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McDermott’s J. Ray fumbles again Service company loses millions on delays, has cost overruns on ‘first-of-a-kind’ marine construction jobs Ray Tyson Petroleum News Houston Correspondent
Oilfield service company McDermott International is sounding like a broken record these days when it comes to apologizing for its troubled marine construction unit, J. Ray McDermott.
Again, Louisiana-based McDermott has promised better times ahead for J. Ray, following a dismal 2003 fourth quarter in which the company incurred a loss of $81.4 million or $1.26 per share, $64.7 million of which was attributed to three J. Ray offshore construction projects the company now vows will be completed by year-end 2004.
Those unattractive 2003 fourth-quarter financial results followed a loss of $184.5 million or $2.94 per share in the fourth quarter a year earlier, due in part to project delays and cost overruns associated with its marine construction business.
“Our operating performance and financial results during 2002 were unacceptable,” Bruce Wilkinson, McDermott’s chief executive officer, said last March. “We have, however, taken actions that should enable us to transform the opportunities we have in our major business segments into value for our shareholders.”
In a March 12, 2004, conference call with industry analysts to explain McDermott’s 2003 fourth-quarter performance, the Wilkinson tune sounded strangely familiar.
“Clearly, the additional charges in J. Ray were a big disappointment to all of us,” Wilkinson said. “It was a temporary and expensive setback in the J. Ray turnaround story, but it will not change the outcome. J. Ray will get better, more consistent and profitable.”
However, McDermott sounded doubtful about J. Ray’s future in a press release issued a day before the conference call. A number of factor’s, including J. Ray’s ability to obtain additional credit, “continue to cause substantial doubt about J. Ray’s ability to continue as a going concern,” the company said. Additional costs for completion of three projects Frank Kalman, McDermott’s chief financial officer, said in the recent conference call that J. Ray is projecting about $85 million in “negative cash flow” during the first, second and fourth quarters of 2004, due to additional costs associated with completion of its Front Runner spar in the Gulf of Mexico, the Carina Aries project in Argentina, and the Belanak FPSO Batam Island facility.
He said that while J. Ray completed a $200-million note offering in December, it currently has access to less than half of the proceeds because about $84 million of the total is being used “to collateralize” letters of credit and $22 million is being held in trust for interest payments until the Front Runner spar is completed.
“Essentially, it’s the cash spending catching up with the losses that we have already reported,” Kalman said. “J. Ray intends to fund its negative cash flow through a new letter of credit facility and sales of non-strategic assets.”
Kalman said J. Ray likely would have its new line of credit later this month or early in the second quarter, adding that J. Ray also had $58 million in unrestricted cash as of March 9. “However, J. Ray’s negative cash flows in the near term are expected to exceed this amount,” he said. Fourth quarter revenues jump Ironically, McDermott’s total revenues for the 2003 fourth quarter jumped 31.5 percent to $582 million compared to the same period a year earlier, while J. Ray’s portion alone rose 54 percent to $428.6 million. The jump in revenues resulted from increased activity on fabrication and marine installation projects in all geographic areas where J. Ray operates, other than the Gulf of Mexico, the company said.
Included in J. Ray’s $64.7 million loss in the 2003 fourth quarter was $5.4 million to cover an increase in insurance. McDermott warned of the charges two weeks prior to release of its 2003 fourth-quarter earnings statement. The company said it may be able to recover about $25 million of its 2003 losses through customer charge orders, negotiated settlements or legal proceedings.
“What got us into trouble in the past is one common denominator: first-of-a-kind projects ... where we have limited experience,” McDermott’s Wilkinson said. Still, Wilkinson said he was “optimistic” about the company’s future.
“For our investors that have been with McDermott for a while and have seen material changes over the years, you’re probably asking why I am optimistic J. Ray will complete its turnaround,” he said. “These projects have been around for several years, and they are all about to be behind us.” He added that J. Ray also is currently bidding on $1.5 billion worth of projects and “we expect to win our fair share of this work.” Company stock has plummeted Over the past five years, McDermott stock has plummeted from a high of around $30 per share to a low of around $2 per share. The stock is currently trading under $10 per share.
In the future, Wilkinson suggested, J. Ray would avoid projects where it has limited experience. “That will change going forward as we continue to focus on our bread-and-butter projects,” he said.
However, he said J. Ray would continue to bid on “certain fixed-price contracts which are required by certain customers,” but that it would be “more selective on the types of projects and the margins required than in the past.”
Other McDermott businesses contributed to the company’s 2003 fourth-quarter loss, including a $9.7 million charge related to The Babcock & Wilcox Co. Chapter 11 bankruptcy settlement. In the 2002 fourth quarter, McDermott took a $110-million charge related to the estimated cost of the settlement. The company also took an $18.9 million non-cash charge related to corporate pension expenses.
As for J. Ray, McDermott “took immediate action on the projects, including appropriate personnel actions,” Wilkinson said. “Accountability has to be important ... J. Ray’s people are given incentives to produce, but there also are consequences for not delivering.”
McDermott is the second oilfield service company within the past month to report major construction problems. In late February, big drilling contractor Pride International reported a 2003 fourth-quarter net loss of $38.5 million because of delays and cost overruns associated with the construction of four deepwater platform rigs for clients BP and ExxonMobil.
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