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Two comments: 1) Wouldn't rely on any of the analysts much. They're just not very good. Which of them predicted any of the cost overruns before CBI announced them? Which spent any effort analyzing Westinghouse? Which predicted the stocks' drop before it actually happened? 2) If they acknowledge the remaining skeletons (I hope they do), the question is whether the stock has already over reacted to those skeletons. The stock is down what $1.5 billion since a couple of months ago? The only definitive thing is CBI going $75 million below expectations. So maybe it's pricing in another $1.4 billion of losses? I will take the "under" on that. Those are good and valid questions. I believe that CBI was overearning from 2010-2015 relative to the current normal and we have a change from variable to fixed price contracts in the new normal that adds to the risk. I believe the new management will clean house and the skeletons (if they exist) will be accounted for with the next 10-q. I believe there is quite a bit that will have to get written off ; also keep in mind that a new management has a substantial incentive to get those things behind them. Disclosure- no position

The issue with the nukes is a bit tricky to resolve. It's a long story, 99% in the past, but two things seem important to me: 1) Sometime after bidding, the nuclear regulatory commission required that the reactor be able to withstand a crash of a small airplane into the shield structure - so that a terrorist couldn't rent a plane and cause a nuclear disaster. Of course this is very expensive, and the owners and the developers and CBI all argued about who should pay those costs. I tend to think that CBI was not on the hook for those cost overruns (that seems like a clear "change order") but the specifics of that issue are not widely known and it's a bit unfair to blame CBI for that particular "cost overrun." 2) CBI has said multiple times that Shaw had indemnities against cost overruns at the nuke projects. The idea was, Toshiba/Westinghouse were trying a new technology out in the U.S., and there were no contractors willing to take on the risk of overruns. So Shaw received indemnities before they agreed to the project. We don't know the extent of these indemnities, and, what they would cover. For example, CBI had cost overruns at their own fabricators who were producing poor quality, and delayed, parts. Was CBI indemnified from that too? Westinghouse and CBI clearly disagree over the issue - which was the driving reason for the Westinghouse-Shaw acquisition, and which morphed into these strange "working capital claims." Without knowing what was indemnified and what was not, it's hard to figure out if CBI took a lot of risk, or if Westinghouse wasn't playing fair. I don't know. But it's plausible that CBI was right about the indemnifications the entire time, but that Westinghouse was trying to play dirty about it. I would say it was empire building which always comes at the expense of risk management. As much as I blame Asherman for screwing it up, shareholders have to get off their high horses too. Hindsight is always better but you have to go back to 2011-12 to see what he was trying to do. Oil was $100, US economy was taking off while the rest of the world struggled.Nuclear seemed the cleaner source and the governments were ramping up the investment.So he tried to grow and diversify by going nuclear (no pun). The economics of nuclear business just got worse after the Japanese accident. So I gave him a pass for the acquisition but the way he lied/suppress/gloss over information in the last few years is inexcusable. Right now there is an honesty discount on this company and the new CEO can bridge that. Tell the shareholders what they don't want to hear. Tell them Cameron is screwed up and will be a big write off. Better to take the hit and earn the good will since no one believes that Cameron LNG is contained anyways. So when the analysts can't trust the management , they just write off the whole damn thing. Just like what they did with the Westinghouse. You can't give them that power.

