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Concerns about contractor building Cameron LNG fuel pessimism for Sempra

Concerned about collateral damage from Chicago Bridge & Iron Co. N.V.'s financial position, Barclays analysts revised their outlook for Sempra Energy given risks of potential construction delays and exposure from the $10 billion Cameron LNG export facility in Louisiana.

While analysts at Barclays declined to elaborate on CB&I's financial outlook, they downgraded Sempra's rating from overweight to equal weight, and emphasized that Sempra is not guaranteed to remain insulated in the event that CB&I is unable to complete construction on Cameron LNG.

"SRE has indicated that the project construction is backstopped with letters of credit as well as joint and several uncapped parent guarantees; however more specific details are lacking," the June 8 research note said. "SRE is further insulated through the tariff agreement, which is structured to adjust over the life of the contract to accommodate EPC schedule delays and maintain the project's internal rate of return, thereby holding project net present value intact."

Cameron LNG LLC in 2014 awarded an approximately $6 billion engineering, procurement and construction contract to a joint venture between CB&I and Chiyoda Corporation. In November 2016, Cameron LNG developers Sempra, Engie, Mitsui & Co. (Shanghai) Ltd. and Japan LNG Investments LLC announced a delay in construction because of flooding and heavy rains. Trains 1, 2 and 3 are now slated to come online in mid-2018, late 2018 and mid-2019, respectively. Sempra reiterated in April that it expects to maintain that schedule.

Macquarie Research on June 5 slashed its outlook for CB&I, citing worries over intra-quarter hidden debt. In dropping CB&I's price outlook from $18 to $11.50, Macquarie analysts outlined their vision on why it is important to consider intra-quarter debt in the construction company's case.

"CB&I draw downs are systematically and materially higher compared to what is reported at quarter end, suggesting to us that the quarter end number is understating the amount of leverage the company is deploying to run the business," the note said. "Although we do not have intra quarter cash, given the spread to the max borrowing is narrowing, we think it is prudent to consider maximum drawdowns from a valuation perspective. At the end of the last quarter, the company indicated the maximum draw down in the prior 90 days was ~$1.7 [billion], compared to quarter ending debt under the revolving credit facility of $917 [million]."

Macquarie analyst and note co-author Sameer Rathod explained that CB&I approached lenders because the company signed contracts for several projects that are not working according to schedule.

"What we saw last quarter was they had to go hat in hand to their lenders to get amendments to their covenants," he said in an interview. "They were losing money on these projects and that resulted in their leverage going up. The lenders were obviously not happy ... and they asked for the company to pledge a lot of assets."

CB&I could not be reached for comment. In a May conference call, CB&I CEO Philip Asherman skirted a question about whether Cameron was on track relative to schedule and expectations.

"We're working with the owner. We don't have any current real disputes out there," he said. "We're working with the owner and all working towards getting to the schedule, and we've hired a lot of people down there and expect to hire some more."

Earlier this year, Sempra was optimistic about Cameron LNG's prospects once the facility comes online and anticipated $11 billion in cash flow after debt service but before taxes, which will kick in around 2024. "We're going to get a mountain of cash," said Joe Householder, corporate group president of infrastructure businesses said during an April 5 presentation. "This is a really important project, and I believe, personally, that our stock valuation is missing this point: Cash is coming. It's coming soon."

Cameron LNG received Federal Energy Regulatory Commission approval in May to add two trains representing 1.41 Bcf/d of LNG production capacity to the original three trains. The overall project has authorization from the U.S. Department of Energy to export roughly 2.1 Bcf/d to countries without a free trade agreement with the U.S. (FERC docket CP15-560; DOE Office of Fossil Energy docket 15-67-LNG)