Fitch: Earnings Highlight US E&C Contractor Pressure

NEW YORK--(BUSINESS WIRE)-- Canceled or delayed projects and industry wide pricing pressure for engineering and construction (E&C) contractors was highlighted during quarterly earnings reports, according to Fitch Ratings. Among the declining volume of projects that have been initiated, aggressive bidding from contractors looking to bolster falling backlogs significantly degraded operating margins across the sector.

Energy firms represent a significant portion of business for E&C companies, such as Fluor Corporation (FLR), Chicago Bridge & Iron N.V. (CBIC) and Primoris Services Corporation (PRIM).

FLR Chairman and CEO David Seaton stated that increased "irrational bidding" in front-end engineering and design (FEED) pricing could contribute to "an unusual and challenging marketplace" during the company's third-quarter earnings call. Mr. Seaton also stated that the "lower-for-longer" mindset on commodity prices is starting to distort the E&C contracting market, citing customer expectations of not only lower prices but also their demands that contractors assume risks that are, in some cases, outside the contractor's control.

Last week, FLR announced financial results for the third quarter ended Sept. 30. FLR revised its 2016 earnings guidance to $2.20 to $2.40 per share, a reduction from $3.25 to $3.50 per share. The company also said it expects 2017 earnings of $2.75 to $3.25 per share, while the current consensus earnings estimate is $3.36 per share for 2017. While FLR's third-quarter 2016 results include an after-tax charge of $154 million for estimated cost increases on a petrochemical facility, the company's recent underperformance underscores industrywide pricing pressure.

During CBIC's third-quarter earnings call, President and CEO Philip Asherman stated that the challenging year for companies concentrated in energy, particularly oil and gas, delayed final investment decisions of many new projects the firm anticipated this year.

On Oct. 27, CBIC announced financial results for the third quarter ended Sept. 30. The company reported $2.8 billion in third-quarter 2016, compared with $3.3 billion in third-quarter 2015 while keeping 2016 revenue and EPS guidance intact.

This week, PRIM announced financial results for the third quarter ended Sept. 30. President and CEO David King stated on the company's third-quarter earnings call that low oil prices continued to depress the company's Energy Services segment due to project cancellations and delays in capital spending. In third-quarter 2016, PRIM reported a 9% overall revenue decline and a 76% net income decline compared with 2015.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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