Hi guys I originally posted this to r/wallstreetbets but I thought you would appreciate it to so here it is
*****Please note I own stock in this Company this is not investment advice its just a research dump invest carefully!****
Overview
Fluor is a Fortune 500 Engineering, Procurement and Construction (EPC) company headquartered in Irving Texas. Fluor corporation has approximately 45,000 employees worldwide. The company operates in 6 segments, Energy and Chemicals, Mining and Industrial, Infrastructure and Power, Diversified Services, and Other with one additional segment being reported as discontinued operations.
Fundamental Problems
Fluor has multitude of issues that have threatened the very survival of the company. These issues have caused the market cap to crater from 8 Billion in 2018 to 2.25 Billion. The most critical problems are summarized below. This is by no means a complete list. For the sake of length, I have omitted some of the less critical issues. We must also note that there may also be other problems lurking as well.
- Improper bidding, cost overruns and restructuring have led Fluor to report a 1.5 Billion loss with approximately 300 Million in asset impairments.
- There are 16 loss contracts that have been improperly negotiated and must be completed at zero margin.
- Weakness in oil Demand has led Flours customers to reduce capex spending in the Energy & Chemicals segment which comprises 40% of Fluor’s revenue.
- Fluor has had major accounting problems which have spawned a SEC & DOJ investigation.
Liquidity
Fluor has $2 Billion in cash, $5 Billion in current assets and $7.2 Billion in total assets. This compares to $3.5 Billion of current liabilities with total liabilities of $6.0 Billion. I believe due to Fluor’s strong cash position they have ample liquidity to meet all their near-term obligations. Furthermore, while substantial I believe their debt is within reasonable ranges. Fluor is selling an equipment rental business to allow them to “Modestly” reduce their leverage and raise more cash, further improving liquidity.
How Fluor Is Addressing Their Problems
While Fluor’s issues are critical, I believe that management is successfully addressing these problems.
Fluor’s improper contract negotiation stems primarily from their Lump Sum contracts. Essentially this mean that Fluor gets paid in a lump sum at the project completion. This is problematic because it means Fluor must wait until completion of the project before being paid. Additionally, any cost overrun or delay is completely absorbed by Fluor. In order to prevent anymore loss contracts from entering their backlog Fluor has stopped negotiating lump sum contracts opting for more traditional contract negotiation approach and thus protecting the future backlog from more loss contracts.
Despite a net loss of 1.5 Billion, Fluor has generated operating cash flow of $219 Million with Free Cash Flow of $38 Million. This operating cash flow will continue to give Fluor a buffer to complete their loss projects while even increasing their cash balance. As Fluor finishes these projects their operating cash flow and free cash flow will continue to climb higher.
The weakness in revenue for Energy and Chemicals should also begin to slow as some EPC work for regular Maintenance is necessary to maintain oil and gas infrastructure. Furthermore, if emission standards become stricter this could spur demand as refineries increase CAPEX to upgrade their facilities. Finally, I expect the chemicals portion of this business to continue to drive adequate performance as we do not have any viable alternatives to Petro-Chemicals yet.
On the accounting side Fluor has unfortunately discovered that there were problems with their Internal Financial Controls and revenue recognition. These issues have been corrected but I think it is safe to assume that Fluor has significant liability with potential SEC & DOJ lawsuits. However, despite this I believe the lawsuits, while expensive, likely will take years to resolve and considering Fluor’s strong cash position they will most likely will be able to pay the fine.
Impact of Reasonable Adverse Development's on Fluor's business
In order to establish Safety of principal we must consider a few possible adverse conditions that can arise and the impact on Fluor's business.
- More loss contracts, This would be a very poor outcome for Fluor but I believe that even with more loss contracts Fluor would still generate enough cash to meet all their obligations. in a worst case scenario Management could also continue to sell more assets in order to raise more capital to fund the loss contracts.
- Major Global Economic Recession, This would be mostly bad for Fluor but its possible they could actually benefit from fiscal stimulus and projects designed to spur demand in the Economy. They also have a backlog of projects so a major drop in (edit: profitability) wouldn't immediately occur in a recession. Rather they would have a little bit of time to figure out what to do.
- Prolonged Depressed Oil Prices, This is a pretty likely scenario thankfully Fluor has expertise in many different industries and can continue to drive growth in these areas. While over exposed at the moment they are not solely dependent on Oil and Gas.
