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LNG developers are insulated from contractor McDermott's financial troubles

Developers behind two major U.S. LNG export facilities being built by engineering and construction contractor McDermott International Inc. do not expect to suffer setbacks as a result of a reportedly imminent bankruptcy at the contractor, which could file for a restructuring within weeks.

A key element in McDermott's financial trouble was losses on the pair of LNG projects after delays and cost overruns. But the developers of those facilities, the Sempra Energy-led Cameron LNG terminal in Louisiana and the Freeport LNG Development LP facility in Texas, said they are on schedule to complete the final liquefaction units this year. Finishing in that time frame would allow the struggling McDermott to finally remove the projects from its books.

"As long they can maintain their current schedules on Cameron and Freeport and finish both projects this year, that should help stabilize things," said Eric Smith, an analyst of LNG projects and managing partner of the research firm EPC Risks.

The Wall Street Journal reported the looming bankruptcy on Dec. 30. The newspaper said a group of lenders could provide McDermott with a loan of $2 billion to maintain the company's operations during bankruptcy, citing people familiar with the situation. McDermott's already battered share price tumbled further on the news.

McDermott did not respond to a request for comment.

In addition to the Freeport and Cameron LNG projects, McDermott is also part of joint ventures building other major LNG infrastructure projects, including the Golden Pass LNG facility in Texas and another export facility in Mozambique.

"At a high level, as long as McDermott can maintain their solvency and the ability to pay vendors, contractors, suppliers, etc., there really shouldn't be a huge impact to existing projects: from Freeport to Cameron to Golden Pass to Mozambique," Smith said.

The bigger issue could be how a bankruptcy affects McDermott's ability to compete for new engineering, procurement and construction contracts, or EPC contracts, Smith said.

"They are going to have to demonstrate to clients that they are financially able to support not only their ongoing projects but also the new ones as well," Smith said. "That's where it's probably going to have the most impact."

McDermott's troubles began with the 2014 oil market collapse and accelerated with the 2018 acquisition of Chicago Bridge & Iron Co. NV, which increased the company's debt burden to about $4.3 billion. It was through Chicago Bridge & Iron that McDermott took on the Freeport and Cameron LNG projects.

In explaining the losses on Cameron LNG in regulatory filings, McDermott has pointed to poor labor productivity and increases in construction and subcontractor costs.

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With Freeport LNG, McDermott's losses also climbed as the company lowered its estimate of claim proceeds associated with Hurricane Harvey, which caused flooding that combined with contractor execution delays to push back the project.

McDermott said in securities filings that the company determined by September 2019 that the ongoing work on the delayed and cost-intensive LNG projects, coupled with the demands of a near-record level backlog of new projects, left it thin on cash and in danger failing to comply with lending agreements. McDermott hired external advisors to evaluate alternatives to its capital structure and amended its credit agreements.

Both the Freeport and Cameron LNG facilities continued to advance through the late stages of construction, and their remaining units stand to make up the bulk of new U.S. LNG export capacity additions in 2020.

Freeport LNG started commercial operations on its first liquefaction train in December 2019 and also began shipping commissioning cargoes from the second liquefaction unit, which is the last big milestone before substantial completion.

Freeport LNG does not anticipate any impact from the McDermott issues on the last of three trains under construction, spokesperson Heather Browne said in an email. That train remains on track to start commercial operations by May, Browne said.

"We do not anticipate any material effects to the project," Browne said.

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Sempra also maintained the most recent timeline for Cameron LNG, which calls for the third train to start commercial operations under tolling agreements in the third quarter, Sempra spokesperson Paty Ortega Mitchell said in an email. The first train of the facility began commercial operations in August 2019. The second train started producing LNG in December 2019, with the start of commercial operations targeted for the first quarter of this year.

Meeting those Cameron LNG deadlines is important for McDermott to receive incentive payments and avoid paying damages under a settlement agreement between the developer and its EPC contractors announced in July 2019, Smith said. Japan's Chiyoda Corp. is McDermott's joint venture partner in the project.

Analysts at Guggenheim Securities LLC said in a Dec. 31 note to clients that McDermott's financial trouble is unlikely to delay the full Cameron LNG project given its late stage. As backstops, Guggenheim pointed to Sempra's disclosures of letters of credit available to the project and the nature of the commitments from the joint venture partners.

"If one is unable to perform its duties, the other is required to complete the project," Sempra's then-President and COO Joseph Householder told investors during a Nov. 1, 2019, earnings call.

A competing contractor could be ready to step in if Sempra needed to replace contractors, Guggenheim said.

In the case of Freeport LNG, McDermott partnered with Zachry Group for the first two trains. Chiyoda joined the partnership for the third train.

The EPC with Golden Pass LNG, which was commercially sanctioned in February 2019 with a 2024 target for the start of exports, also includes all three of the contractors. That means less exposure for McDermott, Smith said. Golden Pass is backed by Qatar Petroleum and Exxon Mobil Corp.

"The project is important to Chiyoda and McDermott in order to prove to the EPC and LNG communities, as well as their investors, they can successfully execute large EPC and LNG projects," EPC Risks wrote in a Dec. 23 report to clients. "Both Chiyoda and McDermott have received investments to try and stabilize their respective businesses; it's critical to avoid a repeat of Cameron LNG and Freeport LNG's cost and schedule overruns."