The firm joins other contractors that are reassessing fixed-price construction risk, a trend that strengthened last year.

Energy Project Prospects

Adding that "customers in our Energy Solutions business unit are understandably delaying capital commitments and conserving cash in this period of uncertainty," Bradie noted that the unit had accounted for more than 75% of company revenue in 2015, with a focus in liquefied natural gas (LNG) sector work.

KBR was until 2007 the engineering and construction unit of oil service giant Halliburton.

"KBR was energy. But this is no longer the case," said Bradie. "With our deliberate growth in high-end government, technology solutions and asset performance, we have reduced KBR’s exposure to capital expenditure in the energy sector to less than 10%."
Bradie did not offer further details on its current energy projects and prospects, saying that would be provided when KBR shares second-quarter results at the end of July, but the energy business was still set to be "marginally profitable" in 2020, the company told analysts.

The company did not respond to ENR queries to confirm status of its fixed-price energy project contracts.

KBR was selected last year as preferred EPC contractor for the planned Train 4 of the Freeport LNG project in Texas, with a $1-billion financing deal announced in March. But the project's final investment decision now is pushed out to 2021, and it will seek new bids for construction,

The firm also holds a contract on Glenfarne Group’s Magnolia LNG project in Louisiana. Glenfarne Managing Partner Brendan Duval said the company intends to make a final decision on the project's construction and operation, citing "the essential role that natural gas plays in the transition to a lower carbon world," according to The Houston Chronicle. He said the facility will provide clean, low-cost and reliable energy globally, "and we are proud to support this critical infrastructure project."

KBR also appears still linked to the Goldboro LNG project in Nova Scotia, an estimated $10 billion, 10-million tonne-per year project being developed by Canada’s Pieridae Energy. The developer told the Kallanish Energy publication that it is "fully committed" to the project, despite a final investment decision delayed to June 30, 2021, due to COVID-19 and KBR "not being able to press forward" on costs because of closed businesses and inability to “access such things as modular yards in China and Europe."

The project is set to start commercial operations in 2025/26.

Pieridae said it is "focused on progressing work with KBR to deliver a fixed-price contract to build the gas liquefaction facility. Finishing this work will allow [the developer] to complete final due diligence and proceed with project financing."

Even so, analysts noted key market issues.

"We are not surprised given the financial troubles that fixed-price LNG has created for the energy E&C names, including bankruptcy and capital raises," said Jamie Cook, Credit Suisse managing director and lead construction sector analyst in a June 17 report.

"KBR remained disciplined during the LNG up-cycle and does not have any fixed-price energy work in its backlog and also de-risked 2020 [financial guidance] by assuming energy services would be break-even" for the rest of the year, she said. "We believe this was another sign energy services was less strategic to KBR’s portfolio," said Cook, but she noted uncertainty in its exit approach, whether the firm is "shutting down [work] or is there a potential divestiture in play?"

Steven Fisher, UBS sector analyst, said "we thought they would save any energy announcement until later this year."

KBR reported a loss of $104 million in its first quarter that ended March 31, related to writedowns of oil and gas sector assets, compared to a $40-million profit for that quarter in 2019. Quarter revenue rose 15% to $1.5 billion, from the previous year.

The company said in its April 29 earnings announcement that Bradie and KBR board members are taking a voluntary 15% salary reduction in the second quarter, with others in the company "leadership team" taking a 10% cut.

The CEO said at the time that "our preparedness for COVID-19 has enabled continuity of service, the resilience of our Government and Technology Solutions businesses and our actions to better position our Energy business [that] will enable continued delivery of predictable, stable and sound financial results."

Shifting Government Work

Bradie also that its government services work is shifting from past exposure to the federal "contingency operations business" that relied on uncertain annual budgets. In particular, KBR held U.S. Army logistics support contracts, known as LOGCAPs, over many years.
Said Cook: KBR "was largely a LOGCAP contractor, which was not only a low-margin business but also generated a volatile earnings stream."

Bradie told analysts that "some think our work is still dominated by that."

He said 90% of the firm's government work is "across space, science, engineering, training, cyber, facilities and supply-chain management and base operation," adding that its mix of internationally funded government work is about 25% of the total, "higher margin and a true differentiator."
KBR also announced on June 19 a global alliance with L&T Hydrocarbon Engineering, a unit of India-based engineering and construction conglomerate Larsen & Toubro Ltd., under which KBR will license proprietary technology and engineering services and the unit will be EPC services provider.

The firms will bid exclusively for refinery and petrochemical projects globally, with a specific focus on India, South East Asia and the Middle East and Africa markets, they said.

The alliance joins "KBR's century-long technology expertise and LTHE's strong capability as a major EPC player and modular solution provider," said Doug Kelly, KBR technology solutions president.

KBR ranks at No. 35 on ENR's 2020 Top 400 Contractors list, reporting more than $2.3 billion in 2019 construction revenue—most outside the U.S.—and at No. 3 on the 2020 Top 500 Design Firms list, with $3.3 billion in engineering revenue reported last year. About 34% of that is in manufacturing and 37% in industrial and petroleum.

Larsen & Toubro Ltd. ranks at No. 14 on ENR's 2019 Top 250 International Contractors list, its latest, reporting $17 billion in 2018 global construction revenue, about 45% in power, oil and industrial markets. It also ranks at No. 33 on the Top 225 Global Design Firms list, also the latest, reporting about $697 million in engineering revenue that year.

"The elements of KBR’s transformation are demonstrable in our ENR rankings, with a No. 1 rank in manufacturing driven by our growing aerospace business, our NASA franchise and the support to defense platform acquisition and sustainment globally, as well as our increasing scale in the manufacture of proprietary equipment." Bradie told ENR.  "Our transformation has been achieved with zero lump-sum turnkey risk in our portfolio of projects, and we have transitioned a large component of our activity to be OpEx-facing."

The firm announced on June 16 a $570.3-million NASA contract at the Marshall Space Flight Center in Huntsville, Ala., to include Space Station payload operations and testing support for the space launch system.

"KBR will continue to evolve, and in many ways COVID-19 may become a catalyst for that evolution," said Bradie.