Major Growth Opportunities
These ideas below are the most exciting and compelling reason to look at investing in Fluor.
Fluor’s Mining & Industrial segment constructs & maintains mines globally. As demand for precious metals increase due to a transition away from fossil fuels, precious metals for batteries could take the place of Oil. This includes lithium, nickel and cobalt Fluor has prior experience with these materials. Mining already comprises about 35% of their revenue and has been profitable and a major pillar of stability in Fluor's business. (Although Covid has Delayed some new contract awards in this segment)
Fluor’s Energy & Chemicals Business has built off shore wind farms, carbon capture, bio-fuels and hydrogen infrastructure. All infrastructure currently being looked at to mitigate or solve the climate change crisis. This area will be competitive but Fluor does have its own IP it can bring to the table and compete with. If there is a major jump in demand in the coming years Fluor is certainly capable of winning some construction work in these areas.
Some other miscellaneous things Fluor engages in is nuclear decommissioning, managing the U.S strategic oil reserve, Building automobile & Pharmaceutical factories and Data center construction.
And then there is the crown jewel NuScale, a company planning on building the First small modular nuclear reactor (SMR) in the United States. Fluor is the Majority investor in NuScale and is the exclusive EPC contractor for NuScale. Recently the U.S Nuclear Regulatory Commission certified NuScale’s one-of-a-kind design. The U.S Department of Energy has also awarded NuScale’s first customer $1.3 Billion in cost sharing to build the first reactor Idaho. Interestingly the United States International Development Finance Corp also lifted a ban for the financing of nuclear projects and has also signed a letter of intent to support NuScale. This will likely be a $1 Billion dollar loan South Africa in order to build a NuScale SMR . There are many other interested parties both inside and outside the U.S including Canada, Romania and the Czech Republic. The applications of this technology are wide ranging. Electricity production is a primary use, however other uses include desalination for clean drinking water and using the excess heat produced by the reactor to create cheap carbon free hydrogen.
Basis for Investment
In the near term I believe Fluor can successfully complete a turnaround restoring most of their business segments back to reasonable profitability. In 2017 Fluor generated 318 Million in Free Cash Flow. Assuming Fluor completes their restructuring and finishes the loss contracts I see no reason why Fluor cannot return to at least 250 million in annual free cash flow. This FCF is 11% of Fluor's Total market cap and by itself presents a very attractive return for an investor. Simultaneously Fluor’s should be able to shift their construction focus away from oil and gas to new areas that are growing increasingly important. The low barriers to entry are both a blessing and curse in this regard. That brings me to NuScale which oddly seems as though it’s being adopted by the U.S government as some strange foreign policy play. While it remains a longshot in my view the combination of the DOE grant and the potential DFC loan is 2.3 billion a big positive. This is equivalent to the entire market cap of Fluor and shows the scale of the opportunity. Furthermore, Fluor currently has no competitors in this market so margins should be significantly higher. I believe Fluor will complete a successful turnaround likely bringing the stock back to 4 Billion and restoring the dividend. In the Long-term the company could even hit new all-time highs however I’m not entirely confident on putting an exact figure on that just yet.
TLDR: Fluor is struggling construction company, but I think the company can pull off a successful turnaround. That coupled with expanding their existing non-oil revenue and the NuScale wild card could send the stock from $16 to at least $30 and possibly beyond $80 (its all time high) since its a very compelling growth story.
Also sorry if there's a lot of awkward phrasing or poor grammar I have a learning disability lol. (actually though)
Sources:
Fluor 10K used for Net losses and Cash Flow
Fluor 10q used for Balance Sheet Items
https://investor.fluor.com/static-files/db1fbb61-9cd7-4958-b5a5-f888d4bd6bba
NuScale-UAMPS DOE award
https://www.utilitydive.com/news/doe-approves-up-to-14b-to-test-12-module-nuscale-reactor/587265/
NuScale DFC letter of intent
Fluor Contracts
https://www.fluor.com/about-fluor/corporate-information/expertise
Fluor Lump sum work
https://www.energyvoice.com/oilandgas/americas/267715/fluor-lump-sum-risk/
Fluor asset sales
Submitted January 03, 2021 at 01:00AM by Rjlv6 https://ift.tt/3omIPJb
