Contractor McDermott Intl. Files Chapter 11 Plan to Cut Debt, Fund Operations
As expected, ailing energy contractor McDermott International Inc. announced that it will file for Chapter 11 on Jan. 21 in U.S. Bankruptcy Court in Houston, with two-thirds of its creditors supporting a "prepackaged" financial restructuring that includes $2.8 billion in operating cash and elimination of more than $4.6 billion of debt, about half the firm's total.
The Houston-based contractor also expects to be de-listed from the New York Stock Exchange within the next 10 days, but its stock will trade in the over-the-counter marketplace.
As part of the bankruptcy plan, McDermott has agreed to sell to private equity investors the Lummus Technology unit, which is a key part of its CB&I business that was purchased in 2018. The partnered investors set to buy it for $2.725 billion are The Chatterjee Group and Rhône Group, which specialize in the chemicals sector.
According ot its website, Chatterjee already owns Haldia Petrochemicals, India's second largest petrochemicals company, "which would make Lummus a good match," says an industry observer.
Lummus Auction Ahead
Samik Mukherjee, McDermott group vice president for projects, told ENR last year that the CB&I purchase boosts its presence in the hydrocarbon market. Lummus' proprietary technology has resulted in $8 billion in petrochemical and refining projects in the last five years and about $39 billion of "identified potential pull-through EPC opportunities," he said.
McDermott will have the option to keep or repurchase a 10% ownership stake in Lummus, but the parent also expects to hold an auction by March 11 to "solicit higher or better bids," it said, subject to bankruptcy court approval.
But McDermott struggled with ballooning debt, primarily incurred from the $6-billion CB&I acquisition. says Zack's Equity Research.
During Chapter 11, the contractor said all of its global businesses, located in 54 countries and including marine construction vessels and fabrication facilities, would "operate as normal" and all projects "are expected to continue uninterrupted." The company notes about 32,000 employees in design, engineering and construction services to petrochemical plants, liquefied natural gas plants and offshore oil and natural gas facilities.
"This reorganization along with the cash generated from operations will aid the company to ... return to its normal day-to-day activities, control its cash flows, improve its balance sheet, stabilize its trade debt and strengthen its position in the long run." says Zack's, which notes that McDermott will emerge from bankruptcy with a $500 million debt load.
Zack's attributes the firm's financial falloff to the drop in oil prices, which generated "soft revenues and escalated unallocated operating expenses due to postponement in certain new award wins and project timing changes on the part of customers."
David Dickson, McDermott president and CEO, said the restructuring "will create a sustainable capital structure that matches the strength of our operating business," adding that "record backlog, the majority of which has been booked in the last two years, and high rate of new project awards demonstrates our customers' continued confidence in our business."
He said "McDermott "will emerge a stronger, more competitive company with a solid financial foundation."
The Chapter 11 filing follows difficult past months that included its November report of a $1.9 billion loss on $2.1 billion of third-quarter revenue, particularly related to its Gulf Coast LNG projects.
The company had reported about $6.7 billion in contracting revenue for 2018, according to ENR's most recent Top 400 Contractors list.
McDermott announced on Jan. 17, in a joint statement with Chiyoda Intl. Corp, and Zachry Group, its partners on the $13-billion Freeport LNG project in Texas, that commercial operation of Train 2 had begun; it had announced last month that on the $10-billion Cameron LNG terminal project in Louisiana, also with Chiyoda, that Train 2 production began, which it said is "a precursor to substantial completion." A third train is set to start exports this year on both projects, McDermott said.
But in its third-quarter loss, the firm cited "unfavorable changes in cost estimates" for EPC work on both projects, as well as on various petrochemical and power plant projects and an offshore oil project for Mexico oil company Pemex.
McDermott had also disclosed it was being investigated by the U.S. Securities and Exchange Commission over the projected loss disclosures that it attributes to poor labor productivity, increased contractor and subcontractor costs at the project and schedule delays, said The Wall Street Journal
The company said it is cooperating with the SEC probe.
However, McDermott also faces a U.S. Justice Dept. probe of alleged fraudulent invoices at a now-cancelled U.S. Energy Dept. project in South Carolina that is linked to CB&I and other site vendors, said a February ENR report. The controversial MOX project at the Savannah River Site, originally set for completion in 2016, was cancelled in January 2019 after cost and schedule estimates increased significantly.