Flour – Shaking Up Management and Trying to Turnaround
Aug 23, 2019 by InvestorDestination Team
While consumers are enjoying low oil prices, Flour (NYSE: FLR) is blaming its challenges on the same. The stock price of Flour is dancing around multi-year lows.
When oil prices declined, oil players forced EPC players such as Flour to bear more risks. However, Flour could have walked away from those risky projects, but it didn't opt to do so. EPC is a low margin business. So, there is not much room for errors, especially while executing fixed-price projects. Since 2017, Flour has been struggling to complete projects successfully. After repeated losses and more than a billion-dollar write-down, finally, the company ousted its CEO and hired a new CEO. The new management is conducting a strategic review of every project.
The new management needs to identify all risks upfront so that it can improve project execution success rates and establish its credibility. Since the new management was not responsible for bidding past projects, it can objectively assess every project and investment. It is doing just that.
Going forward, the company needs to have quality projects in its backlog. The new management is tightening new project bidding policies. These new policies will reduce its risk exposure, negatively impact its revenue growth and backlog, but will improve profit margin. It will also help the company improve its reputation for building quality projects.
Flour had built a strong reputation and relationships with customers by building quality projects on time and budget. Its recent project delays might have dampened its reputation and strained relations with customers. Project delays negatively impact Flour customers too. Its struggles with gas-fired power projects had extensively strained its relations with those customers. The company has exited that business. The company is also experiencing challenges in energy and government projects.
Now the company needs to regain its reputation and improve relationships with customers. It can only strengthen its reputation by consistently delivering successful projects. It is focusing on improving relationships with customers. The company has appointed the previous CEO, who had excellent relations with customers as an executive chairman. It is trying to reassure its customers that the new era is here by changing the management team and board. It has also rehired the former CFO.
Traditionally, the backlog of Flour consisted of 20% fixed-price and 80% variable cost projects. For the last two years, its backlog consisted of 50% fixed-price projects. It looks like the company was increasing its risk exposure even while it was struggling to execute riskier projects. According to the company, that was not the case. The scale tipped due to one large project, LNG Canada, and the company has conducted an extensive risk assessment for that project. However, for the next couple of years, its earnings will depend largely on its ability to execute the LNG Canada project.
Recently the company's credit rating has been downgraded. However, it has a stable balance sheet. It has no debt due until 2023. It is restructuring and assessing all its investments.
EPC is a cyclical business, and macro slow down will negatively impact the company. However, for patient investors, it is a buying opportunity.
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