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  1. phil

    Good morning!

    Futures down a bit, this is reversing a long-standing trend of positive futures. 

    Oil blasted back up to $50 with /RB $1.64, /SI is over $17, /YG $1,285 – people are sure nervous and the Dollar is 93.66, so it's not weakness there that's an issue.  

    CBI/Batman, Learner – It seems to me that their biggest problem is the cutback in oil investment and that's out of their control.   They seem to think it will come back and have already pivoted to more LNG projects, which they see as a large growth area.   The bulk of their problems have been underestimating costs to complete new LNG facilities and, though that sucks, it's not abnormal in their 10,000-hour process of becoming experts in the field for the next decade.  

    Earnings History for Chicago Bridge & Iron Company N.V. (NYSE:CBI)

    We are not satisfied with our second quarter results, which include a net loss from continuing operations of $304 million or $3.02 per share. This net loss is entirely due to charges we recorded in relation to four Engineering projects. As you will hear in more detail, the remainder of our backlog of projects across the company, including in our E&C operating group, continue to perform well at or above as-sold profit margins.


    As Pat stated, we reported a net loss of $304 million or $3.02 per share for the second quarter of 2017. The loss was due to the charges on four projects that amounted to $548 million on a pre-tax basis.

    Revenues came in at $1.3 billion, which is below the year-ago quarter, due primarily to the sharp decline in our E&C group. The decline reflects the fact that a portion of our overall project charges was the recognition as a reversal of $367 million of previously recorded revenues on our two U.S. LNG projects. Also contributing to the revenue decline relative to the year-ago period was the wind-down of our large cost-reimbursable LNG project in the Asia-Pacific region.

    Of the charges recorded, $181 million was related to the two gas turbine power projects that we discussed to some extent on last quarter's call. One is the IPL Eagle Valley project in Martinsville, Indiana, and the other is a project for Calpine in York, Pennsylvania. I'm sure you're as frustrated as we are to see additional charges on these projects.

    We also recorded $367 million in charges on two U.S. LNG projects; our project in Hackberry, Louisiana, for Cameron LNG, which we are executing in a JV with Chiyoda; and our project for Freeport LNG in Freeport, Texas, which we are executing in JVs with both Zachry and Chiyoda. The majority of the charges we took in Q2 on these two jobs are related to the Cameron LNG project, where we are working with the owner to finalize an updated schedule.

    As mentioned by Sempra on their earnings call last Friday, we expect the first train to complete in early 2019, with the remaining two trains following throughout that same year. The charges represent CB&I's share of forecasted cost increases and were necessary because of lower-than-expected labor productivity, weather-related delays, increased costs for fabrication, and craft labor, subcontractor and indirect costs associated with extensions of schedule. Some of these factors are within our control and some are not.

    As is typical for CB&I, we are executing hundreds of contracts across our businesses, the vast majority of which are completed successfully at attractive margins. We recognize, though, that it only takes a few contracts to result the material charges that negatively impact the business significantly, and we are working very hard to eliminate these kinds of situations.

    I will provide some more specifics in a bit on the types of initiatives we are undertaking to capitalize on our expensive lessons learned on these LNG and power jobs, and using those to drive confidence and reliability on other ongoing projects and upcoming projects.

    In the weeks leading up to my assumption of the CEO role on July 1, I worked closely with the leadership team here to take a hard look at our operations in order to determine the best path forward to position CB&I for long-term growth and success.

    Notice new CEO takes charge the day AFTER the quarter ends.  By tanking Q2, he starts with a clean slate and has easy comps to beat for his entire first year – locking in any bonuses he has in his contract.

    One final item I'd like to mention before turning the call over to Mike is a favorable decision in CB&I's litigation against Westinghouse that occurred at the end of June. We're very pleased with the Delaware Supreme Court's reversal of a previous decision in the Court of Chancery. Ruling in our favor, the Delaware Supreme Court decided that nearly all of Westinghouse's claim will not be presented to the independent auditor.

