ROD DEAN'S 2006 REVIEW

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E & C Hydrocarbon Review - The Global view from Europe. Looking back on 2006 & ahead to 2007.

Bechtel's activity in China this year focused on acquiring more steel and other building materials to supply Bechtel projects elsewhere in the world. It also will build up its engineering support center in Shanghai and take on more work in China for multinational customers.

One company created more news than any other during the past year (and there is still more to come I think) and that is CB & I. I have already (mainly for sentimental reasons on my part) mentioned the rise of this new member of LNG (Liquefaction aspirant that is) Club earlier in my review. Well I make no apologies in coming back to focus on some of the darker aspects of their year. It started badly got better and ended in a flourish (with more of the latter to come in the short term). At the start of the year the global CB& I was under a cloud whilst it investigated allegations of accounting improprieties from a senior member of its accounting department revolving around the determination of claim recognition for two projects and assessment of costs to complete two projects that was possibly improper. The audit committee of the company's board of directors conducted an investigation into the matter with the full cooperation of management. CB&I said it believed that its overall earnings capacity, financial viability, growth potential and cash position remained intact. The top two global CB&I executives (both ex Fluor) were terminated and sued the company for wrongful dismissal and by May CB&I had agreed to make a $735,000 cash payment to former chairman and chief executive Gerald M. Glenn. CB&I said in a filing with the Securities and Exchange Commission that the payment is subject to some reductions, taxes and withholdings and that Glenn's stock options will vest according to schedule.

By June they were announcing a drop in net profit for 2005 down to $16 m, or $0.16 per share, from $65.9 m, or $0.67 per share, in 2004 due to subcontractor cost growth issues on two projects and timing issues related to the segmentation and derivatives factors. So as we say there is no smoke without fire especially as revenues increased 19% to $2.3 bn due to refinery expansion projects in North America, a large natural gas processing plant in South America, an LNG terminal in China and two LNG terminal projects in the UK. So the figures were even worse than expected. Senior executive appointments were made in both operations and sales as the company rebuilt its executive team after the three departures.

The industry press sharpened their pencils accordingly and a typical report went something like this:-

CB&I have a little more on its plate these days than just building the LNG terminals and storage tanks in which it specializes. With recent accounting problems and the departure of its CEO, CFO, and COO fresh in investors' minds, rebuilding credibility and investor confidence will be just as important.

Though Q1 results weren't entirely a great start, the good news outweighed the bad. Revenue rose 35% in the quarter, with results boosted by work on LNG projects in the U.K. helping significantly. The company also boosted its backlog from the end of fiscal 2005; it currently stands at about $3.4 bn, more than a year's worth of revenue at current run rates.

Gross margin fared worse, falling more than a full point. Operating income also dropped 20%, partly because of the costs associated with stock compensation and the investigation of the accounting troubles. Order levels were also lower this quarter, as new business fell 38%. It should be noted, though, that this tends to be a somewhat lumpy metric; the timing of large orders can make comparisons look really good or really bad from one quarter to the next.

Accounting irregularities are generally a valid reason to steer clear of companies, but I think CB&I have done a noteworthy job of quickly cleaning house. I couldn't comment on the impact it had on rank-and-file employees, but I'd consider the departure of three major executives a significant reaction to the problem.

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