SNC-Lavalin Group Inc. is exiting the oil and gas sector and taking more financial charges on contracts in a bid to reassure investors it has all potential problems in hand as the Canadian engineering company speeds up its strategic reinvention after years of crisis.
In a surprise move, Montreal-based SNC-Lavalin said on Tuesday it will sell its its oil and gas unit to Kentech Corporate Holdings Ltd. of the United Arab Emirates. No firm purchase price was disclosed, but SNC said it expects to book a small gain on the sale when the transaction is finalized after taking a fair-value writedown of $260-million to $295-million on the value of the asset.
“Selling the oil and gas business takes a big chunk [of risk] away, and we’re down to what I would call a manageable level of issues,” SNC-Lavalin chief executive officer Ian Edwards told analysts on a conference call. “Our intention here is to be absolutely confident of the provisioning that we’ve made against all these risks so that we can smoothly go forward.”
One year after striking a deal with federal prosecutors to settle a criminal corruption scandal centred on past business dealings in Libya, Mr. Edwards is trying to reshape SNC-Lavalin into a company that delivers predictable profits. He’s ramping up consulting and services work and closing out billions of dollars in higher-risk lump-sum turnkey contracts, in which the company agrees to execute a project for a fixed price and absorb cost overruns.
The sale to Kentech is a full retreat from oil and gas for SNC-Lavalin, which made a big bet on the industry by buying Kentz Corp. for $2.1-billion in 2014. The company will remain active in the mining sector.
SNC helps oil and gas producers in the Middle East and elsewhere set up and maintain their facilities, but the business has struggled because of the collapse in global oil prices last year and the economic impact of the COVID-19 pandemic. In 2019, SNC took a $1.24-billion writedown on the value of the oil and gas division, citing in part difficulties securing new work in Saudi Arabia because of a rupture in diplomatic relations between Canada and the kingdom.
SNC had been restructuring its oil and gas unit over the past 18 months, closing pieces of it and fixing others, but entertained offers for the assets from interested parties that resulted in a sale, Mr. Edwards said. Kentech will get a business with a work backlog worth $745-million and 7,100 employees, and assume any potential warranties and liabilities.
“[Oil and gas] was going to require a lot of management attention, and this essentially ends that problem,” analyst Chris Murray of ATB Capital Markets said. “For me, zero [net proceeds from a sale] is a good outcome considering what we’re looking at in terms of losses coming up, potential liabilities down the road and the challenges of getting that business back to profitability.”
The extent to which SNC is trying to cut risk is showing up in other ways. After swinging to an unexpected loss in its third quarter in part because of an unfavourable ruling on a decade-old resources project, the company said last October it would review all outstanding legal issues on its lump-sum turnkey legacy projects to get a better handle on the remaining risk.
On Tuesday, it announced it took that exercise even further and reviewed, with the help of outside advisers, all significant litigation matters and commercial claims receivable on all projects. About 20 contracts with higher risk profiles were identified and SNC deemed it appropriate to take additional financial provisions on seven of those, the company said.
As a result, SNC will take a $140-million charge related to litigation issues and $155-million worth of reductions on commercial claims receivable when it reports its fourth-quarter results, the company said. SNC is also taking a charge of $95-million on its last remaining resources construction project and related claims.
Mr. Edwards and his team continue to work through their backlog of lump-sum turnkey construction projects and reimbursable resources contracts in a bid to bring it to zero by 2024. It stood at $3.1-billion worth of work at the end of September.
SNC is working on three big infrastructure construction contracts in Toronto, Ottawa and Montreal, all of them light-rail transit systems. In Toronto, the company is part of a consortium building the Eglinton Crosstown LRT.
The consortium in October sued its clients, Metrolinx and Infrastructure Ontario, over escalating costs and delays on the Eglinton project caused by the COVID-19 pandemic. The builders say the provincial agencies refuse to declare the pandemic an emergency and recognize its effects on construction.
Mr. Edwards has said the stricter health and safety measures implemented hurt productivity on construction of the Crosstown LRT and other projects, particularly on things such as tunnelling and working at heights, which usually require workers to be in close proximity with one another. Lockdowns also restrict the number of staff SNC can deploy to worksites, he said.
Those challenges continue, Mr. Edwards said on Tuesday, and are the main reason for another $90-million in charges SNC will take as it delays booking any of the disputed expenses as revenue. “On all these projects, we are in negotiations and even litigation to recover these costs. But we are applying prudence and not recognizing any revenue on these projects until we have greater clarity on the outcomes,” the CEO said.
Tuesday’s announcements mark “a potential watershed moment” for SNC-Lavalin, Bank of Nova Scotia analyst Mark Neville said in a note. Selling the oil and gas business removes a significant layer of risk, while the financial adjustments SNC has made effectively isolate the risks associated with completing the remaining lump-sum turnkey backlog, he said. He estimates the potential impact on SNC’s cash position from the measures at $230-million over several years, which “can easily be absorbed.”
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