Chicago Bridge & Iron: Turnaround brewing

Chicago Bridge & Iron (CBI) appears strategically positioned in all its gas-facing and downstream end markets, which should result in 2018 being a turnaround year for CBI. We find several catalysts to drive shares forward during the next six months including projects tracking on a new schedule, no additional project charges, progress on cost- cutting programs and the achievement of late-2017 booking targets. However, the most important catalyst will be a successful and lucrative sale of Lummis Technology.

Management appears confident of valuation and timeline targets. The last three-year average earnings of the business (technology and engineered products) is in the $220-$230 million range, and management expects to achieve a minimum 10X multiple. We believe strong competition could drive a higher transaction multiple. The formal sale process kicked off in mid-September. Management indicated buyer interest has been stronger than expected, with interest from a variety of sources exceeding management expectations. The sale of technology business for valuation in excess of $2 billion should provide CBI with flexible financing footing. Management plans to use the proceeds from an expected technology sale by 2017 year end to extinguish its entire debt balance and to still have residual liquidity. Management plans to use the proceeds from expected technology sales by 2017 to pay down the current $1.8 billion debt.

Problem Projects
At its power projects, CBI has not witnessed labor productivity levels that it usually sees in its direct workforce. As a result, management has decided to not be in the power market in those regions in the foreseeable future, and rather be in markets where management understands labor productivity. Management has now taken a conservative view and is assuming future productivity at these problem power projects will be similar to that achieved to date.

Liquefied natural gas (LNG) markets have been oversupplied for the last two years, which management expects to eventually turn in a very sharp way. In management’s view, markets are going to turn from being significantly inactive to being very active. CBI management expects supply deficits by 2021-22. CBI has already seen the balance of power slowly shift away from buyers. CBI is working on several projects, in collaboration with companies such as Exxon (XOM) and Qatar Petroleum, among others and all of these projects have good fundamentals. Even if only two or three of these projects go ahead, that would be pretty significant for CBI.

On the power front, CBI expects the Engineering, Procurement, Construction (EPC) industry in general to be more selective in pursuits. Continued efforts to recapitalize its financial profile are leading to the proposed sale of CBI’s most current valuable asset; one not close to being recognized in current valuation, a defined overhead and operational cost reduction program, and a move to emerging as a global EPC/fabricated product vendor.

While there is risk of further costs to LNG, projects remain and the cash burn could increase, we believe the market’s valuation and eventual worst case impacts as balance sheet flexibility; CBI has the ability to execute the turnaround. We look at a 2018 CBI post asset monetization, debt elimination recapitalizing and restructured company leveraging off a potential recovery in pent- up downstream and LNG capital investment. The degree to which management successfully implements plans to convert change orders, hold to project schedules, manage and enhance operating cash during the second half will allow a sharp recovery of at least a portion of the significant valuation loss since May (see “CBI due for recovery” below).

Our $20 price target reflects first half asset restructuring and a successful technology sale by year end.