CBI - Chicago Bridge & Iron

[Green King]

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.

 

What's going have not been following this. Is there any legal liability on this? or Does this just have too much debt?

[racemize]

They sold the nuclear business for $0 and wrote off a bunch of good will.  Then the deal had a working capital adjustment at close that they are arguing over, where CBI says they are owed ~$400 million and Westinghouse (now declaring bankruptcy) says they are owed $2 billion, essentially incorporating cost overruns and future expenses of nuclear work into the working capital adjustment.  Arguments have been heard in the Delaware Supreme Court and they should give guidance on how the adjustment should be handled.

 

Selling their low margin business for ~$750 million this quarter and all of it should go to reduce debt.

 

Two labor jobs have killed their cash flow the last two quarters.  Either a symptom of the Shaw jobs, or one offs.  Cash flow has been good post getting rid of the nuclear projects, except for these two jobs.

[Green King]

They sold the nuclear business for $0 and wrote off a bunch of good will.  Then the deal had a working capital adjustment at close that they are arguing over, where CBI says they are owed ~$400 million and Westinghouse (now declaring bankruptcy) says they are owed $2 billion, essentially incorporating cost overruns and future expenses of nuclear work into the working capital adjustment.  Arguments have been heard in the Delaware Supreme Court and they should give guidance on how the adjustment should be handled.

 

Selling their low margin business for ~$750 million this quarter and all of it should go to reduce debt.

 

Two labor jobs have killed their cash flow the last two quarters.  Either a symptom of the Shaw jobs, or one offs.  Cash flow has been good post getting rid of the nuclear projects, except for these two jobs.

 

Thanks for the info.

Ok sounds like a good bet. Without the Overhang. Management is a problem too hard to trust what they are saying.

[MaxDC]

I think the real reason for this sell off is the structure of its debt which has changed after they once again renegotiated their covenants for.

 

1. All senior debt is now being securitized with cash, accounts receivable and assets.

 

2. the proceeds from the asset sale will be distributed on a pro rata basis between the senior loans

 

3. any subordinated debt issuance or equity capital issuance has to be used to repay the senior facilities first.

 

4. the revolving credit facilities are not securitized, which may be a problem.

 

My opinion is that CB&I is a business that can easily service 1 bn of debt or a little bit more given its technology and fabriation business.

But as a service business, there are not really much assets which you can pledge. so why the change?

 

In this context, 2 things may have forced the banks to do so .

 

1. The risk that CB&I has many underperforming contracts which will eat up cash

2. The Westinghouse lawsuit ( which is propably the reason why the banks changed the covenants that they are reassured to get their money in case of a bad outcome)

 

I liked CB&Is business but I think Asherman has to go. He repurchased stock for $400 mn which the company better used to pay down its debt. The future did not look that bright (downturn in LNG, oil price collapse which resulted in capex reductions) but he thought he is the king.

 

EPCs business usually has a lot of inherent risks that it cannot bear high loads of debt, but this guy thought otherwise.

He always talked about 500 mn free cash flow which in reality was not used to pay down debt but to plug holes in the disastrous Shaw acquisition.

 

Hopefully this all gets sorted out and CB&I returns to its real valuation which I see between 5-6 bn. If you subtract the 1 bn debt after the sale, it would come down to a $45 share price.

 

If the Westinghouse lawsuits hits, it will be probably nothing. The current price makes sense if you attach a 50% chance of a bad outcome on the lawsuit/auditor and some more bad contracts.

[Green King]

Good read, when does the Westinghouse lawsuit conclude?

[Spekulatius]

Anyone noticed the following footnote in CBI's last quarterly report? $500M in approved change order (up from $120M) is enough to go be me shivers and certainly one reason why the stock is down.

 

 

So, basically they try to recognize revenue for changes in the scope of their projects, that they deem necessary, but that the customer has not approved. Some are in arbitration -hmmm. They recognized the work done related to those as revenue, but of course the customer had not paid yet and in my opinion, the fact that these snowball is very very bad news. I think we will some big charges soon, as it becomes clear that some of these claims will not be paid. Management is playing pretend and extend here, imo.

