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.

For Fluor in the UK another glittering year (£800m revenues must be an all time high?) However let me just digress a moment - that ‘old chestnut’ (for Fluor anyway) of Lump Sum contracts reared its head again. Now I have nothing but admiration for Fluor in their seventy years or so since Bob started out in Southern California - they are, I suppose the ‘Blue Blood’ of general contacting. They have been involved in some mighty projects in that time - from the Andes to the Middle East and many points in between you will have bumped into Fluor. Given the situation with ‘King Coal’ again I remember the huge Sasol Coal to Liquids plants in South Africa in the 60’s through the 80’s - mammoth projects that are very similar to the GTL plants under construction in Qatar today. Still back to my original point ‘the Fluor Achilles Heel’ LS contracting - over the years they have had a number of problems in this area and in 2006 the curse struck again. They have had one or two ‘ups and downs’ in that time. OK it was infrastructure this time - not Hydrocarbons or Power but it is a recurring theme in the company’s history. 2005 had been a record year for earnings with revenues up by 40%. Although Power had suffered a major loss on one project during the year overall margins stayed above the benchmark 3%. In the last big boom, in the late 1970s, Fluor's revenue and earnings growth "exploded," as an index of commodities prices paid by producers of goods climbed 8% annually from 1975 through 1982, Fluor's revenue soared 25% a year. By the end of Q1 2006 the stock was nudging $90.

During April Fluor announced that the relocation of its global headquarters to a new corporate campus in Irving, Texas, was completed in April 2006. "Fluor is off to a great start in 2006," said Chairman and Chief Executive Officer Alan Boeckmann. "Earnings per share exceeded expectations and we continue to see substantial new project opportunities in all business groups. The outlook for Fluor is very positive, with many of our markets in strong upturns driving continued growth in demand for engineering, procurement, and construction and maintenance services globally. Clients continue to announce significant capital spending plans, and the company is particularly well- positioned to capitalize on these trends in oil & gas, petrochemicals, infrastructure, mining and power."

All was still going well on a global basis but there was a slight hiccup when the British government rejected a $749.5m bid for British Nuclear Group Ltd. (BNG) from Fluor. The government told state-owned British Nuclear Fuels Ltd. (BNFL), the holding company that controls BNG, and the Nuclear Decommissioning Authority to formally approve a new sale process for BNG. It said officials from the Treasury and the Department of Trade and Industry had decided that BNFL would not be allowed to sell the entire subsidiary to Fluor. The British government may preferred to break up BNG as it could see this as a way to encourage competition in the British decommissioning industry, currently dominated by BNG. Fluor said then its offer recognized that BNG as a whole is worth far more than its individual parts.

Then in October Fluor said its third quarter results, scheduled to be released on November 6, would include approximately $168m in pre-tax charges for cost overruns on several fixed-price projects. Considering these changes, the company lowered its preliminary earnings outlook for 2006, sending the stock down 8.99% in the extended trade. The company also guided 2007 below Street expectations. Cost overruns in the company's Government segment include provisions of $133m relating to certain United States embassy projects and $13m on a construction project for the United States Air Force in Afghanistan. The company's Industrial and Infrastructure segment includes a provision of $22 m relating to a highway project in California. This hiccup reduced margins in Q3 to 1% and in the YTD to 3.8%.

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