KBR Projects Growth in Hydrocarbons from U.S. Shale Gas Market after Second-Quarter 2014 Losses

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Researched by Industrial Info Resources (Sugar Land, Texas)--Engineering, procurement and construction company KBR Incorporated (NYSE:KBR) (Houston, Texas) reported sharp drops in revenues and profits for second-quarter 2014, as demand from the U.S. Department of Defense continued to decline, key Canadian businesses incurred losses, and volumes generally paled when compared with last year. The company reported a net loss of $8 million, compared with net income of $90 million in second-quarter 2013.

Industrial Info is tracking $108 billion in active projects involving KBR, such as Canadian Oil Sands Limited's (Calgary, Alberta) $1.9 billion construction of a centrifuge tailings management plant at the Mildred Lake North Oil Sands Mine in Fort McMurray, Alberta. Upon completion, the plant is expected to produce 7.3 million tons per year of cake. KBR Canada Limited (Edmonton, Alberta) is serving as the general contractor on the project, which is expected to be completed in the second quarter of 2015.

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While $40 billion of total value of projects related to KBR comes from North America, a greater number--more than $47 billion--is tied to projects to be built in Asia. The largest of these is Azerbaijan South Caucasus Pipeline Limited's (Baku, Azerbaijan) $10 billion construction of a natural gas pipeline from the Shah Gas Field in Azerbaijan to Akhaltsikke, a city in southern Georgia. The project, which is set to kick off construction in the first quarter of 2015, will run 2,200 kilometers and have an annual transportation capacity of 16 billion cubic meters. KBR is performing design-engineering services.

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The remaining $21 billion in KBR projects tracked by Industrial Info are split among Africa, Europe and South America.

Total revenues stood at $1.66 billion, a 14.92% decrease from second-quarter 2013. Major reasons for the lower revenues include the completion of several key projects in 2013, such as a liquefied natural gas (LNG) project in Algeria and a gas-to-liquids project in Nigeria, and the resulting drop in business volumes this year. The company's Gas Monetization segment benefited from fees and recoveries on an LNG project last year, but did not see the same benefits this quarter. Some of the segment's lower revenues were offset by heightened activity on an Australian LNG project.

The Services segment reported a steep drop in revenues and a profit loss, following an estimated $41 million hike in construction and labor costs associated with problematic pipe fabrication and module assembly projects in Canada. The Hydrocarbons segment reported improved revenues globally, especially from the Petroleum Refining and Chemicals Processing industries, where the company saw strong EPC demand for downstream ammonia, ethylene and urea projects; however, a shift to higher-cost and lower-margin EPC projects resulted in a profit decline for the segment.

Capital expenditures for the second quarter totaled $18 million.

"The quarter's results were dominated by Canadian projects, particularly the pipe-fabrication and module assembly contracts," said Brian Ferraioli, the executive vice president and chief financial officer of KBR, in a conference call. He said that of seven existing Canadian contracts, "four are largely completed, and these contracts represented significant sales growth. But the modules we are manufacturing and assembling are far larger and are more complex than we had historically completed. The cost increase and productivity decrease are what's driving the financial results."

Despite the second-quarter setbacks, KBR executives are optimistic about future projects, particularly with strong demand coming in from the North American natural gas and hydrocarbon markets. The booming U.S. shale gas market is one of the biggest drivers. KBR also is seeing strong overseas demand for defense and other government-related work, such as projects for the U.K. military and police, and the Australian Defense Force.

One of the largest North American bookings in the second quarter was for a 600-megawatt (MW), combined-cycle natural gas station in Marshalltown, Iowa. The project involves building two 195-MW Siemens combustion turbine generators, two Nooter Ericksen supplementary fired heat recovery steam generators, and a 255-MW Siemens steam turbine generator next to an existing power plant owned by Interstate Power and Light Company (Cedar Rapids, Iowa), a subsidiary of Alliant Energy (NYSE:LNT) (Madison, Wisconsin). KBR is performing EPC services.

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"In general, it was a good bookings quarter, particularly for Hydrocarbons and Infrastructure, Government and Power [segments], which booked the Marshalltown gas-fired power plant," Ferraioli said in the conference call. "More encouragingly, we are optimistic about the bookings for the latter half of this year for Hydrocarbons, which is being driven by work resulting from the 'shale gas revolution' in the U.S. So we expect bookings to continue for Hydrocarbons, for the balance of the year."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.