 

 

 

Unapproved Change Orders, Claims and Incentives[/size]—At [/size]March 31, 2017[/size] and [/size]December 31, 2016[/size], we had unapproved change orders and claims included in project price totaling approximately [/size]$505,800[/size] and [/size]$121,100[/size], respectively, for projects within our Engineering & Construction and Fabrication Services operating groups. Our unapproved change orders and claims at March 31, 2017 are primarily related to a proportionately consolidated joint venture project and a consolidated joint venture project. The change orders and claims are primarily related to schedule related delays, fabrication activities and disputes regarding certain reimbursable billings. Approximately [/size]$166,000[/size] of the unapproved change orders and claims are subject to arbitration proceedings that are in the early stages and the remainder are subject to early commercial discussions. At [/size]March 31, 2017[/size] and [/size]December 31, 2016[/size], we also had incentives included in project price of approximately [/size]$38,200[/size] and [/size]$43,000[/size], respectively, for projects within our Engineering & Construction and Fabrication Services operating groups. Of the aforementioned unapproved change orders, claims and incentives, approximately [/size]$454,300[/size] had been recognized as revenue on a cumulative POC basis through [/size]March 31, 2017[/size].

[/size]

[MaxDC]

Yes, thank you for mentioning that. that definitely reminds all CBI investors of the dark days CBI tried itself as a partner of Toshiba in constructing untested, not finally engineered nor approved nuclear power plants in the US.

 

My guess is that these change orders point due to their magnitude to the LNG jobs at the Gulf coast. Hopefully there is no major problem.

 

Anyhow, if the sale of the capital service business is done, that is a major step forward.

 

But that's their last free shot without impacting their business model.

 

Asherman closed the call mentioning "maximizing the value of our high margin businesses" (technology, fabrication) for shareholders. What do you think that means? is he trying to sell a minority stake to some investor or what?

 

[MaxDC]

by the way, those 2 union projects are supposedly Eagle Valley CCGT plant, York-2 CCGT in Indiana/Pennsylvania. Eagle Valley was a Shaw contract, York 2 to my knowledge a CB&I contract.

 

For any shareholder that bought in the 60s or 70s that CEO and the word Shaw must make them tears in their eyes.

 

By the way, Asherman said no regrets when he was asked about the Shaw acquisition last year.

Knowing where CBI came from and is now a top tier EPC contractor I can understand that, but the price was way to high.

He should step back and let Pat Mullen or Dan McCarthy from the original Lummus business run the place.

 

Incouraging is the fact that Fidelity supposedly bought over 4.000.000 shares last quarter. There are at least other stupid people out there :)

[alpha231616967560]

Asherman out... http://investors.cbi.com/news/press-release-details/2017/CBI-Announces-Retirement-of-Philip-K-Asherman-and-Appointment-of-Patrick-K-Mullen-to-President-and-Chief-Executive-Officer/default.aspx

 

[drzola]

Must be close to liquidation value by now?

 

[racemize]

Ridiculous price--I've established a pair call/put trade as I don't see how this price can be correct (good or bad) in 20 months.

[boilermaker75]

Westinghouse should do an LBO of CBI, thereby canceling the lawsuit, and then spinning out CBI. They would probably make more money than they will get in the suit.

[valcont]

Ridiculous price--I've established a pair call/put trade as I don't see how this price can be correct (good or bad) in 20 months.

 

I'm thinking of the same trade. Its either bust or going to fair value. What kind of pair are you trading?

[Spekulatius]

It's worth much less than people think. I believe that CBI can easily become a Donut, even when they win the lawsuit against Westinghouse.

https://www.investorvillage.com/smbd.asp?mb=4143&mn=389429&pt=msg&mid=17232628

[racemize]

Ridiculous price--I've established a pair call/put trade as I don't see how this price can be correct (good or bad) in 20 months.

 

I'm thinking of the same trade. Its either bust or going to fair value. What kind of pair are you trading?

 

I did $15 puts and $20 calls.  I'd rather the calls work.

[valcont]

It's worth much less than people think. I believe that CBI can easily become a Donut, even when they win the lawsuit against Westinghouse.

https://www.investorvillage.com/smbd.asp?mb=4143&mn=389429&pt=msg&mid=17232628

 

Thanks for the link. So the analyst raised the EV by adding some by reclassifying bunch of current liabilities. Well the first question is what does the covenant say? If the lenders look at the qtr end leverage than their will be no breach. The second question is , where are they moving the cash from to reduce the qtr end drawdown? He talks about the contract liability but I'm not clear if that is what he implies.

 

Rest of the stuff was already known to the market but he just added it to justify the lower valuation. I am not arguing against his valuation but it seems like he is trying too hard to justify his price target. Need to research more.

[valcont]

Ridiculous price--I've established a pair call/put trade as I don't see how this price can be correct (good or bad) in 20 months.

 

I'm thinking of the same trade. Its either bust or going to fair value. What kind of pair are you trading?

 

I did $15 puts and $20 calls.  I'd rather the calls work.

 

I agree. I remember their goodwill cookie jar controversy few years ago and nothing came out of it. With Asherman gone and divestiture of capital services, it may go back to its 15% ROI days.

