McDermott International, Inc. MDR recently clinched a front-end engineering and design (FEED) contract from Qatar Petroleum for the offshore North Field expansion project. Per the deal, the Texas-based equipment supplier will design wellhead platforms, pipelines and cables. The value of the contract — which is expected within $1-$50 million — will be reflected in the company’s second-quarter 2019 backlog.
The North Field expansion project is being executed by LNG producer Qatargas, a subsidiary of Qatar Petroleum, in which various oil and gas supermajors like Exxon Mobil Corporation XOM, TOTAL S.A. TOT, Royal Dutch Shell plc RDS.A and ConocoPhillips hold shares. Notably, the North Gas field, which was discovered around 48 years ago, holds recoverable reserves of more than 900 trillion standard cubic feet of gas (comprising approximately 10% of the world's known reserves), making Qatar the world's largest holder of proven gas reserves after Russia and Iran.
Markedly, the North Field expansion project involves the construction of four mega LNG trains, which would bolster Qatar’s LNG production from 77 million tons per year to 110 million tons by 2024. With global LNG consumption on the rise, Qatar wants to boost LNG supplies as it is likely to face stiff competition from Australia and the United States in the coming years. It is estimated that the North Field expansion project, on completion by 2024, will generate $40 billion of additional revenues for the country.
For McDermott, the latest FEED contract for the North Field expansion project solidifies the firm’s ties with Qatar Petroleum and adds to its impressive backlog. McDermott’s significant presence in countries where state-owned entities continue to scout for production growth and new resources is helping the company to win contracts regularly. Its latest deal comes on the heels of more than $4.5 billion worth of EPCI contracts, associated with Saudi Aramco’s Marjan Increment Development project. The value of those contracts will also be reflected in McDermott’s second-quarter 2019 backlog.
While the company displays an impressive backlog, which came in at $15.4 billion at the end of first-quarter 2019, there are multiple headwinds hounding the Zacks Rank #4 (Sell) stock.
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High leverage ratio of 83% and cost overruns on its Cameron LNG project have dampened investors’ sentiments. Moreover, McDermott expects cash flow deficit of around $470 million in 2019. Shares of the oilfield equipment provider have plunged 43% over a year. While strong backlog and its merger with Chicago Bridge bode well, execution issues, weak financials, along with bleak cash flow outlook may play spoilsports.
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