fool
Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
