SNC-Lavalin Group Inc. is scaling back its energy and mining business by more than half as it retreats from a sector ravaged by falling demand for oil and lingering diplomatic tensions.
The Montreal-based engineering company will close or sell resource operations in 21 of 30 countries where it currently has offices to focus on select key markets, SNC said in a statement accompanying second-quarter results Friday. The move will result in a 60-per-cent drop in employees working on resource contracts, from 15,000 to 6,000 people by the end of next year, the company said.
“We want to maintain in control of [our] destiny,” SNC-Lavalin chief executive Ian Edward said on a conference call. “The important thing for us is to simplify the business, get the overhead down, concentrate on these clients that we’ve got a long track record with and get the business back to profitability.”
Mr. Edwards is trying to reshape SNC-Lavalin into a company that does more consultancy and project-management type work while closing out billions of dollars worth of higher-risk construction contracts. The company has been hurt recently by continued weakness in its oil and gas business in particular, made worse by the collapse in global oil prices earlier this year and the COVID-19 pandemic. SNC helps oil and gas producers and miners set up and maintain their facilities.
The resources business, which includes mining and energy, was once a mainstay of SNC-Lavalin’s capabilities that made up 30 per cent of consolidated revenues. The company made a big bet on oil and gas by buying Kentz Corp. for $2.1-billion in 2014.
By the end of next year, SNC estimates resources will generate barely 10 per cent of sales as the company cuts its exposure to the sector. The company’s mining operations will centre on specific clients in Peru, Brazil and Canada while the oil and gas business will be focused on repeat business in the Middle East, the United States and Canada, Mr. Edwards said.
SNC-Lavalin announced in July, 2019, that it would explore options for the resources business as part of its move to exit lump-sum turnkey contracting and focus on engineering services. Earlier that year it 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 in 2018.
Things have improved for SNC in Saudi Arabia since the company stopped pursuing big oil and gas construction contracts, Mr. Edwards told The Globe and Mail in May.
SNC has completed a strategic review of the resources business, concluding that it will only keep parts of the unit where the company has existing profitable relationships with long-standing customers and a clear sightline on future money-making opportunities.
The company last month struck a deal to sell its resources operations in South Africa, which employ 1,800 workers, to local management. It also sold a European fertilizer business. Other pieces could also be sold, although it’s more likely that most will simply be closed, Mr. Edwards said Friday.
“Resources is finally being slimmed down as there are no buyers in this market,” Maxim Sytchev, an analyst with National Bank of Canada, said in a research note. “But at least we can turn the page on the Kentz” acquisition, made at the top of the cycle, he said.
SNC reported a net loss of $111.6-million or 64 cents a share for its latest quarter ended June 30, narrowing a loss of $2.12-billion or $12.07 per share a year earlier. Revenues fell 14.5 per cent to $1.95-billion compared with the same period a year ago.
The company said it spent $47.3-million on the resources restructuring in the quarter. Earnings were also hurt in part by cost adjustments linked to the coronavirus pandemic on legacy project work.
SNC said it took a $70-million charge on an unnamed resources project in the Middle East where it has had warranty and claims disputes that escalated during the quarter. The COVID-19 crisis affected the company’s ability to mobilize resources to the work site and resolve issues, the company said.
SNC shares closed down 9 per cent to $21.25 on Toronto Stock Exchange.
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Nicolas Van Praet