So one question with CBI is whether you view the problems as stemming primarily from the Shaw acquisition, or whether the problems stem from risk management (of which Shaw is an example). If Shaw is mainly the problem, the architects of that disaster are gone, the transaction has basically been unwound. So while Shaw caused many years of problems, today you buy the stock cheap but with the bad parts of Shaw excised. If you view risk management as the problem, then you expect cockroaches to pop up periodically, and unfortunately, in a high-revenue, low-margin business this will be one prolonged, frustrating ride down. -- I would note that Mullen started essentially today, and he has a release saying his focuses are: Balance Sheet Cost Controls Risk Management Increased Innovation and Collaboration He doesn't mention acquisitions or even backlog growth. I am a little nervous that "Balance sheet" is the top item. This could be an innocuous statement - use FCF to pay down debt. Or it could be a dangerous statement - sell off one of their "moats" (like technology) to clean out debt. That might well pop the stock because I see CBI as worth less than the sum of its parts, but I like the technology/fabrication/E&C combination. Which acquisition other than the Shaw had been disastrous? Granted Shaw was a terrible acquisition but they also had a string of bad luck. Nuclear was all the rage before the Japanese accident in 2012, the same year they bought Shaw. And then the goodwill cookie jar controversy , the cashflow issue and CFO resignation. Now Asherman is out of the way , I hope the CEO will focus on what they did best. Engineering with solid underwriting skills. That's the game in fixed price contracts. These are higher margins than the cost reimbursable ones but carries risk of negative working capital (exactly what CBI is dealing today). I doubt the new CEO will continue with the same strategy. Jacking up earnings/backlogs wouldn't cut it any more. And if their rational for acquisitions is to merely book reserves by consolidating liability than they are out of luck since everyone is razor focussed on cash flows. Just have to wait for his first conference call to get some clarity. I think Shaw and the way they've handled it since then speaks volumes. When people appear so dishonest, you start worrying whether or not they don't reckon the mess they created, and then it gets really frightening when they keep emphazising acquisitions. The sale of Capital Services doesn't seem very well executed either (they seem to have put themselves in a shitty bargaining positiom). Anyway, it's all in the past. I hope (and think) you're right that things are gonna change. Question is how much more crap they haven't told us about.

Really good question. It still irritates me that the company hasn't really come out and said, Shaw was a poor acquisition, we messed up, and we're sorry. Three answers: 1) I think a prerequisite to any acquisition has to be, de-levering the balance sheet and getting their stock "currency" up to multiples near peer multiples. The company trades at a large discount to competitors, and I think that valuation gap has to close before they can acquire anything. Well if CBI can get close to competitor multiples (I think FLR trades at like 15x earnings?) then that's a really nice gain and sure head on out. 2) My model for CBI is BAC. The acquisitive "visionary" Ken Lewis replaced by the boring Brian "mumbles" Moynihan. Moynihan is (and has) done the hard, boring work of focusing on operations and cutting costs, etc. Moynihan is there as a reaction to the flashy, "grow grow grow" Lewis. We don't know how Mullen will lead, but one hopes he focuses on credibility (IMO #1 issue) and operations (#2). I think it's reasonable to wait a while to see how he's going to lead. 3) Nuclear acquisition obviously a disaster, and capital services poor. But I love their technology division (Mullen came from there). I think fabrication is very good too. These provide moats and competitive advantages for the company. It's why I think the core (basically what's left of CBI) has a pretty decent business model. The technology/E&C combination is what used to make Berkshire and Greenlight excited for the company and that is still there. So I think if they do make an acquisition, you have to judge on the merits of the acquisition itself. I like "tuck in" acquisitions where for example they could increase their moats (or add capabilities) in technology of fabrication. Things that increase the moat = good! Big E&C acquisitions = bad! But at their current valuation, aren't they more likely to be acquired than to acquire? I mean to me CBI would be highly accretive + bring a moat to any of their large construction peers, at a low low price.

It's been a great week though. I mean if it had gone $13, $16, $17, $18, $18 you'd probably feel better, but $13, $20, $21, $20, $19 you're probably making more money :). Anyway, for me this (as with BAC) is a longer-term hold. The hope is at some point, the company will say they're going to earn $X, and the market believes that number, and the company delivers. CBI's credibility needs repair more than anything else, and that will take a long time. Asherman's credibility is terrible. Even when he tells the truth on Westinghouse everyone assumed he was lying and was about to lose another billion dollars. But anyway, a new CEO (right now!!) is pretty much a prerequisite to regaining credibility, but it's a slow process, so for me anyway I'll be patient with the stock price. Guidance and/or Q2 earnings are important, but what's interesting about CBI is that their problem projects should mostly complete in the next 1.5 years. It sets a not-that-long time horizon for earnings normalization. And I suspect it will happen sooner - because they can take reserves against the projects and go back to normal earnings the following quarter. But it requires - and I hope they do - a level of honesty about their problem projects that the company has just not had recently. For long-term holders, the best outcome is actually one where the stock remains pretty low, CBI de-levers and regains the ability to repurchase stock. I think they can do around $400 million in FCF, so they could be taking out 20% of the outstanding shares each year if the price stays around $20. Or said another way, a FCF yield of 20%. There is something surprising about capital services. The working capital adjustment seems to be pretty negative (between transaction costs and working capital, -$50 million). Say working capital was -$40M. What would cause that? Did it have an awful quarter? Did CBI gut the company of cash before closing? That number seems surprisingly high.

