Saudi Aramco's Efforts to Renegotiate LTAs Seen as Slight Negative for McDermott (MDR), Says KeyBanc

KeyBanc analsyt Matt Tucker commented on McDermott (NYSE: MDR) following reports that Saudi Aramco is seeking to renegotiate its existing long-term agreements with McDermott and three other contractors. Contractors reportedly have been asked to submit revised commercial offers by the end of March, and NPCC has been invited to submit a bid.

Tucker said this was a slight negative but "less so than the headline news might suggest."

"We gauge that Saudi Aramco is largely asking its contractors to pass along procurement and supply chain savings as project costs have generally fallen since the LTA agreements were signed last summer, implying that MDR's margins should remain roughly consistent with expectations when the LTAs were signed. While the news implies potentially lower project scopes and additional competition, MDR is in a relatively better position to absorb the cost reductions sought following its 2014-2015 restructuring and ongoing cost savings initiatives," said Tucker.

"Additionally, we view the ability to reduce project costs as a positive in terms of Saudi Aramco's willingness to deploy capital and move forward with planned projects. We also think the risk of MDR being replaced as an LTA contractor is very low considering the ongoing work it has already secured and MDR’s strong positioning and capabilities in the Middle East region. Importantly, per the article, the revised LTA terms would only be applicable to offshore projects that are yet to be awarded and would exclude the nine ongoing projects awarded under the LTA last year worth $3.5B-$4B in total, which includes an estimated $1.5B+ award booked by MDR in 3Q15," continued the analyst.

Tucker added, "We do not consider the pressure Saudi Aramco is putting on its contractors to pass along supply chain savings to be overly surprising and continue to view MDR’s exposure to Aramco as an important positive, as the key sponsor is expected to tender projects totaling $10B+ to its LTA contractors over the next few years. This would include two potential near-term contract awards tendered earlier this year, per prior Upstream reports, for the Safaniyah oilfied ($350M+) and the Marjan and Zuluf fields ($400M-$500M), which could be awarded in the next few months. We view MDR as well positioned to compete for these contracts, particularly as it has worked in each of these fields in the past, although we expect the tenders will be highly competitive."

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