CBI - Chicago Bridge & Iron

[Valueguy134]

 

This post has nothing to do with the reality of the E&C business, nor does it reflect how an E&C firm operates. I believe whoever wrote the post is looking at this company in isolation and is regurgitating management/Buffet, and I would caution if you are basing your investment off that blog.

 

A wonderful business keeps getting repeated, but there is absolutely no mention of the huge pricing pressures the company faces, competition, and a shrinking market. The project overrun paragraph is just flat wrong. After purchasing Shaw no one really knows how many bombs there are in backlog and it is no longer the same company when comparing historicals.  It's also clear the writer did zero work on reviewing the industry for LNG, petrochem, etc..

 

My suggestion would be to read some reports/transcripts from competitors.... and see how difficult the environment is, what's ahead of them, and then go from there if you still want to invest in this business.

 

Many vague assertions here..."the overrun paragraph wrong" (specify), "A wonderful business keeps getting repeated" (wut?), "The company faces huge competition" (find one that doesn't), "no one knows how many bombs there are after Shaw" (that's what due diligence is for).

 

This is a contracting firm that generated 20% ROE for a long time. A big drain from Shaw was the nuclear construction biz which has been disposed. A lot of what's left is nuclear maintenance/decomissioning (wide moat opportunities).

 

The firm is projected to generate free cash flow in excess of $500-550M this year.

 

"go read transcripts". We look at opportunities that are out of favor. We don't invest based on current sentiment (we in fact try to do the opposite of current sentiment). Strange, we know. Interesting how foreign that seems on a "value investment board". Ever hear of the concept of Margin of Safety? Explains why VRX was such a popular pick here (when it was multiple times the price it is now--before it went out of favor). Keep that VRX train(wreck) goin... goin.. goin...

 

Good luck.

[MrB]

JPM conference notes

"Integrated approach to projects. CBI highlighted its integrated

offering that can independently execute large, complex projects across

industries (petrochemicals, LNG, power) and effectively control 70-80%

of a project from pre-FEED stage to EPCM.

 Strategic initiatives reiterated. Management focused attention on key

strategic achievements that provide strong positioning in 2016 and

beyond (sale of nuclear business, share repurchases and debt

restructuring).

 75% of 2016 revenue in backlog, backlog shifting towards

petrochemicals and LNG. 75% of CBI’s 2016E revenue ($11.4-12.2bn)

reflects projects already booked as backlog – a reassuring statistic. Post

nuclear sale ($8bn in backlog or ~25% of total), backlog has shifted

towards several large petrochemical and LNG projects at varying levels

of completion. Petrochemicals now form 23% of backlog versus 11% in

2014 and LNG has grown to almost a third of total backlog versus about

a quarter in 2014.

 Technology and Fabrication Services are critical strengths.

Technology and Fabrication Services allow CBI’s E&C teams to deepen

relationships with customers allowing for a broader spectrum of orders"

[MrB]

"At closing, WEC will assume, and indemnify CB&I for, previous, current and future liabilities associated with the AP1000 nuclear projects. CB&I expects to receive cash payments from WEC of $229 million, of which $161 million is anticipated to be received upon WEC's substantial completion of the nuclear projects and $68 million is anticipated to be received upon the attainment of certain milestones related to CB&I's continued supply of discrete scopes of modules, fabricated pipe and specialty services to WEC on a subcontract basis for the nuclear projects."

 

This is how i have read it.

 

also if the assumptions you noted were true. Shouldn't the correct thing to do be "taking the pain". instead of engaging in actions to make short term earnings look good.

 

GK you don't think it is just to tie them in to finish the work, like providing steel plate structures, pipes etc on the fabrication side to the nuclear projects? The nuclear projects were $7.7Bn (backlog value), which they sold.

 

[Green King]

"At closing, WEC will assume, and indemnify CB&I for, previous, current and future liabilities associated with the AP1000 nuclear projects. CB&I expects to receive cash payments from WEC of $229 million, of which $161 million is anticipated to be received upon WEC's substantial completion of the nuclear projects and $68 million is anticipated to be received upon the attainment of certain milestones related to CB&I's continued supply of discrete scopes of modules, fabricated pipe and specialty services to WEC on a subcontract basis for the nuclear projects."

 

This is how i have read it.

 

also if the assumptions you noted were true. Shouldn't the correct thing to do be "taking the pain". instead of engaging in actions to make short term earnings look good.

 

GK you don't think it is just to tie them in to finish the work, like providing steel plate structures, pipes etc on the fabrication side to the nuclear projects? The nuclear projects were $7.7Bn (backlog value), which they sold.

 

That could be the more likely scenario. If management was right all along this was not the deal i was expecting. I came in because I thought it a was miss pricing of cash flow due to a major project with free underlying growth. Now base upon the recent event it doesn't look to be the case. In terms of value yes there might be something there, but right now for me it is too hard to tell. I think you have the stronger hand compare to me at this point.

