Fluor 3Q16 Earnings Call Notes

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Fluor (FLR) Q3 2016 Results
David Seaton

Seen significant increase in industry infrastructure

“Through the first three quarters of 2016, overall global economic growth has underperformed our expectations. We continue to experience greater than anticipated headwinds from the commodities and related markets, which impact our Energy, Chemicals, Mining and Maintenance Modification Asset Integrity segments. On a more positive note, we’ve seen significant increase in industry infrastructure in power new awards and backlog which should contribute to our growth next year. Looking forward, we do expect a modest improvement in the economic growth next year, which should lead to greater consumer spending and growth in industrial production”

Expecting better economic activity in 2017

“We expect these increases and economic activity will lead to greater project opportunities for Fluor. We do believe that in order to maintain supply demand balances in key commodities like crude oil and copper, our customers will need to move forward with major capital projects, but it will be gradual. We also expect infrastructure and government spending to continue.

Lower for longer mindset on commodity prices is distorting the E&C contracting market

“As we move into 2017, I remain concerned that this longer – lower for longer mindset on the commodity prices – is starting to distort the E&C contracting market. We were now seeing customers not only expecting lower prices without addressing capital efficiencies, but also demanding contractors take on risk that is in some cases outside of the contractor’s control. This along with an increased level of irrational bidding in feed pricing creates an unusual and challenging marketplace. But we’ve seen this cycle before. Having said all that, it’s imperative that we maintain the discipline in our approach to pricing and risk management. That means not only seeking the right clients, but the right projects with the right clients. It means making sure we appropriately price for risk, advise our clients on the benefits of an integrated solutions approach, and when we win the contract, intentionally focus on execution and project completion.”

Competition is extremely tight

“When you look at 2017, I would say, it’s just in a couple of places. One is there’s been a delay in the award of some of the projects, even with the TCO project. So it’s a book and burn issue that drives us to – and not the number we presented. The other issue is I think the competition is extremely tight. And we’re probably, maybe a little bit more conservative in terms of the win rate that we look to get – because we are going to maintain that discipline in terms of risk and pricing.

Stay disciplined

“So, as I said, this isn’t the first time we’ve seen this behavior, both on our customers’ sides and on our customers’ sides. But I think we’re going to maintain that discipline and I think that’s where our diversity is part of the answer for continuing to grow. We’re able to skate to where the puck’s going to be, and not – not have to rely on, going back to a previous – previous question, not rely on a must-win project. We’re going to maintain our discipline.

Lower for longer creates some opportunities because people are comfortable with it

“Now, I would like to comment on the lower for longer piece. When you think about our oil and gas customers as well as our mining customers, I think they’ve gotten their head around the fact that the commodity prices are going to be maintained at current levels for a long, long time; and they have in fact changed their business model to deal with a lower for longer oil price as an example. So, when you look at what’s out there, they’re prioritizing those projects. They – you can argue they’ve taken a longer deep breath here – not having the confidence that the oil prices were going to moderate. And therefore, that pushes even the high quality projects out in time, and that’s what we’re experiencing now. I would also say that the conversations we’re having with our customers is they’ve gotten comfortable with their new model; they’ve gotten comfortable with the lower prices and they’re starting to move forward with projects that are critical in terms of their growth trajectory. So, we’re seeing many, many of these customers moving these projects towards FID as we get through next year into 2018, 2019, 2020. So, where lower for longer can be seen as a negative, I actually see it as a positive. Because we’re seeing much better behavior from customers in terms of the priorities that they’re doing, and these high value projects are typically the most critical and most complicated projects, which I think feeds right into our value proposition with those customers and what those customers expect us to deliver. So, I kind of denoted a little bit of negativity in the way you used the term – the phrase, lower for longer, but in fact I actually see that as an opportunity now.”

It becomes a buyer’s market when this cycle happens

“It’s a great question. We’ve seen, as I’ve said, I’ve seen these cycles before. And when there is movement in terms of lack of capital programs, it becomes a buyers’ market, and we see a lot of customers across the board looking for benefits from that. So I wouldn’t say, it’s just oil and gas, it’s across the board in terms of competitiveness.”