I'm surprised the company is down on this news too. It wasn't long ago that people were worried about short-term covenant breaches. This removes ~33% of their net debt. Something I haven't really talked about, from the limited information CBI has given us, Capital Services is a negative cash flow division. They have only given us Q1 information, but it looks like this: Q1 earnings: 2016 +5.5M 2017 +8M Q1 cash flow from operations: 2016 -$11.7M 2017 -$17.5M I don't know if there's seasonality here with the cash flows, and they don't provide full-year numbers that I can see. But IF capital services is indeed a negative cash flow operation, then good for them for selling off negative cash flow for $650 million.

Looks like the acquisition company's bonds were issued: http://cbonds.com/news/item/926883 bookrunners: Goldman, Barclay's and UBS 7.75% bonds expiring 2025 Purchase agreement specifies signing at 11AM. Perhaps a press release shortly after, or at the end of today? Well this has been a fun week

Good article, I didn't know about this. It suggests $50M+ of money is coming in in Q4. And this is the point I've tried to make about "unapproved change orders." People see them as a big risk (some cases they are). But the vast majority of these convert into "free" cash flow (in the sense that the expenses were already paid). When there's a dispute, CBI can file liens which puts a lot of pressure on the owners to settle. I've done some construction and my feeling is that people underestimate the amount of leverage a construction company has. I've been told before, well if you don't approve the change order, we can't continue and your project will be delayed indefinitely. Anyway, back to the Capital Services sale, which is probably the next piece of positive news: https://www.moodys.com/research/Moodys-assigns-new-ratings-for-Capital-Services-B3-CFR-B3--PR_368249? https://www.moodys.com/research/Moodys-Publishes-Covenant-Quality-Assessment-for-CSVC-Acquisition-Corp-Bond--PR_368858 I think these two "articles" by Moodys indicate a bond offering was done ... yesterday? today? tomorrow? (the second article refers to the bonds as "has assigned" to $515M of notes due 2025). Anyway, issuing bonds indicates to me that the deal is going to complete "soonish."

A couple of observations - A) CBI is close to de-risking Westinghouse and their balance sheet. The cost overruns are still out there, but at some point they'll set reserves from those and earnings from then on should be fine. So at that point, it seems like they could earn $3.50/share or more. A de-risked, lower debt CBI probably deserves a 10x multiple more more, so $35+ seems possible. At one point, the technology division meant that CBI deserved a premium to their competitors ... so an even higher multiple than 10x seems plausible too. B) MaxDC: I don't know for sure on the collect-ability. It's a good question. I was mostly focused on it going from -$1Bn to $0. But it's definitely possible that Westinghouse ends up owing a big chunk to CBI. My sense (but I'm not sure!) is that CBI would come above both Toshiba (current equity holder) and the nuclear contracts (I think those nuclear contracts are what's really killing Westinghouse) in priority. But I don't think Westinghouse has a ton of cash to spend, so ... argh could CBI end up owning equity or debt in Westinghouse? Can this vampire never die?? C) The $70 million you see referenced, is CBI's view of how much money is up for debate in front of the auditor after the big issue was ruled on. Their view is Westinghouse owes them $400M, and that Westinghouse could plausibly argue that $70M of the $400M really should be returned to Westinghouse. Westinghouse has a different (unstated) view. But I think the important part that CBI alludes to is, they think the difference in opinion between Westinghouse and CBI is now "immaterial" so that the gap is small enough for them to settle rather than suing each other repeatedly. That would be great news. D) I think Veritas will close. I have a simple article going up on SA in the next day or two which supplies the reason why. Mostly that article is about shaming analysts who made up big Westinghouse losses - they should be immediately raising their price target by like $10/share or something. E) Valcont: I don't think it's that simple. The Delaware Supreme Court is supreme insofar as it concerns Delaware state law. Contracts are generally state, and not federal, and I believe this one is governed by Delaware, thus the court. In order to "go federal" you'd have to find a reason that CBI violated federal law or the constitution. It's possible, I suppose, but it would be an uphill battle for Westinghouse. One potential way would be to accuse CBI of fraud, that they deliberately misrepresented their books. But Westinghouse seemingly blew this path out of the water when they (strangely) seemed to acknowledge they knew that the books were wrong when they signed the purchase agreement. I just don't think this has a high probability of working because this is contract law, contract law = state law.

