Engineering firm SNC-Lavalin Group Inc. lost more than a quarter of its market value after revealing a major problem in its mining division and a weak outlook for its energy business, partly because of Canada’s diplomatic spat with Saudi Arabia.
The Montreal company said Monday it will write down its oil and gas division by $1.24-billion after-tax, or about $7 a share. The company said its Saudi business is doing worse than expected, and that and volatile oil prices “have led to deterioration in our near-term prospects which we cannot ignore,” creating the accounting charge. SNC shares lost 28 per cent, or nearly $2.4-billion in market capitalization.
The setbacks extend a difficult run for SNC. Until recently, the company seemed to be turning the corner after a multiyear overhaul, but since last summer its shares have taken a beating. It is one of the few Canadian companies with a sizable operation in Saudi Arabia, which accounts for more than 10 per cent of its revenue.
Canada and Saudi Arabia have been in a diplomatic deep freeze since August, when the federal government called for the release of some detained Saudi dissidents. The kingdom responded by expelling the Canadian ambassador and putting on hold all new trade and economic ties between the two countries. Ottawa’s decision to accept Rahaf Mohammed, a high-profile Saudi asylum seeker who said she was fleeing the country because of its oppressive attitudes toward women, has exacerbated the tension.
The relationship "has not been helped by the recent positioning with regard to the asylum seeker,” SNC chief executive Neil Bruce said. Mr. Bruce added that the feedback from Saudi clients so far is that they want SNC to continue on with currently contracted work. “But our ability to secure future work is very much under review,” he said. Layoffs of some of the 9,000 SNC employees in Saudi Arabia are a possibility if diplomatic relations don’t improve, Mr. Bruce said.
In the mining business, SNC said it experienced major problems with a project awarded in 2016. The company provided few details beyond that, though given the timeline, some analysts believe it is the construction of two sulphuric acid plants for Chile’s state-owned miner Codelco. Mr. Bruce would not verify that. Codelco declined to comment.
In a research note, Canaccord Genuity analyst Yuri Lynk said that the mining blunder showed "execution challenges that are deeply disappointing.”
SNC announced that Ian Edwards has been appointed to the position of chief operating officer. Mr. Edwards was principally responsible for turning around SNC’s troubled infrastructure group. On a conference call, Mr. Bruce said that “ultimately, we want to bring that focus to all of our sectors.” The head of every division will now report to Mr. Edwards.
Although a host of issues were revealed Monday, Mr. Bruce said the mining issue was the most significant. “The major item in all of this, and the biggest disappointment, is within the mining sector,” he said.
All Mr. Bruce would say is that the mining unit’s problems are largely internal issues. “We’re deeply disappointed that the mining team have made commitments in terms of our supply chain [that] have not, as yet, been reciprocated with the client,” he said.
SNC said it will reveal more details in a few weeks, so for now, management merely said that the trajectory of its earnings-per-share growth has been set back by about a year and a half. SNC said it expects to report earnings of $2.15 to $2.30 per diluted share, on an adjusted basis, for 2018. Mr. Bruce said he believed it “was just hugely important, from a disclosure perspective, to get this information out to the market as soon as we possibly could.”
The oil and gas division has also been hit by a number of other issues, including operation setbacks that have forced the company to push out the timeline for when it can recognize certain revenues. SNC has also lost a recent arbitration on an energy project in Australia that weakens its profit from the project. All of these factors contributed to the large writedown.
Both mining and energy fall under SNC’s engineering and construction (E&C) group, and the group’s total profit for fiscal 2018 is expected to be cut by more than half, falling to between $1.15 and $1.30 a share from $2.60 to $2.85 a share.
Because of Canada’s current political tension with the Saudi leadership, analysts asked if SNC’s oil and gas business in Saudi Arabia could be sold. Mr. Bruce said that until now it hasn’t been explored. However, he added that the new COO will be “looking at clients and countries and regions that we’re operating in … to ensure that we have far more predictable [revenues] in the future.”
The pressure on SNC only increased in October when SNC failed to secure a deferred prosecution agreement that would have allowed it to pay a fine to extinguish criminal charges of fraud and bribery against the company. The charges are related to the company’s past dealings in Libya.