McDermott International, Inc.’s MDR share price movement has been weak, both in absolute and relative terms. Shares of the oilfield equipment provider have plunged 71.6% over a year, much wider than the industry’s 49.3% decline.
The company has failed to impress investors as it delivered weaker-than-expected earnings in three out of the trailing four quarters, delivering average negative surprise of 213.4%. Let’s delve deeper into the factors that are responsible for the stock price decline.
With the 2018 acquisition of Chicago Bridge & Iron, McDermott ended up assuming the high debt load of the former. The new entity carries a debt load of around $3.4 billion, representing a debt-to-capitalization of more than 83%, restricting the firm’s financial flexibility.
Cost overruns on its Cameron LNG project have dampened investors’ sentiments.Unfavorable labor productivity, and rising subcontracts, commissioning and construction management costs have spiked overall expenses. Notably, the company incurred additional charges of $165 million, $482 million and $168 million for the Cameron LNG project in the second, third and fourth quarter of 2018, respectively. The escalating costs, which are unlikely to be recouped by the company, have impacted the already stretched balance sheet. In 2018, apart from Cameron, it recorded charges in two other energy projects, which did not perform per expectations.
Moreover, McDermott expects cash flow deficit of around $310 million in 2019, following the deferral of a mega petrochemical project and its advance payment into 2020. Taking into consideration the expected capital budget of around $160 million, negative free cash flow during this year is likely to be about $470 million.
Investors are also spooked by McDermott's revised restructuring and integration cost estimates associated with the Chicago Bridge & Iron merger. Cost expectation for 2019 is now pegged at around $120 million versus $45 million projected earlier.
While McDermott’s financials have taken a beating owing to the Chicago Bridge buyout, the deal has indeed increased scale and diversification of the entity by adding onshore services to the offshore-focused portfolio. The Zacks Rank #3 (Hold) company has an impressive $15.4 billion backlog, which will position it to become a powerhouse in the energy construction business in the long term. However, investors should be prepared for volatility until the company displays strong and effecient project execution. While McDermott has a lot on its plate that may boost the firm’s earnings and revenue prospects, execution issues, weak financials and bleak cash flow outlook may play spoilsports.
Meanwhile, investors interested in the same industry can consider Oil States International, Inc. OIS, Superior Drilling Products, Inc. SDPI and USA Compression Partners, LP USAC, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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