McDermott's (MDR) Q4 Earnings, Revenues Lag Estimates

McDermott International, Inc. (NYSE:MDR) recorded fourth-quarter 2018 loss of $1.55 per share, significantly lagging the Zacks Consensus Estimate of earnings of 21 cents. Moreover, the bottom line deteriorated sharply from the prior-year earnings of 32 cents per share.

The weak earnings report can be attributed to surging operating costs. The company’s bottom line was affected by the incurrence of an additional $253 million of cost overruns in the reported quarter, related to rising expenses of Cameron LNG, Calpine and Abkatun-A2 offshore projects.

Operating loss in the reported quarter was $2,499 million against the prior-year operating profit of $45 million.

Further, McDermott missed revenue estimates in the quarter under review. The company generated revenues of $2,073 million in the quarter, lagging the Zacks Consensus Estimate of $2,700 million. Nonetheless, the top line witnessed year-over-year growth of 188.7%.

Upbeat 2019 Guidance

McDermott announced detailed guidance for 2019. The company expects revenues in the $9.5-$10.5 billion range compared with the corresponding Zacks Consensus Estimate of $9.7 billion. This reflects a significant improvement from 2018 revenues of $6.7 billion.

Operating income in full-year 2019 is expected in the range of $725-$775 million. Moreover, full-year adjusted earnings per share are expected in the range of $1.65-$1.75 compared with the Zacks Consensus Estimate of $1.51. This also reflects a huge jump from 2018 loss per share of 99 cents. This upbeat guidance more than offset the negative effects of fourth-quarter earnings. As a result, the stock price jumped around 7.6% on Feb 26.

For 2019, the company expects capital expenditure to be around $165 million. Negative free cash flow is expected in the range of $265-$215 million. At the end of 2019, cash and cash equivalents are anticipated to be within $510-$560 million and gross debt is expected to be around $3,530 million.

While the company anticipates soft performance in the first quarter, operating performance is expected to be stronger in the second half than first-half 2019.

Costs and Expenses

Cost of operations increased from $597 million in the year-ago period to about $2,197 million in the quarter under review. While expenses in research and development increased to $7 million in fourth-quarter 2018 from $2 million in the year-ago period; that of selling, general and administrative rose to $94 million from the prior-year quarter’s $62 million.

All these, combined with restructuring and integration costs, transaction expenses and other intangibles amortization, resulted in a total expense of $4,584 million compared with the year-ago figure of $671 million.

Revenue Pipeline

The Revenue Pipeline of the company includes Backlog, Bids & Change Orders Outstanding, and Target (NYSE:TGT) Projects. As of Dec 31, McDermott had a backlog of $10.9 billion compared with $3.9 billion in the corresponding period of 2017. It had $20.3 billion in Bids & Change Orders Outstanding and $93.1 billion in Revenue Pipeline at the end of the fourth quarter compared with $24.5 billion in the comparable year-ago period. Revenue opportunity pipeline of $93.1 billion was mainly driven by North, Central & South America, as well as Middle East & North Africa segments.

Capital Expenditure, FCF & Balance Sheet

Capital expenditure of McDermott was about $24 million during the quarter compared with $22 million in the year-ago period.

The company generated a negative free cash flow (FCF) of $309 million in fourth-quarter 2018.

As of Dec 31, 2018, it had cash and cash equivalents of $520 million, and a long-term debt of approximately $3,393 million. Its debt-to-capitalization ratio was about 80.5%.

Zacks Rank and Stocks to Consider

Currently, McDermott carries a Zacks Rank #3 (Hold). Investors interested in the energy sector can opt for some better-ranked stocks as given below:

Austin, TX-based Jones Energy, Inc. (OTC:JONE) is an exploration and production company. For 2019, its bottom line, which has witnessed one upside revision over the past 60 days, is expected to grow 19% year over year. The company currently holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Madrid, Spain-based Repsol (MC:REP), S.A. (OTC:REPYY) is an integrated energy company. Its bottom line for 2019 is expected to increase 13.7% year over year. The company delivered average positive earnings surprise of 9% in the trailing four quarters. The stock currently has a Zacks Rank #2.

Enbridge Inc. (NYSE:ENB) is a Calgary, Canada-based energy infrastructure provider. The company delivered average positive earnings surprise of 33.2% in the trailing four quarters. It currently has a Zacks Rank #2.

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