[Dalal.Holdings]

Currently up after an earnings report that "disappointed" on earnings, yet showed strong cash flow. After disposition of the nuclear construction business, this is a strong cash generating business. Current prices are attractive.

[Green King]

what happened to Technology segment ?

[Valueguy134]

CB&I: A Compelling Opportunity:

 

CB&I is a wonderful business that is not capital intensive, has a moat, and generates high returns on equity capital.

 

CB&I is an E&C company that has sold off due to exposure to the energy space and problems with the Shaw acquisition.

 

While the business is wonderful, management needs to demonstrate redemption: the Shaw acquisition was a major mistake and management benefits are a bit rich (ie. personal aircraft use).

 

We believe that management must be held to a higher standard by the board of directors and shareholders going forward.

 

http://www.lumegroup.com/blog/cbimar16.html

 

This post has nothing to do with the reality of the E&C business, nor does it reflect how an E&C firm operates. I believe whoever wrote the post is looking at this company in isolation and is regurgitating management/Buffet, and I would caution if you are basing your investment off that blog.

 

A wonderful business keeps getting repeated, but there is absolutely no mention of the huge pricing pressures the company faces, competition, and a shrinking market. The project overrun paragraph is just flat wrong. After purchasing Shaw no one really knows how many bombs there are in backlog and it is no longer the same company when comparing historicals.  It's also clear the writer did zero work on reviewing the industry for LNG, petrochem, etc..

 

My suggestion would be to read some reports/transcripts from competitors.... and see how difficult the environment is, what's ahead of them, and then go from there if you still want to invest in this business.

 

In case you're wondering why the stock is down over 8% today.

 

Follow-up: Chicago Bridge downgraded to neutral from buy at UBS

Friday, July 22, 2016 02:51:36 PM (GMT)

 

Firm notes news that CBI filed a lawsuit against Westinghouse, regarding legacy nuclear projects in South Carolina and Georgia, alleging that Westinghouse is not living up to its contractual obligations in the purchase agreement from Oct 2015. Westinghouse is seeking over $2B from CBI, while CBI is seeking $248M from Westinghouse. Firm sees this as an overhang for CBI shares.

Target reduced to $38 from $48

Analyst is Steven Fisher

[Buffetteer]

Thanks for the info Valueguy, I couldn't find anything online and was wondering what caused the drop.

[Txvestor]

Amazing that this issue is still an overhang after their sale of nuclear assets purportedly to reduce liability. What's worse is the stance of Asherman when asked if buying Shaw was an error, he dismissed that out of hand and implied that it was not. Now that he sold the nuclear assets and still appears not to have shaken the liability issues(which now appear understated all along), you really have to question whether or not management is not the real liability here. Another interesting point is the exit of Berkshire from this position last year. Buffett and co. place a lot more emphasis on management than many folks realize. And sadly they seldom(or basically never) go activist, instead choosing to sell and leave instead.

CBI though appearing like undervalued on the surface is likely one of those investments that produces very mediocre results in a best case scenario and potentially with a lot more risk than is worth it. A change in management would be a positive catalyst here IMHO.

[RadMan24]

I would not argue that new management could offer positive outcomes long term. But even in that case, by the time the new management team is in place per say, this nuclear issue would be completely resolved - meaning thats more of a risk than current management, albeit - once you find one cockroach, many more appear.

 

This could be a case of such a situation bearing fruit.

 

However, CBI also filed a rebuff, claiming they are owed an additional $400m in working capital changes or so.

 

Regardless, the earnings call will provide more info, on both fronts.

 

The fact that CBI's CEO has indicated he'll be on the hunt for a potential transaction in two or so years, also makes one nervious whether or not that decision will be accretive to shareholder value. 

[undervalued]

CBI just keep getting cheaper and cheaper. Am I alone in thinking it's cheap?

[valcont]

CBI just keep getting cheaper and cheaper. Am I alone in thinking it's cheap?

 

As a long term holder who bought when they were accused of cookie jar accounting during Shaw takeover , I can tell you its been perpetually undervalued. Market kept finding the issues. Two years ago it was the nuclear payment overhang. Last year it was negative operating cash flow and now

its lawsuit against Westinghouse. Its been a frustrating ride. I think they need to fire Asherman. He is either as sleazy as the CEO of Horsehead (One that I didn't buy after I listened to few of his conf calls) or he has no clue.

 

Having said that , I think the Westinghouse suit is lot of bull and pressure tactic to settle. They had access to the book before they purchased the company. Claiming improper reserve liability and overcharging AFTER the purchase will not get the sympathetic ear. Its one thing to cook the books and falsify the numbers , another to categorize it differently. And lets not get into Westinghouse and Toshiba accounting.

