McDermott Project Woes Creates Cheap Target: Real M&A

McDermott International Inc. (MDR) is so beaten down that buyers can snap up the offshore oilfield-construction company and its fleet at a near fire-sale price.

McDermott shares have slumped 47 percent in six months amid cost overruns at projects off of Malaysia and Saudi Arabia, leaving it trading at its liquidation value, according to data compiled by Bloomberg. Now, it’s vulnerable to being scooped up by rivals tempted by Houston-based McDermott’s still-strong industry brand and manufacturing operations near large crude producers such as Saudi Arabian Oil Co., said BB&T Corp.

The $1.7 billion company is struggling as it expands beyond lower-margin work in shallow water to riskier projects at deepwater sites. After its decline, competitors Saipem SpA (SPM) and Technip SA (TEC) could pursue McDermott to gain its fleet of offshore vessels for installing heavy pipelines, according to Capital One Financial Corp. (COF) McDermott may even attract more traditional engineering and construction companies such as KBR Inc. (KBR) and Foster Wheeler AG (FWLT), Stephens Inc. said.

“The McDermott name is well-recognized globally,” Michael Marino, an analyst at Stephens Inc. in Houston, said in a phone interview. “There’s some value in that, which someone might find attractive.”

Photographer: Timothy Fadek/Bloomberg

A section of gas pipeline is lifted onboard the Castoro Sei, a pipe laying vessel operated by Saipem SpA, during the construction of the Nord Stream AG natural gas pipeline in the Baltic Sea, Sweden. After its decline, competitors Saipem SpA and Technip SA could pursue McDermott to gain its fleet of offshore vessels for installing heavy pipelines, according to Capital One Financial Corp. Close

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Photographer: Timothy Fadek/Bloomberg

A section of gas pipeline is lifted onboard the Castoro Sei, a pipe laying vessel operated by Saipem SpA, during the construction of the Nord Stream AG natural gas pipeline in the Baltic Sea, Sweden. After its decline, competitors Saipem SpA and Technip SA could pursue McDermott to gain its fleet of offshore vessels for installing heavy pipelines, according to Capital One Financial Corp.

Steven Oldham, a spokesman at McDermott, didn’t return phone or e-mail messages seeking comment on whether the company has been approached by suitors or would consider a sale.

Surprise Loss

McDermott plunged 21 percent on Aug. 6, the biggest one-day drop in almost two years, after surprising analysts and investors with its biggest quarterly net loss since 2002, according to data compiled by Bloomberg. The loss resulted, in part, from project costs and delays.

“We have significantly underperformed as compared to our own expectations,” Chief Executive Officer Stephen Johnson said on the company’s earnings call last week. McDermott is taking steps to remedy its business, including bolstering its project oversight and management, he said.

The decline in McDermott’s shares last week to a more than four-year low of $6.73 left the company trading at a discount to the value of its net tangible assets for the first time since 2008, according to data compiled by Bloomberg. The stock ended last week at $7.11, about even with McDermott’s tangible book value, or the amount shareholders would expect to recover in a liquidation, the data show.

Photographer: Antoine Antoniol/Bloomberg

Technip, a Paris-based engineering and construction company, is a possible buyer after purchases in recent years including its $1 billion deal for Global Industries Ltd. in 2011, Randy Bhatia, an analyst at Capital One in Houston, said. Close

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Photographer: Antoine Antoniol/Bloomberg

Technip, a Paris-based engineering and construction company, is a possible buyer after purchases in recent years including its $1 billion deal for Global Industries Ltd. in 2011, Randy Bhatia, an analyst at Capital One in Houston, said.

Today, McDermott shares rose 3.2 percent to $7.34, the biggest gain among stocks in the Russell 1000 Energy Index.

Becoming Vulnerable

“There’s obviously a lot of speculation about the future of McDermott as a standalone company,” Will Gabrielski, an analyst at Lazard Capital Markets LLC in New York, said in a phone interview. The company has assets and operations that could attract buyers, he said.

McDermott offers a wide range of engineering and construction services to the offshore oil and gas industry. Its core business is building and installing production platforms anchored to the ground in shallow waters around the world. McDermott also is expanding into subsea work, using its fleet of deepwater ships to install pipelines and also to connect flowlines that run from equipment on the sea bed through almost two miles of water to floating production vessels.

“While the brand might look tarnished to investors, there’s a very long history there of capable execution work,” Gabrielski said. McDermott also has fabrication facilities in the Middle East, Mexico and the Asia-Pacific region, he said.

Technip, Saipem

Technip, a Paris-based engineering and construction company, is a possible buyer after purchases in recent years including its $1 billion deal for Global Industries Ltd. in 2011, Randy Bhatia, an analyst at Capital One in Houston, said. Saipem, a Milan-based engineering and construction competitor, is also large enough with a market value of 7.1 billion euros ($9.4 billion) to buy a company of McDermott’s size, Bhatia said. It may take a year for McDermott to attract takeover interest, he said.

KBR, a $4.5 billion engineering and construction company, and Foster Wheeler, with a market value of $2.5 billion, also could be tempted to take a look, Marino at Stephens Inc. said.

Floriane Lassalle-Massip, a spokeswoman at Technip, said the company doesn’t comment on speculation. Georgia Colkin of Barabino & Partners, a communications firm representing Saipem, said the company declined to comment, as did Rohan Hutchings, a spokesman at Houston-based KBR. Patti Landsperger, a spokeswoman for Geneva-based Foster Wheeler, didn’t return a phone call.

Buying Opportunity

McDermott may find a willing buyer in Asia, where a large manufacturing company might be able to accept McDermott’s risks in an effort to gain market share and experience in offshore infrastructure development, said Robert Norfleet III, an analyst at BB&T in Richmond, Virginia.

“I would never rule out that somebody would look at this as a real opportunity, especially if they could get comfortable with the projects in backlog,” Norfleet said in a phone interview.

Some potential buyers may hold off while the company works to address its project management issues, he said.

“This has now turned into a ‘show-me’ story,” Norfleet said.

It may take a year or two for buyers to ultimately be interested in acquiring McDermott, said Tahira Afzal, an analyst at KeyBanc Capital Markets in New York.

“There are very few players out there that do what they do,” Afzal said in a phone interview. “To the extent the strategy for some of these Asian guys is to become bigger players in this market, it would seem like the eventual end for McDermott.”

Editors: Beth Williams, Sarah Rabil

To contact the reporter on this story: David Wethe in Houston at dwethe@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net; Susan Warren at susanwarren@bloomberg.net

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