McDermott Wins EPCI Contracts Worth $4.5B From Saudi Aramco

McDermott’s (NYSE:MDR) shares spiked 12.89% to close the trading session at $10.51 on Jul 10, after the company announced that it clinched two major contracts associated with Saudi Aramco’s Marjan Increment Development project offshore Saudi Arabia. The twin contracts for Marjan Package 1 and 4 are worth more than $4.5 billion.

Twin Contracts to Boost McDermott’s Q2 Inbound Orders

Under the Package 1 contract, which is worth more than $3 billion, McDermott will offer engineering, procurement, construction and installation (EPCI) of Marjan offshore field’s Gas-Oil Separation Plant (GOSP). China Offshore Oil Engineering Company will partner with McDermott for the Package 1 contract. The consortium contract led by McDermott aims at building the GOSP, which will enhance oil output from the Arabian Gulf field from 500,000 to 800,000 barrels per day.

The engineering phase of the contract will commence in third-quarter 2019 and fabrication will begin in first-quarter 2020. The project is expected to be completed in fourth-quarter 2022. The value of the contract will be reflected in McDermott’s second-quarter 2019 backlog. Markedly, this is the single largest offshore EPCI contract awarded by Saudi Aramco to date.

Under the Package 4 contract, which is worth more than $1.5 billion, McDermott will provide EPCI of offshore gas facilities and pipelines. The contract involves the fabrication of three tie-in platforms and seven wellhead platforms, along with the installation of subsea trunk lines, in-field pipelines and subsea cables. The engineering phase of this contract will commence during third-quarter 2019 and be completed by year-end 2022. The value of the contract will be reflected in McDermott’s second-quarter 2019 backlog.

While the company’s backlog came in at $15.4 billion at the end of first-quarter 2019, there are multiple headwinds hounding the Zacks Rank #4 (Sell) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

High leverage ratio of 83% and cost overruns on its Cameron LNG project have dampened investors’ sentiments. Moreover, McDermott expects cash flow deficit of around $470 million in 2019. Shares of the oilfield equipment provider have plunged 43% over a year. While strong backlog and its merger with Chicago Bridge bode well, execution issues, weak financials along with bleak cash flow outlook may play spoilsports.

Saudi Aramco’s Plethora of Deals to Boost Marjan & Berri Output

Notably, Saudi Aramco’s Marjan field development is a part of the broader plan to boost the production from Marjan and Berri fields. In this context, the company has awarded 34 contracts, worth $18 billion, to increase production capacity at the two fields by 550,000 barrels of oil per day and 2.5 billion cubic feet a day of gas a day.

Out of the 34 contracts awarded by Saudi Aramco, half were clinched by the Saudi firms itself. Italy-based Saipem SpA SAPMF, Sinopec (NYSE:SNP) and Norway-based Subsea 7 SA (OTC:SUBCY) also clinched contracts among various others.

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