Strategic Diversification To Shield Bechtel From Weak Markets
BMI View : Bechtel has adjusted well to take advantage of changing opportunities in the engineering industry. The company has made several strategically sound acquisitions and partnerships to capitalise on new growth segments in the oil and gas, mining and power segments. However, the company has seen order bookings fell dramatically over 2012, and is exposed to a number of sectors for which we hold a more bearish outlook. Nevertheless, the extent of Bechtel's strategic diversification should ensure that the company has the flexibility to adjust to changing market conditions.
Bechtel 's 2012 results illustrat e a strong top line performance; however, new order bookings were some way below 2011's record high of US$53bn. Although 2011 was an extraordinary year, order booking s in 2012 were also low by historic standard s . With a number of high value projects moving into the final stages, hence supporting strong growth in revenue, this fall in new bookings could hit revenue generation over 2013 and 2014.
The company's top line performance is broadly in line with its peers, with US engineering companies Fluor and URS reporting 18% and 15% revenue growth respectively over 2012. Whilst all three companies saw order backlog decline in 2012 versus 2011, the dip for URS and Fluor was significantly less pronounced.
|Revenues And Backlog Performance Diverge|
|Bechtel Peer Group, Revenues (LHS) And Backlog (RHS), US$bn|
It does look likely that 2013 will be a stronger year for new bookings. In the first half of the year, we have seen some high value contracts come in, including a LNG export terminal in Canada and the upgrading of a nuclear power plant in the US. We expect to see the benefits of Bechtel's strategic moves into new sectors and markets over the coming years as it achieves greater earnings diversity and wider contract opportunities. Some of the notable sectors Bechtel has expanded into are renewable transmission, SMRs, industrial and precious metal mining, petrochemicals and refineries.
|Top Line Hitting New Highs|
|Bechtel Revenues (LHS) And New Work (RHS), US$bn|
One strategy Bechtel has employed to rebuild its order book is diversification, offsetting persistent weakness in Europe with new markets and high growth sectors in existing markets. The other side of Bechtel's strategy is to expand into new high growth countries such as the Middle East, Africa and Mongolia. In doing so, the focus has been - and is likely to continue to be - on emerging markets. Following on from the company's successful bid to formulate a master plan for infrastructure development in Gabon, Bechtel's award of a master plan for an industrial complex in Mongolia highlights its frontier market strategy.
Bechtel is also cementing its presence in the Middle East, a market we expect to provide some of the highest value contract opportunities globally. The company is already working on two of the largest airport projects in the region (Oman and Qatar) and will likely benefit from the World Cup-related project frenzy in Qatar and the rest of the Gulf Cooperation Council (GCC).
In terms of new markets, Africa could be a profitable frontier market for the company, with its venture in Gabon a potential launch pad for an expansion into the region. In the same vein, Mongolia could hold significant potential, with huge investment into mining as well as demand for support infrastructure and freight transport capacity.
In terms of sectors, the most immediate potential is from the company's ability to capitalise on the shale gas revolution in the US. Whilst policy remains uncertain, and low prices are dampening new exploration and production volumes, there are significant opportunities. In the power segment, natural gas has become the fuel of choice, due to its low cost (brought on by high supply) and its relatively clean nature. Indeed, electricity generation from natural gas in the US grew by 21% in 2012. Bechtel, in cooperation with Siemens, is building two 758MW natural gas-fuelled combined cycle power plants in Texas for Panda Power Funds. In November 2012, the company broke ground on its project in Sherman, Texas, while a second project in Temple broke ground in September 2012. The power plants are estimated to cost US$750mn each, although it is unclear what Bechtel's portion of the contract is worth. Both are due to be completed in 2014.
One interesting avenue is the company's entrance into ethylene cracker plants in North America. In response to the shale gas revolution currently underway, Bechtel announced in July 2011 a venture with Linde to capitalise on international experience to develop new ethylene cracker plants in the US. A number of huge plants are in the works as companies seek to utilise substantial new gas supplies coming onstream in the US and capitalise on the low prices to convert gas to chemicals.
|Energising Contract Opportunities|
|US Oil And Gas Production|
Big Winner On LNG Boom
One of Bechtel's biggest areas of opportunities both in the US (further benefitting from shale gas) and internationally will be its expertise in LNG export terminals. The company is the global leader in construction of this type of infrastructure, holding contracts for 40% of the LNG capacity currently being developed globally.
The company is the EPC contractor for what will be the US's first LNG export terminal. The US$5.6bn Sabine Pass LNG project will see the current LNG import terminal in Louisiana be converted into an export terminal. The project is taking great strides forward, and a final investment decision was made by Cheniere Energy in July 2012 to move forward with the project. Financial close on the project was achieved in August 2012, allowing the company to issue Bechtel full notice to proceed with its US$3.9bn EPC contract. Construction of the first LNG terminal is due to be completed in 2015, with the second one following six to nine months later.
The construction of LNG export terminals is going through a boom period globally, due to significant new discoveries of gas and strong global demand and high prices. Canada is also benefitting from the shale gas boom, and a number of LNG export terminals are planned on the British Columbia coast. Bechtel was awarded the front-end engineering design (FEED) contract in June 2013 for the Pacific NorthWest LNG export terminal.
