SNC-Lavalin plummets on oil and gas headwinds in Saudi Arabia, and mining problem

SNC-Lavalin Group Inc., one of Canada’s biggest engineering and construction firms, dropped nearly 30 per cent on Monday after warning that problems are brewing in its oil and gas business, particularly in Saudi Arabia and other parts of the Middle East.

That news came on top of an announcement it experienced major cost overruns at an undisclosed mining project.

On a conference call to investors on Monday, chief executive Neil Bruce declined to quantify the scope and size of the company’s problems until audited fourth-quarter results are released Feb. 22.

While the company has not yet experienced any impacts as a result of the diplomatic rift between Canada and Saudi Arabia last year, Bruce expressed concern about the company’s ability to continue operating in the Middle Eastern country in future.

“We’ve seen just in the last six weeks, a further cooling of the relationship between Saudi Arabia and Canada,” said Bruce during the call. “We have had feedback from our clients there, that yes, they want us to carry on … but our ability to secure significant future work is very much under review.”

Bruce made the comments after the company announced its oil and gas business would post lower cash flows as a result of higher costs than anticipated, and unexpected trading challenges.

The company also took a $1.24 billion non-cash after-tax goodwill impairment charge, about $7.04 per share, on the carrying value of its oil and gas business. The stock closed off 27.81 per cent to $35.01.

SNC-Lavalin has about 9,000 employees in Saudi Arabia, or 15 per cent of its workforce, according to the company. In the past, it has downplayed the diplomatic feud that started after Foreign Minister Chrystia Freeland tweeted about the imprisonment of human rights activists in Saudi Arabia.

More recently, in January, Canada provided asylum to an 18-year-old Saudi woman who renounced Islam.

“The world’s a pretty unpredictable place at the moment. I’m not sure that anyone would bet on intergovernmental relations.

CEO Neil Bruce

Bruce said during the call the company has not lost any work, or made any layoffs, as a result of the diplomatic tensions.

Asked if he thought SNC’s Saudi business operations would be more valuable in a non-Canadian company, he said the company is looking at all options, including a possible sale, but also cast doubt that a company from another country would fare better.

“The world’s a pretty unpredictable place at the moment,” he said. “I’m not sure that anyone would bet on intergovernmental relations.”

The company also announced cost overruns on an undisclosed mining project, which would lower its mining segment’s cash flows for the fourth quarter.

As a result of lower cash flows from its oil and gas and mining units, and also a legal decision it lost in Australia related to an oil gas project, SNC revised downward its adjusted consolidated diluted earnings per share for 2018 to $2.15 to $2.30 from an earlier forecast of as much as $2.85.

“The major item in all of this, is within the mining sector,” said Bruce. “I’m not saying we were happy with the other two portions either, but mining is the biggest impact.”

He declined to disclose which mining project encountered increased costs, except to say it was contracted in 2016. According to a review of the company’s press releases, it contracted a half-dozen projects that year, including to build two sulphuric acid plants for Codelco, the Chilean copper producer.

The major item in all of this, is within the mining sector. I’m not saying we were happy with the other two portions either, but mining is the biggest impact.

CEP Neil Bruce

The Codelco contracts are classified as an engineering, procurement and construction contract, which require SNC to build the project at an agreed-upon price and absorb any cost overruns. Neil declined to confirm if it is the Codelco project.

Michael Willemse, a senior research analyst with Taylor Asset Management, an investor, said “I’m not as concerned about that as the problems in oil and gas, particularly Saudi Arabia.”

SNC’s oil and gas segment is far larger than its mining business — providing $662.7 million in revenues versus $181 million in mining through the first three quarters of 2018, according to its annual report.

Willemse said his firm had been concerned about the risks of operating in Saudi Arabia, and management had always been optimistic until now.

The company also appointed Ian Edwards as chief operating officer, who led the infrastructure business since 2014.

Willemse said the biggest issue of all is the company’s plans to sell a slice of its 16.76 per cent stake in Ontario’s 407 toll road that cuts across the greater Toronto area.

I think they should resolve the major issues they have now,” he said, adding, “Most of the value of this company is in their equity stake in the 407.”

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