Fluor Continues Management Shakeout to Boost Results
With former Fluor Corp. chief legal officer Carlos Hernandez now permanent as CEO to raise it out of financial doldrums, the giant contractor is moving quickly to reshuffle key C-suite posts and scrutinize its project and financial risks.
The moves are gaining favor from some Wall Street analysts concerned over first-quarter results.
Fluor announced May 28 that retired Chief Financial Officer Michael Steuert will return to the firm on June 1, as current CFO Bruce Stanski is tasked to help Hernandez complete an extensive “strategic review” the company must deliver to is board next month and to the investor community in advance of its second-quarter results set for release in early August.
Steuert, also a former senior vice president since 2001 when he joined the company, retired in mid-2012. He held a similar role at defense contractor Litton Industries, now part of Northrop Grumman.
Fluor ranks second on ENR’s Top 400 Contractors list, with $15.59 billion in listed construction revenue last year and $27.6 billion ln contract awards.
Fluor confirmed on May 16 that it upgraded Hernandez from an initial interim CEO role, in the surprise news that he was replacing CEO David T. Seaton, who resigned in the wake of a $58-million first-quarter loss and lowered 2019 earnings outlook stemming from execution issues on two energy projects.
Fluor also confirmed on May 27 that Mark Fields now is global president of its energy and chemicals group, which was previously noted by sources and on its website but not announced.
He replaces James F. “Jim” Brittain, in the role since 2017 and a 32-year Fluor veteran, who retired.
Fields, at Fluor since 1981, is formerly energy and chemicals president in the Americas.
While Wall Street is taking some comfort at veteran Steuert's return, the new team has its work cut out.
Moody’s Investors Service said May 10 it downgraded Fluor’s senior unsecured rating to Baa2 from Baa1 with a negative outlook, citing “the recent deterioration in its operating results and credit metrics … and the risk that weaker trends will persist.”
Michael Corelli, Moody’s senior credit officer, said Fluor results could improve in 2019 “if project bidding and execution issues are not repeated, since backlog strengthened to $39.3 billion versus $29.1 billion last year.” He said the firm “maintains an excellent liquidity profile with a significant cash and marketable securities balance of $1.9 billion as of March.”
Fluor will air results of its review of global operations, investments and joint ventures on Aug. 1, along with the Q2 financials.
“While I recognize our challenges… the underlying business fundamentals are strong,” Hernandez said in the May 16 statement. “Most of our projects are profitable and my immediate priority will be to … fully identify the underlying issues on the few projects that have contributed to recent underperformance.”
Looking for Results
Following management meetings, analysts appear optimistic.
In a May 28 note to investors, Credit Suisse senior construction sector analyst Jamie Cook noted “opportunity for positive change at Fluor. We believe the first priority is to scrub the current backlog to ensure execution issues on future work are minimized” and to “increase rigor associated with risk on future project prospects.”
Cook speculated the firm could reduce “underperforming investments,” including its NuScale small modular nuclear reactor startup “which is long overdue, in our opinion.” She noted the need to “improve returns/earnings through better risk management.”
According to Cook, the investment community is watching progress of the estimated $14-billion LNG Canada LNG export terminal complex project, awarded last year to Fluor and partner JGC as EPC contractor. While the project “remains on track,” said Cook, “given the size and importance to Fluor's future earnings stream, we believe management will place increased attention" on execution.
LNG Canada is 40% owned by Shell, with another 30% ownership split by Mitsubishi and Petronas.
Industry sector analyst Steven Fisher of UBS Securities LLC noted results from improved bid rigor, explaining in a May 23 research note after a meeting with executives, that one project prospect “was rejected in the last two weeks that would have passed the prior hurdles.”
While he emphasized that Fluor’s board “is expecting a bottom-up review” of the entire company, with “no sacred cows," Fisher said he “didn't sense at this point that the company is willing to walk away from the EPC business.”
According to the analyst, continued risk issues in Fluor's backlog “could keep an overhang” on its near-term stock value, but “clients are being receptive to more balanced risk sharing.”
He said Fluor anticipates award of two methanol projects in the next two quarters, with other LNG projects set for final investment decisions in the next six months to one year.
Fluor stock closed at $28.76 per share on May 30, down about 27.6% since April 30 and off 108.4% from its 52-week high.
But UBS analyst Fisher is optimistic about 2020 earnings potential and issued a "buy" rating for the stock. Cook's note included an "outperform" rating, with both analysts targeting a per-share price above $40.
The company announced on May 30 its win of a $1.7-billion design-build contract, along with JV partner Balfour Beatty, for widening and reconstruction of an 11-mile stretch of Interstate-635 near Dallas, also known as LBJ Freeway. Work is set for substantial completion in late 2024, it said.
"Fluor remains focused on and committed to the Texas infrastructure market and numerous upcoming opportunities" expected from the Texas Dept. of Transportation," said Terence Easton, president of Fluor's infrastructure and power group, in a statement.