I have a perspective here, not enough for a formal article, but it relates back to your question. Small construction companies go bankrupt all the time. But AFAIK large construction companies are pretty stable - since they have a diversity of revenue streams and better risk control. For example, I think a small group of large construction companies have built all the LNG export terminals in the world and it's basically the same group now as a decade ago. Look up "Australia LNG" for example. In aggregate, there's $50Bn of cost overruns there, there's Gorgon which is like $20Bn over budget. All LNG projects are built by a handful of huge construction companies, of which CBI is one. And guess what - you don't see even a $500M write down (1%) on the construction side of Australian LNG projects. If you look for some articles, you'll see that around 60% of LNG projects are over budget, and they're over budget a lot. So being over budget is the norm. What's unusual is the analysts seem to think CBI is taking 100% to 300% of the cost overruns (I say 300% because they're in JVs, but no one seems to really mention their partners), when historically, I don't think any LNG construction company has lost $500M on a project. Chiyoda is CBI's partner, they've probably built 40% of the world's LNG export terminals. They've never lost anything like this amount, but (apparently) have lost all risk control only as it applies to Cameron and Freeport. My article concedes up to $500M losses at Cameron (CBI would be $250M), but even that is, as far as I know, an unprecedented loss historically. Frankly if large construction companies thought the risk/reward was (+$250M to -$1Bn), they'd never build another bridge or power plant. They'd all be bankrupt sooner or later. But who knows? CBI sometimes does dumb things. Cost basis is in the high teens. It's big enough that I don't like to look at my brokerage balances :).

I liked your article "Homer." Just sharing some more information here - it's partially hypothetical, but some parts of the Cameron jig saw puzzle are fitting together for me. 1) I think sometime last year, fabrication services discovered they could not make pipe spools for Cameron (and Freeport) in time. This was compounded by flooding which halted production of the pipe spools further. A) They took a $45M charge against fabrication during Q4 2016. B) I'm guessing some of this is in dispute, whether a delay on the fabrication from flooding, counts as an excuse for delays at Cameron LNG. 2) Those pipe spools are prerequisites to some of the Cameron construction. This is the basis for the "Cameron is 6 months delayed" comment in November. 3) In Q1 2017 call, Asherman says, we've turned the corner - the pipes are all done. This means that bottleneck is over. Then he says some vague stuff about the project, and says some vaguely comforting things about Sempra and the owners. Sempra also says some vaguely comforting stuff about CBI. It's all vague, though, which scares the crap of CBI shareholders :). 4) They then take a $24M charge on Cameron, in the 10Q they directly acknowledge this charge is for fabrication delays and schedule delays. This is good because since the bottleneck is over, they should be in a position to estimate the cost for the delay. 5) Late May, all the parties meet on the site. 6) In mid-June, CBI files a request with FERC to dramatically raise the number of employees at Cameron. I believe this is them try to get to back to schedule by essentially working on all the trains in parallel. These employees are there to quickly install all that delayed pipe. Curiously the FERC filing says these employees are there to try to get the project back on schedule. With the extra employees, the site is empty of CBI on Feb 2019. This looks to me like a 2-3 month delay not the 6 month delay that's being reported. 7) My estimate is the delta from before is 7,000 employees for 6 months at $5,000/month ($60K/year). This is a ~$200M cost overrun. Maybe even $300M. But remember it's a JV, so half of the hit goes to CBI. 8) This part is PURE guesswork: I think the reason CBI and Sempra were so vague on the conference call is, they both understood the delay, but they needed to have a big pow-wow to decide what to do with it. I think CBI showed up and said we have two options: A) We run the project as-is, 6 months delayed, and then we go sue each other over liquidated damages at the end because flooding. B) We ramp up the project dramatically and cut that delay in half. To do this we have to hire a lot of extra workers, we run night shifts, and we have them work in parallel on all three trains. But this is going to cost us $300M to do. You pay half out of your contingency, we each take a $75M charge. We settle those "unapproved change orders" and move on. 9) This pure hypothetical leads to: Sempra says, we are completing this faster than we told you a few months ago, and at an unchanged total budget. CBI says, we book extra revenues, we cleared out a chunk of "unapproved change orders," we took a $75M hit for our culpability in the delays. And now both sets of shareholders get to go home happy, because they've resolved this in a win/win way. I just have the intuition that the FERC filing indicates they agreed to "something" - I don't see the rationale for CBI to just start absorbing cost overruns for Sempra's benefit. I think they're trading time (important to Sempra) for money (important to CBI), probably with CBI still taking a haircut on the deal, but not the huge ones analysts mention. I dunno ... maybe. Just conjecture.

