Commentary: Contrasting views on the E&C outlook in energy and petrochemicals

23 June 2014 00:00  [Source: ICB]

The global boom in capital expenditures (capex) for energy and petrochemical projects may not necessarily benefit engineering and construction (E&C) firms to a large extent, noted credit ratings agency Moody’s Investors Service. Interestingly, Moody’s cites excess E&C capacity, a phenomenon not being reflected in comments from chemical companies.

Aggressive bidding for projects amid excess E&C capacity and strong competition along with execution challenges pose the greatest risks to margins and the credit outlook for the E&C sector, Moody’s noted.

E&C firms will have many projects but can they capitalise?

Chevron Phillips Chemical

E&C firms will have many projects but can they capitalise?

“E&C companies will not see a significant improvement in credit quality through mid-2015, based on the timing of projects, the low margins of the industry, weakness in other sectors, and bidding and execution problems,” said Michael Corelli, senior analyst at Moody’s.

“Excess E&C capacity has led to aggressive bidding on projects and has reduced profit margins. Aggressive bidding increases the risk of losses and squeezes margins for projects with fixed-price contracts,” he added.

The citing of excess E&C capacity by Moody’s – albeit for energy as well as petrochemicals – is in stark contrast to statements from several North American chemical companies on seeing higher project costs from constraints on E&C resources.

On 15 June, US-based Williams Companies announced that its rebuilt and expanded cracker in Geismar, Louisiana will start up in late July rather than late June as earlier indicated, and cost more than planned. The start-up had already been delayed from an orginal target of April 2014.

Williams cited “lower than planned construction labor productivity and other factors” for the delay, and noted that capital spending on the project is expected to rise by $65m from the previous guidance, to $715m.

A margin squeeze for E&C companies could come despite a growing project pie across energy and related sectors, noted Moody’s. In the US alone, there are around $500bn in announced power generation, chemicals and oil and gas projects, on top of “hundreds of billions of dollars in overseas projects”, Moody’s said.

“Low natural gas prices will also support pipeline investments as companies build new gas-fired power plants and liquefied natural gas (LNG) export terminals,” said Corelli.

Low natural gas prices, are also the foundation of the massive planned investment in US petrochemical capacity.

There are already plans to build 11 new ethane crackers in the US. If all are built, along with expansions of existing facilities, US ethylene capacity could jump more than 50%, according to an analysis by ICIS.

“Capital spending on oil and natural gas transportation and storage infrastructure [in the US] will stay robust at roughly $85bn annually through the end of this decade – far more than in recent years,” Corelli added.

By: Joseph Chang
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