[benhacker]

I agree. I remember their goodwill cookie jar controversy few years ago and nothing came out of it. With Asherman gone and divestiture of capital services, it may go back to its 15% ROI days.

 

I continue to be pretty surprised by the bull case here.  Not necessarily that I think it doesn't exist, but more because I don't see it ever explained convincingly.

 

CBI is this:

1) A formerly good/great company with a monstrously bad acquisition (Shaw)

2) They re-valued Goodwill 2 times on their purchase price, after closing the Shaw acquisition (shifting more of the fair value to goodwill each time due to the core business having less value than initial thought - maybe account cookie jar, or maybe *reality*)

3) The executives in charge of that acquisition repeatedly lied about it's ongoing "success"

4) You then have the division (mostly) sold - with some legal overhang

5) A balance sheet w/ ~ negative $1B in equity

6) Economic accounting that has very high leeway to management in terms of cash vs. accrual

 

I think the core business is ok, and the technology division is likely (very) valuable... but man-o-man you have to really have done your DD here to be comfortable with this situation.

 

Unlike some names on CoBF where folks seem to dig deep (regardless of if I disagree or not)... the analysis on CBI (with few bull exceptions) seems to be very shallow.

 

So sure, any other analyst, on any other company, comes out and makes some commentary about loan drawdown, and quarterly "average" debt being consistently "higher" than quarterly *ending* debt and you can say "no big deal..."... they are just justifying a lower PT...

 

But with CBI?  Are you kidding me???

 

I wish everyone the best here (I have had no position for a while, and I've penned my, negative, thoughts here or elsewhere on CBI already), but you better have your A game at the table on this one.  It looks like a real steaming pile of garbage.

 

I know a lot of folks originally got interested due to Todd C, but frankly, if the company was so stinky it tricked him (he bought high and sold for a large loss), you should be doubly hesitant that he hasn't stepped back in at these prices... something isn't right in dodge.  If it tricked him, it may (still) be tricking you.

 

<calls bottom>

 

Ben Hacker

 

PS - Valcont, I replied to your post, but mostly I am making a general statement about CBI commentary, no necessarily specific to you, or even this board.  Thanks,

[Spekulatius]

I agree with Ben here - so many red flags here, that it looks like a red army parade on Victory day in Moscow in the 50's. This business with huge contracts is a difficult one that has felt many companies over time. The fact that they are managing their balance sheet to look good at the quarter end, is just one of many.  I agree that you really need to know the game very well and better than the management that left to make a sound investment case here. I don't think there is going to be anybody who can make a  good guess on the intrinsic value of the business here.

[MaxDC]

@benhacker

 

1) true

2)those goodwill statements / restatements were necessary. A construction business does not have any meaningful assets. If you acquire one, the purchase price is pretty much for the backlog and the existing workforce, all in the end ends up in goodwill, which needs to be adjusted when you sell a portion. clearly they overpaid, should have received money to take on Shaw.

3)true, it was a horror.

5)a lot of services business do not have any "hard equity" on their balance sheet. In CBIs case its the cash, accounts receivable, shops, IP. except for IP and cash, there is not much.

6)true, management was overpaid after the shaw acquisition.

 

red flags are there, it has been a disaster. but the price adjusted from close to 90 to 15.

 

At 1.5 bn market cap, debt of 2.4 bn and an mid point outcome of the 2bn lawsuit, CBI is not too expensive here.

 

Of course, CB&I gets prepayments, may manage its balance sheet.

if you consider the years before Shaw, they were a cash generating machine and developed the business well.

 

After the lawsuit, we end up with a good EPC business, a great technology division and a better fabrication business in a market which is in its trough, maybe accelerating a little.

 

CBI is capable of servicing 2.5 bn, its pieces together are worth more than they would be on their own.

 

I fell for CBI when it was in the 30s. I understand your objections to CBI but are those risked a little overblown? where should those risks be besides the banks pulling their credits (which i do not think is likely as long as they have good backlog / pay back their debt)

 

In the end it comes down to the performance of their (fixed priced) contracts in the US. A nice output at fabrication would be good, some good quarters at technology even better.

 

If these contracts are bad (Freeport, Cameron, the CCGTs), there goes CBI, but honestly, I think that was their core business for many years.

 

As they still get big contracts from Total and have gotten from Exxon, that are known for their great execution on projects, there is evidence that CBI is not a complete disaster.

 

[MaxDC]

lets do not forget that they repurchased shares during the past 3 years for 450 mn. that money should have been used to reduce debt.

 

At todays prices, that would have bought them 30 mn shares, does point to utmost stupidity of management.

 

CBI is able to generate cash, is able to service its debt, and will pay it down.