Well if Cameron and Freeport are really losing a billion dollars or whatever, here's a nice outcome: - Bankrupt Cameron and Freeport JVs; sell the rest of the E&C backlog to a competitor for $1Bn - Sell Capital Services for $700M (slight haircut from current offer) - Sell Fabrication Services for $2Bn (a ~7x EV/EBITDA) - Sell Tech for $1.2Bn (~10x EV/EBITDA) - Pay off net debt ($2Bn) Would yield about $30/share in liquidation :). I think other companies would love their technology and fabrication divisions those are really good. Depending on whether they actually screwed up at Cameron and Freeport, E&C has a value (per CSFB) between $500M and $3.2Bn. I don't think bankruptcy is a good option here... too damaging to the ability to grab new business.

Capital services worries me. I think I have an edge on Westinghouse, and potentially even Cameron, but there is no way for me to divine what's going on at Veritas or CBI now. Here are the things favoring it closing: - As far as I can tell, Veritas has closed all their acquisitions. Their "currency" is the ability to close acquisitions/sales, since they are a P/E firm. - They have cash on hand to do it, as they raised a few billion immediately before this acquisition. - Purchase agreement says Veritas has to pay $40M in liquidated damages if the deal doesn't go through. - There's no obvious MAC or reason the deal wouldn't close, Capital Services had a normal Q1. - Don't think there's any real regulatory issues. I don't see any urgency for Veritas to close. The Q2 date is important to CBI. I don't think it particularly matters to Veritas. A marginally delayed closing (I think it has to be done by August in the Purchase Agreement) I don't think the debt holders would really care. A canceled closing would mean more covenant changes, would probably come at a price, and they'd probably turn around and try to sell to the next-highest-bidder. With the $40M in liquidated damages, probably comes out about the same, though of course shareholders would be twisting in the wind even longer. Can't really tell for sure. I think most mergers that get to this stage, go through. But how many don't: 10%?

https://seekingalpha.com/article/4082822-chicago-bridge-iron-huge-risky-mess-think I think the article is here, look forward to your feedback.

That happened a month and a half ago. Goldman came out suggesting large losses happened maybe a month later. So are they reacting to the Q or are they reacting to the price? I think the article is going up on SA sooner or later (I'm a little confused by the process). I have a section on "unapproved change orders" and Cameron LNG. How about read that and get back to me. My view, it's a risk, but I don't think people understand what an "unapproved change order" is. It is a signed contract for work to be done by CBI, usually (always?) on a reimbursement basis. The contracts were signed before the work began. There is risk there, I'm not arguing against that, but of a lower magnitude than people think (IMO)