This project adds to the company's impressive backlog of LNG projects. In Mozambique, Bechtel was awarded a contract to perform FEED for a planned new LNG plant to capitalise on the country's nascent natural gas sector. The Mozambique LNG export terminal, on which a final investment decision is due in 2014, is one of a number of new terminals being planned on Africa's East coast. Consequently, Bechtel could leverage its position in Mozambique to expand further into the region. The company is already well established in West Africa, where it provided engineering work on Angola's US$10bn LNG export terminal. The terminal shipped its first cargo in June 2013.
The company has benefitted hugely from its presence in Australia by bolstering its order backlog with megaprojects. The company holds an EPC contracts for a cutting edge project to build three LNG export terminals side-by-side on Curtis Island, Australia. The project has a combined value of over US$50bn (although it is unclear what portion of the project is Bechtel's).
Gold Mine Or Risky Business?
Bechtel's Mining & Metals unit has also secured a number of high value contracts. The company has benefitted from its joint venture with Xstrata (now Glencore Xstrata) to win contracts for copper concentrators at projects across Chile. Bechtel is looking to expand its mining business to iron ore and gold. This move comes at a difficult time for the mining industry, as Chinese demand is suffering and mining companies are beginning to reassess capex plans. Copper mining in Chile and Peru and iron order in Australia are both industries vulnerable to this trend. The company's plans to expand exposure to gold mining could also cause problems, especially for operations in Latin America, where the environmental and social considerations associated with the practise has caused many projects to stall over recent months.
|Slowing Production Could Weigh On Contract Opportunities|
|Global Metals Production, % Change y-o-y|
The company has also been diversifying its areas of activity by leveraging off strategic joint ventures (JVs) and capitalising on new sector opportunities.
Bechtel has a strong presence in the US renewable sector, with the company acting as EPC contractor on one of the largest PV projects and the largest solar thermal project globally. The US$2.2bn Ivanpah thermal solar power project, located in California's Mojave Desert is being built in cooperation with BrightSource Energy, and benefiting from investment by Google and NRG, as well as federal loan guarantees. Construction on the 392MW project reached the halfway mark in August 2012, is on track to be completed in 2013. Bechtel is also helping to develop the California Solar Valley Ranch, a 250MW solar photovoltaic power plant. One of the largest PV plants globally, the company broke ground on the project in November 2011.
Whilst this venture into solar has seen Bechtel capture a couple of high profile projects, as previously noted, the future of the sector is unsure. Federal subsidies have been cut in the US, and we have already seen project volumes decline. At the same time, hopes of expanding internationally could be dashed with European austerity having put attractive feed-in tariffs on the chopping block. Whilst MENA and Latin America hold some promise, an auction method for doling out contracts, combined with high competition, has seen worryingly low margins on offer in certain markets in Europe. As such, entering as an EPC contractor rather than an operator - particularly in the European solar market - could be a sensible way round this issue.
|Opportunities Of Offer, But Competition High|
|Solar Power Capacity, % y-o-y|
Making Waves In Wind
Against the backdrop of a struggling global solar power sector, Bechtel has announced a new strategic partnership to target the wind power sector. The company announced in October 2012 that it had formed a partnership with offshore engineer Subsea 7 to target offshore wind and related transmission infrastructure in Europe. The offshore wind segment is seeing strong activity, despite economic headwinds in Europe. Indeed, the European market promises a strong pipeline of new tenders, especially in Germany where the government plans to install 7,600MW of new offshore capacity by 2020. The sheer volume of new offshore wind capacity coming online is also necessitating new transmission infrastructure. However, the partners will see strong competition from the established European majors in this field.
Bechtel is also benefitting from growing green energy investment in the US to win cutting edge transmission contracts domestically. The company was awarded the first segment contract for the US$1.8bn New Jersey Energy Link by the Atlantic Wind Connection. The project is the first offshore transmission line to be built in the US and is aimed at not only improving the reliability of the grid, but also connecting thousands of megawatts of new wind capacity to the grid. The US is hoping to develop offshore wind in the northeast and new offshore transmission lines will be crucial. With this project, Bechtel could position itself as the first-choice contractor for these offshore transmission projects.
Looking Ahead With SMR
Another more promising clean energy venture is Bechtel's entrance into the small- and medium-sized reactor (SMR) industry. Bechtel is already well established in the traditional nuclear power market in the US. Whilst we see very few new large scale projects in the pipeline moving forward, we do see opportunities for upgrade contracts, especially following the Fukushima disaster in 2011.
BMI anticipates that greater opportunities for new builds will be found at the smaller end of the scale and Bechtel is pursuing this market thought its JV with Babcock & Wilcox (B&W) to develop the mPower SMR - a 125MWe PWR. The partnership, agreed in 2010 and known as Generation mPower, will see Bechtel help B&W bring online the world's first Generation III++ SMR. The smaller size means reduced capital costs, shorter construction times, and therefore lower chance for costly overruns. It also bypasses the need for substantial new grid infrastructure, especially as the reactors can be located closer to the consumer. SMRs are also be touted to have much better safety credentials, which is a major draw following the Fukushima nuclear crisis. BMI believes that SMRs have significant potential, especially in emerging markets; however, the technology is still at the early stages and is more of a longer-term play by Bechtel.
Our positive view on SMRs was matched by the Department of Energy (DoE), where in November 2012, it announced an award to support Generation mPower in the engineering, design certification and licensing of the first of its kind SMR. The DoE has committed to investing up to half the total project cost of the plant and in April 2013, signed a cooperation agreement with Bechtel that outlined the allocation of US$79mn in the first year. A construction permit application is in the works for the pilot project, and could be constructed in Tennessee in partnership with the Tennessee Valley Authority. Commercial operations for the project are targeted to be by 2022.