Goldman Slaps A Sell On KBR Shares, Cites 'Challenging Outlook For LNG Awards'

Analyst Jerry Revich expressed concern regarding the impact of “significant cuts to large scale energy projects – particularly for LNG – and slowing nitrogen capex, a key KBR market,” on the company’s earnings growth in the medium term, as well as risk of multiple compression.

Turnaround Progress 'Positive,' Margin Expansion 'Challenging'

“We are positive on the company’s turnaround progress, but believe further margin expansion will prove challenging amid an extended commodity deflation cycle,” Revich stated.

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The outlook for large scale energy projects appears challenging, given that there could be multi-year capex reductions outside of U.S. shale, driven by “challenging energy company returns on capital, peak reinvestment rates, and the completion of prior generation projects.”

In addition, the global LNG capex award cycle appears to be significantly weakening, with increasing LNG oversupply, driven by the 45 percent capacity additions in the U.S. and Australia. This in turn has been driving spot prices meaningfully lower.

According to the Goldman Sachs report, “While KBR’s Magnolia project appears to be on track, the prospects to replace completed KBR projects in Australia are limited.”

To add to this, the nitrogen capex cycle is also close to its end, and declining global nitrogen prices, along with rising project costs, have adversely affected returns.

The EPS estimates for 2015 and 2017 have been raised, while that for 2016 has been lowered to reflect project timing, including Magnolia LNG.

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