 

This is a 10 year stock. The ROE of 20% takes at least a decade because of the long business cycle in the EPC companies.

[Txvestor]

If there is leadership change, I would add to my position. Otherwise I will ride with my medium sized position. Asherman does not deserve his job.

[Spekulatius]

If there is leadership change, I would add to my position. Otherwise I will ride with my medium sized position. Asherman does not deserve his job.

 

If CBI get's new management, it is better to wait 6 month until the new management had time to inspect the closet for dead bodies.

[Txvestor]

About damn time. Finally an activist investor trying to do the deed.

 

http://www.businesswire.com/news/home/20160824005552/en/Significant-Chicago-Bridge-Iron-Company-N.V.-Shareholder

 

Point taken Spekulatius.

[undervalued]

I can't find any information regarding Cohen Capital Management or Daniel Cohen.

[kdk77]

Anyone following the fortunes of CBI?  It does look cheap (value trap? Maybe) and looks like it is a binary event.  The outcome of the lawsuit, which can drag on for years, looks likes determines the future of CBI. Other concerns for CBI including the effectiveness of management, backlog, cash flows, etc. have been covered before but not entriely put to rest.  Thanks.  Disclosure: I am already long CBI.

[rogermunibond]

Issue with Westinghouse is going to a third-party auditor.  The CBI lawsuit was dismissed.

 

General counsel resigned.  Likely falling on his sword.

 

Mgmt overpaid for Shaw Group (a crappy EPC rollup) on the lure of a new future for nuclear construction.  Ascherman defended the Shaw acquisition through many years of negative cash flows and construction accounting excuses.

 

They took a big charge when they sold Stone & Webster to Westinghouse.  Likely will take another charge when auditor rules on cash flow accounting on the nuke projects.

 

Underlying petrochemical EPC business is still very high quality.

[RadMan24]

Anyone following the Toshiba developments and CB&I? It is pretty Interesting how Toshiba is looking into Westinghouse. From reading into it, Toshiba indicates that after speaking to a whistleblower, there may have been a lack of internal controls. If CB&I offloaded this junk and in good faith (there were outstanding lawsuits that CB&I claimed it was protected against cost overuns), then it would be a blessing.

 

If they are found liable for an additional $1-2 billion, CB&I would have to win its appeal in the courts or things would get ugly. The probability scenario I have is more than 50% they don't fess up more money as the NWC adjustment should retain CB&I's accounting treatment, just depends on whether accountant accepts Westinghouse's additional liabilities. Big if of course, which is why I would be surprised if anyone has it above 75% given the track record surrounding this thing. Any thoughts on court's ruling on the method of accounting to follow in calculating the NWC would be interesting to hear.

 

As such, it looks like It's a binary event right now. But even in the last 10Q there were several surprises, both positice and negative on earnings from current/completed contracts that make you think twice that this isn't a cockroach situation.

 

The NWC adjustment should be completed by March i would presume, so both CB&I and Toshiba can audit their books. Could be wrong though.

[MaxDC]

Hi RedMan,

 

I follow CB&I since 2014 and it is one of my largest holdings besides IBM and Chart Industries.

 

To me the transaction that occurred in 2015 was not that surprising in hindsight.

 

The story is not that new. Toshiba sold unproven, untested AP1000 reactor designs at a fixed price contract to SCANA and Southern. Then came the problems with the NRC, worldwide procurement of parts, productivity of labor, assembly of modules, quality issues etc. Apparently the fixed price contracts between the owners, Westinghouse and Shaw allowed Shaw/CB&I to be compensated for certain costs but they also had to bear project risks up to a certain amount (I think it was mentioned it the latest Toshiba presentation).

 

That amount was reached in 2015 so CB&I really had nothing more to lose on these projects. By that time, CB&I and WEC were entrenched in litigation and I think there was no common ground left. Apparently Toshiba tried to cover up the severity of its financial problems with the projects at that time and did the deal with the owners and CB&I, which also involved a resolution with SCANA and Southern. That ended the litigation risk, gave WEC the entire control of the projects, freed up some cash (cash withheld from the owners) for Toshiba, had new completion schedules implemented and did calm down capital markets at that time.

 

In my opinion this deal was just kicking the can down the road for Toshiba the way it was structured. CB&I was to receive the net working capital (it invested I think $800 million in the last months) at completion of the projects (clearly in favor of Toshiba, which had financial problems).

 

Now the resolution of that dispute is open. However, it is not a substantial threat to CB&Is finances, although it currently weighs heavily on the stock. As mentioned, these amounts would be due the time when these projects are substantially complete. That is at best 2020/2021. Based on my knowledge, reactor construction nowadays is the same mess as it was in the 70s/80s when people decided not to do it anymore. I love the stories about the stranded assets in the US that were abandoned  by the owners in the midst of construction. In Finland, Areva started a project in 2003. By now, Areva would be bankrupt without state aid and the reactor is still not complete.