[RadMan24]

I wrote an article on them recently in SA, management just has to execute. This is no doubt a rough patch. The risks are large, its a high uncertainty and high risk investment. Not necessarily the best breed of an investment. By the end of June, the hope is some uncertainty is lifted, and updates on future conference calls and 10Qs show meaningful improvement in cash and operating results. 

 

A lot has to go right it feels like to really hit a home run on this investment. Patience sitting in cash might be a better option or a small investment in long dated call options out of the money (grand slam potential, small capital position)

[Spekulatius]

There is no question that CBI could double from here, but I think there is a chance that it's a zero as well and I am not sure which one is more likely.

My take is that the business performed well in a huge secular commodity boom, but now that the boom is over, the addressable market is much smaller, but more importantly, the margins are down, perhaps permanently. Even more importantly, it seems like CBI is deep rooted execution issues and/or is more aggressively bidding on risky projects to retain market share. Their balance sheet has a fair amount of debt and at some point, this and the above will make it very difficult for CBI to get new contracts. I certainly would think twice to give conract to CBI if I were decision maker for a multi billion $ project, since you can just go to FLR or Bechtel and sleep better imo.

 

I would not be surprised, if they were to make a share offering to get rid of some debt and get their balance sheet in line with the competition more. While I agree that the debt load isn't really too excessive, there is reflexivity at work here, if you think about it when you handle multi billion $ projects, where a customer has to out down hundreds of millions just to get work started, you absolutely cannot afford any doubt that obligation will be met in any case. That is the reason why these business need to carry huge cash balances around. You need to look at these from a customers POV, since the customers want to be sure that obligations are met.

[MaxDC]

I agree with your assessment, the downward risk is high and I have not been buying any shares in more than 2 yrs.

On WSJ, I saw Fidelity purchased 4.7 mn shares from 01.01.17-31.03.17. Bad timing by those pros.

 

I disagree with you on the supercycle and the market situation.

 

Of course, the projects in Australia were great for CB&I and have come to an end. On the other hand, the oppurtunity for LNG in the US is still there (Rio Grande LNG, Golden Pass LNG (Qatar Petroleum / Exxon) to mention the biggest ones. Those are around 20 bn in revenue, add to that Cameron Trains 4&5. (Mozambique is a little bit further out, but it will be built due the resource base, the proximity to asian markets, and not to forget the Exxon investment.)

This is just LNG. I think we are only in the first inning in natural gas conversion of the entire US. CCGTs (shutdown of coal, nuclear, and replacement of old power plants), petrochemical downstream projects will be built in the US for at least on decade (just look at the Sabic / Exxon project in Texas)

The US is a blessed country. However, in other places of the world (Europe, Asia), domestic oil and gas is depleting and imports are starting to grow. When oil and gas doesnt move directly from well to point of comsumption, you need tanks, tanks, tanks. Especially the middle east will use more and more of its resources for domestic electricity generation.

 

The middle eastern countries are starting to grow their own petchem base, and these projects like Bapco refinery expansion, liwa plastics will not be the only ones as the world needs more energy and more plastics etc. Russia needs to update its petrochemical industry. Refineries worldwide need to upgrade because of more stringent marine fuel regulation.

 

Finally, not many companies have the size and means to compete on those projects, like CCGTs, LNG, petchem facilities. Of course if there are fewer projects, there is more competition. but EPCs have a pretty elastic supply function. They hire for projects and if there is not much work, dont hire. I dont see why CB&I should bid on a job that has no margins.

 

Demand for CB&Is services is definitely there. What the management makes from this is up to them.

[racemize]

There is no question that CBI could double from here, but I think there is a chance that it's a zero as well and I am not sure which one is more likely.

My take is that the business performed well in a huge secular commodity boom, but now that the boom is over, the addressable market is much smaller, but more importantly, the margins are down, perhaps permanently. Even more importantly, it seems like CBI is deep rooted execution issues and/or is more aggressively bidding on risky projects to retain market share. Their balance sheet has a fair amount of debt and at some point, this and the above will make it very difficult for CBI to get new contracts. I certainly would think twice to give conract to CBI if I were decision maker for a multi billion $ project, since you can just go to FLR or Bechtel and sleep better imo.

 

I would not be surprised, if they were to make a share offering to get rid of some debt and get their balance sheet in line with the competition more. While I agree that the debt load isn't really too excessive, there is reflexivity at work here, if you think about it when you handle multi billion $ projects, where a customer has to out down hundreds of millions just to get work started, you absolutely cannot afford any doubt that obligation will be met in any case. That is the reason why these business need to carry huge cash balances around. You need to look at these from a customers POV, since the customers want to be sure that obligations are met.

 

You do know that they are selling one of their divisions for $750 million this quarter to retire debt though?