SNC-Lavalin strikes deal to sell oil and gas unit, ends global energy ambitions
SNC-Lavalin Group Inc. agreed to sell its unprofitable oil and gas business to Kentech Corporate Holdings of the United Arab Emirates as the Montreal-based builder sharpens its focus on project management and nuclear energy.
The deal will probably close by mid-year, SNC said Tuesday in a news release. It didn’t disclose financial terms, other than to say the transaction’s “net cash impact” is expected to be minimal.
SNC also said it would book $480 million worth of provisions and writedowns of receivables in the fourth quarter following a review of outstanding litigation and commercial claims and a reassessment of expenses. SNC — which plans to release its fourth-quarter results in the next few weeks — will push “very hard” to recover extra costs associated with the completion of Canadian fixed-cost projects such as the Réseau express métropolitain, chief executive Ian Edwards said.
The asset sale closes the book on SNC’s global foray in energy services — an expansion accelerated by the 2014 acquisition of Kentz Corp. and its 14,500 employees. SNC paid about $2 billion for Kentz, which operated in 36 countries at the time, to expand in oil and gas just as crude prices were crumbling.
The deal allows SNC to “cleanly and quickly reduce our business risk” by exiting oil and gas fixed-price projects, Edwards said Tuesday on a conference call with analysts. The company is also “significantly reducing delivery and warranty obligations on all outstanding contracts.”
Under the terms of the transaction, Kentech will take over SNC’s $745-million oil and gas backlog and the unit’s 7,100 employees, the CEO said. Edwards had disclosed in late 2019 that the company was mulling options for the resources business.
SNC shares jumped about 11 per cent Tuesday to close at $25.31 on the Toronto Stock Exchange. That trimmed the stock’s one-year decline to about 23 per cent.
Fourth-quarter results will include $90 million in charges because productivity continues to be affected by COVID-19, Edwards said. SNC will also book a $95-million charge on its remaining resources business.
Lockdowns in Quebec and Ontario “are restricting the amount of people we can get to the projects,” the CEO said. Productivity is also being affected by contact tracing, which is forcing some workers to isolate and miss work, he said.
“This lockdown is definitely going to go into the spring,” Edwards said. “But really beyond the summer, we’re assuming that things largely get back to normal.”
SNC on Tuesday reaffirmed a forecast calling for fourth-quarter revenue at its engineering services unit to decrease by “low- to mid-single digits” year-over-year. Adjusted profit in the business should represent somewhere between 8.5 per cent and nine per cent of revenue.
Engineering services — which include design, project management, nuclear and infrastructure contracts — accounted for revenue of $1.45 billion in SNC’s third quarter of 2020, or 72 per cent of the company’s total sales. A year earlier, the proportion was 62 per cent.
Since taking over on an interim basis in June 2019, Edwards — whose appointment was made permanent four months later — has worked to reduce risk and generate more consistent earnings and cash flow by reorganizing SNC into two main lines of business and ending the practice of bidding on fixed-price construction work.
So-called lump-sum turnkey projects in resources are “the biggest source of risk for SNC,” Desjardins Capital Markets analyst Benoit Poirier said Tuesday.
ftomesco@postmedia.com
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