 

 

To understand the Shaw transaction, you have to take into account the history of CB&I and the growth.

 

In 2006 their revenue was around 3bn, now its a little more than 10, but growing due to their expertise in fast growing areas, especially natural gas, petrochemicals and power.

 

Back in 2006, CB&I was a tank construction company that performed some additional work for process units. At that time, it could not take on construction of an entire ethane cracker or an LNG export terminal on its own with its self-perform model. It was sub contracted by the likes of Bechtel, Flour etc.

 

The addition of ABB Lummus gave the company some nice licensing income, but it was also the entry into a now fast growing market of ethane crackers, refining engineering & licensing etc. By the way, they paid a relatively cheap price for these assets before the shale revolution in the USA.

 

What that company was lacking was pipe fabrication, power construction and maintenance work, which fits the self perform model nicely and would allow CB&I to take on the big jobs out there (many of which they got: their backlog is great)

 

To make that real, they acquired Shaw in 2012. That was a mixed success.  The positives were the epc capabilities for natgas (outlook for natgas power plants is fantastic), the pipe fabrication, and the maintenance services for refineries, power plants, and related activities.

 

In hindsight, probably the bulk of the assets of Shaw, the nuclear construction and nuclear capital projects business, was a disaster. They retained some interesting assets:

 

-nuclear maintenance (which is a good business and will probably lead to some nice decommissioning opportunities

-CB&I can sell bended pipe (they retained Cojafex), still have their edge in reactor vessel construction

 

what makes that divestment look less of a loss going forward, is the fact that nuclear plants are shutting down in the US, the big opportunity seems to be decommissioning.

 

As of today I have great confidence in CB&I and their engineering skills. If it was a bad company (cockroach theory), you would have heard from Gorgon, Wheatstone. Exxon would not contract a bad EPC firm. Apparently they are quite happy with CB&Is work in Canada, in the US (Golden Pass), in Australia (Esso Longford Gas Treatment).

 

What reassured me, was the fact that they completed the Feed, EPC package for OXY/Mexichem on time and on budget, while another project, Sasol,although way bigger, handled I think by Flour, had problems

 

Another big positive is the fact that their fabrication services unit, technology unit, epc unit can generate revenue by selling to projects not run by CB&I such as the DOW Chemical agreement, where they sell fabricated pipe to Dow.

 

CB&I has a great engineering reputation, good people. I hope the problems with WEC / Toshiba will not longer be a problem for this great company.

 

By the way, is there anything that would have prevented CB&I from repurchasing $200 million of stock in January? The past 2 years, they did that in the september quarter, but in January that would have been more than 6% of the company.

[MaxDC]

Regarding the litigation & working capital dispute, that depends in my opinion on the original contracts between Shaw & Westinghouse. WEC made changes to receivables according to a Reuters article, that imply CB&I was not entitled to compensation.

 

"The vastly different amounts stem from four changes that Westinghouse made to CB&I's calculations. Westinghouse reduced by 30 percent an outstanding receivable on the unit's balance sheet, it adjusted it to reflect the cost of design changes in its projects, it raised the estimates of the cost to complete the projects by 30 percent, and added back a $432 million liability that CB&I had deducted."

 

I doubt that because CB&I management always said they would be reimbursed for costs related to design changes. The cost to complete the projects are a joke knowing the real cost as of today.

 

I am not a lawyer, but after Toshiba's mess maybe they just tried to get some cash. 

[RadMan24]

Nice overview and thanks for that. Was helpful. With earnings out, I still get the sense that the nuclear deal will be in CBI's favor, just from following this situation, but I could be wrong.

 

A few more (not surprised) increases in cost of projects - due to production rate of union job sites.  Whether its an excuse or not, getting out of that segment does appear to be a good move. This will be a negative drag but managable.

 

Capital services gone -2H2017, will be used reduce debt to $1.5 by year end. Maybe more depending on capital use. This does derisk company but reduces forward earnings and cash flow.

 

If awards pick up mid to late 2017 after a decent Q1, Q2, they're ability to handle a future negative ruling on the nuclear deal will be greatly increased.

 

If in ruled favor, I imagine fair value is around $45-60 a share.

 

Just my thoughts

[RadMan24]

Well those "union jobs" have really cost the company and put it on edge. The carnage is real and the CEO has just made bad decisions consistently. Not feeling to solid about the preceding valuation, cash flow once again is an Issue. I believe this may be a cockroach situation after all. We'll see...

[bigbluffzinc]

Anyone know about anything new here or have a position on and an opinion?

[racemize]

Not too much to say.  I'm in it, but I don't trust the CEO.  I tend to think the Westinghouse side doesn't have that much merit, but it is going through court so who knows?  If they get the sale through and reduce debt and show some cash flow again, it seems like it has to go up.