Waggaman update: on schedule, on budget, expected Q3

It’s refreshing to write an update for a plant where construction is on schedule and on budget, which appears to be the case at Dyno Nobel’s ammonia brownfield at Waggaman, LA.

Recently, we’ve seen delays, cost-overruns, and lawsuits aplenty for projects like US Nitrogen at Greenville, TN, OCI at Wever, IA, and LSB Industries at El Dorado, AR.

But Dyno Nobel’s parent company, Incitec Pivot, described progress quite differently during this week’s earnings call:

“The project update is … a really simple message, and that is Louisiana is on track and on budget … The project is 97% complete, commissioning is in program, and we still expect beneficial operation in the third quarter of this calendar year …

There’s no change to our initial budget of $850 million, so that’s a good number.

So as I said, there’s not too many sites – not too many major construction projects that you can point to anywhere in the world that are on track, on time, on budget. And importantly, when we look at the investment case it still stacks up.”
Yahoo Finance: IPL’s H1 2016 earnings call transcript

Source: IPL 2016 Half Year Results Presentation, 05/10/2016
Source: IPL 2016 Half Year Results Presentation, 05/10/2016
It’s not clear whether this project has truly remained on-budget, or whether costs have risen but the overruns have been swallowed by the fixed price EPC contractor, KBR.

Certainly, it appears that KBR moved away from offering these types of contracts a few years ago.

Although KBR’s latest earnings report doesn’t provide much insight, except to acknowledge “E&C headwinds,” its strategic change from offering lump-sum contracts to only offering reimbursable contracts was highly visible in earlier periods.

In October 2013, when work was just beginning at Waggaman, KBR sounded pretty bullish about its ability to manage the risks of fixed-price contracts:

On backlog mix as of September 30 [2013], 46% of our backlog was fixed price and 54% was reimbursable. This was not a significant shift from the second quarter mix of 48% and 52%, respectively. As we’ve discussed on prior calls, the types of risks in KBR’s backlog included a high percentage of back-to-back contracts, funded contingencies and KBR home office services. So in our view, the risks are not as high as the percentage of the fixed versus reimbursable might suggest.
Seeking Alpha: KBR’s Q3 2013 earnings call transcript

However, by July 2014, just nine months later, KBR’s narrative had significantly changed – presumably helped along by its new CEO, Stuart Bradie, who took over in June 2014. Here, he addresses KBR’s evolved attitudes to risk across different segments of its portfolio:

It starts off as … technology. And if you think about where we sell our technology, that’s a very low risk entry and – as is the associated proprietary equipment that we sell with that technology … with pretty good returns in that space. So even the standalone technology play is very healthy and fairly low risk.

And as we sort of move that into FEED and into EPC, what we’re seeing, there’s really a good portfolio of opportunities across the, I guess, the ammonia-urea space, the gas space and obviously, the refinery space. And it is a … mix of lump sum EPC, [reimbursable] EPC and I guess, traditional services, depending on the client and the maturity of where the engineering is when people want to sign contracts.

And I think the takeaway really in terms of the level of risk that KBR will take on is that we will be very, very selective when we take on EPC projects going forward. And we will not be chasing revenue for the sake of revenue. We want to make sure that we’ve got a very solid basis for execution, that we’ve got a good relationship with the customer and that we really have the people and the wherewithal to execute these projects and really understand, in certain — I mean, there’s certain areas in the U.S. where it would be pretty challenging to take … risk on things like labor rates and things. If you look at the Gulf Coast, which is very hot at the moment, wages and per diems are moving up quickly. So our clients, the mature clients recognize that so you can get levels of relief through your contractual negotiations in that space.
Seeking Alpha: KBR’s Q2 2014 earnings call transcript

Whatever the cost to KBR, Incitec Pivot has only spent $712 million so far on the Waggaman plant, excluding capitalized interest, and it doesn’t expect its final cost to exceed $850 million. Full details are in my Research Note for Waggaman, LA.

In terms of the precise timing of start-up in the third quarter, Incitec Pivot’s CEO, James Fazzino, said this:

Sometimes we’re asked what month; frankly, this is a 50-year project and I’m fairly indifferent whether it’s July, August or September. It will be sometime in those … months and we’ll take our time and we’ll get it right. But when I look at the progress, everything is going to plan.

There are occasional speed humps along the way that you’ll find in any commissioning, that’s why we’re saying it will be sometime in the third quarter of calendar and we’ll take our time and when we strike speed humps we’ll go and fix them.
Yahoo Finance: IPL’s H1 2016 earnings call transcript

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