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.

FW has had successful recruitment, almost 2000 people hired in last 3 quarters. (Surely a large number departed as well!) Engineers want to work on something they enjoy and in an environment where they are appreciated and are supported. Recruiting has been heavy in India, Shanghai, Singapore and Thailand. Houston’s hiring is strategic. FW has lost market share in the North American market but there is a strategic initiative to gain market share.

Reporting through their UK HQ there are a number of offices:-
Thailand is their biggest office, facing tough competition from Technip, Worley, Toyo and others - 600 people and busy, but limited by the available resources in the market.
Shanghai combined E&C and Power engineering office is about 250, projected to increase in 2007. All their business is PMC, and they are struggling to break in to EPC
Malaysia - KL office is not big (100 or so) but enjoying lots of PMC work - engineering is largely moved to the Thai and Indian offices.
Singapore - about 200 but supporting the major Shell Petrochemical and Lucite projects
India (Chennai) - has now moved to E&C control (from Power) and have grown to 70 in 2006 - this is an "export" engineering office only- they do not pursue business in India. However for an HVEC office this growth rate is exceptional and frankly probably much too fast to guarantee an adequate standard of work.
We understand an additional office is planned for Calcutta.

Awards have come thick and fast and one gets the impression that they take on the work whether they have the resources or not. FW Italiana has had several awards in the Middle East, Eastern Europe and Greece - its traditional hunting ground; The Madrid office is winning work in Spain, including quite a lot of power related work. Reading remains very strong in the Middle and Far East but is also winning work in the UK - it has a strong foothold in Refining and Petro Chemical areas. With the ever increasing demand to process heavy crudes their Delayed Coking process has had a very successful year with a number of strategic global awards. They are also moving slowly away from just a FEED / PMC contractor and taking on more EPCM and even some Lump Sum EPC work in the right circumstances.

They are now a fully paid up member (almost) of the fabled LNG Club ( a mysterious group of contractors from Japan, the USA and France who for the past 30 years have been able to handle the majority of the available LNG Liquefaction work. With the large increase in the number of potential LNG projects, coupled with the huge cost increases predicated on materials, equipment, construction and schedule there has been a trend away from full LSTK EPC contracts which has opened up opportunities for both FW & CB&I.

FW already working (with Worley Parsons) on the EPCM project for Woodside Train 5 at Karatha are also involved on other Australian opportunities at the Study / Pre FEED and FEED stages and has made moves (with Chiyoda) to go head to head with the TSKJ consortium in a front-end engineering and design contest to build a seventh train with an option to build an eighth under what is called NLNG Seven Plus. Each train will have a capacity of about 8 million tonnes per annum, making them as big as any yet under construction in the LNG sector. NLNG said previously it is targeting a final investment decision by the end of 2007. It also made clear that it "has a preference to execute the project with one single contract package".

So should some of us, who are classed as speculators, invest in FW or is it too late? On the London market the few quoted companies are trading at up to thirty times earnings - pretty heady stuff most of us would say. KBR have recently floated 20% of their equity as part of the planned separation from Halliburton (the rest will be spun off in March 2007) and are trading at just shy of 50% above their issue price. The gloss has gone off some of the major E & C’s on the NYSE , who are now trading off their historical highs achieved in middle of 2006. Foster Wheeler now has an order backlog that is nearly twice as large as their entire sales for 2005, and at least one analyst, James Thorne at MBT, believes they have enough business on the horizon to keep them busy for 15 years! But have we ever really believed what some of the analysts say?

So is too much optimism priced into Foster Wheeler or their compatriots to make them compelling today? My gut feeling is no, but I need to look into this some more. Everyone from the FT to Smart Money has been calling attention to these companies following their recent downturn, so perhaps it's too late for any good returns in the short term -- but over the coming decade, I can't find a solid backing for the argument that the demand for cleaner, more efficient power generation, refining capacity and gas developments is going to decline.

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