    The court decision vindicates our position that the Westinghouse claim was without merit, and we look forward to resolving any remaining disputes between the parties. While we still need to resolve the issue of a working capital true-up, we believe the pool of items subject to discussion is now approximately $70 million, and we now see this as a more routine commercial dispute that will be resolved in due course.

    Our total debt at the end of Q1 was $1.8 billion, which is down sequentially from $2.4 billion at the end of Q1. We achieved this by applying all of the net proceeds from the Capital Services sale, roughly $646 million towards debt reduction, but was partially offset by current quarter borrowings under the revolver.

    The combination of Technology and Engineered Product is a business that has had recent annual revenue run rate of roughly $700 million and more than $200 million in EBITDA. We believe the sale will generate proceeds in excess of $2 billion and we expect the transaction to generate a very sizeable gain for both book and tax purposes.

    However, we also expect to use NOLs and tax credit to offset most of the cash tax impact. Said another way, we expect most of the proceeds will stay with CB&I, allowing us to virtually eliminate our total debt once the transaction is completed and provide flexibility to invest in the business.

    As of June 30, 2017, our outstanding indebtedness was approximately $1.8 billion. As a result of these amendments and our intention to sell our Technology business and apply the net proceeds towards debt reductions, we have reclassified all of our long-term debt as current.

    The reclassification of the debt to current does not mean our debt is callable by the banks. As we previously stated, the company continues to have access to available sources of liquidity as in the past, with borrowing capacity of approximately $1.4 billion at the end of the second quarter.

    Another reason they wanted to write off as much as possible, they are about to get $2Bn (possible if the EBITDA works out) and this will lower the tax blow.

    We expect the second half revenue to be between $3.7 billion and $4 billion, and diluted earnings per share in the range of $1 to $1.25. CB&I's guidance does not include any benefit from the cost reduction program, which are likely to be realized in 2018.

    Looking forward, we continue to see strength in refining and petrochemical prospects in the U.S. and Middle East, with LNG beginning to move more aggressively in 2018 and beyond.

    Following the planned divestiture of our Technology business, CB&I will be a global company with an estimated $6.5 billion to $7.5 billion in annual revenue and a rejuvenated balance sheet. Our global footprint, our integrated business model of E&C and Fabrication capabilities, the unmatched experience of these businesses in our key product markets, and most importantly, the capabilities of our outstanding employees will sustainably position CB&I well.

    Right. Mike, the process that we've started is a process for the sale of the full business. As Mike and I both alluded to, the annual run rate EBITDA for that business has been in excess of $200 million over the last several years. And with some of the recent uptick in new awards both in technology license and in the heaters side, we expect that outlook going into the future to be even better. So we expect a evaluation in excess of $2 billion roughly is what we're looking for.

    I think, prospectively, when you think about E&C margins, not necessarily to the back half of the year, but really on a go-forward basis, I think with the headwinds in margins you have related to the remaining backlog associated with some of the LNG projects and all, you'd see that margin kind of dip down to the lower end of the range, that 4% to 7% range, on a prospective basis.

    Yeah. Well, that's basically what it was at the end of the quarter, when you look at our total debt. And if you look at the borrowings, I think we had about $374 million of borrowings on the revolver at the end of the quarter. So our total revolver capacity is about $1.9 billion. So, if you take that amount, less that $1.9 billion, less the LCs outstanding on those facilities, that left about $1.4 billion of capacity into those facilities at the end of the quarter.

    As we look at the back half, we've got about $4.5 billion of specifically identified prospects in our plan that we believe have a good probability of being booked this year. As I said in my prepared remarks, I think confidence level in our new awards in Technology is very high, because of continued strength in petrochemical licensing all over the world, and also some really good indicators about strength and catalyst bookings in the back half of the year.

    And then I think going into 2018, I would expect similar fundamentals. But more towards the latter half of 2018, I think some of our bigger LNG prospects in East Africa and the U.S., I think those will start to accelerate and that will allow us to really start more meaningfully building our backlog again.

    And then I think, on the storage part of that business, we are definitely seeing a good uptick, as I mentioned in my prepared remarks, especially in the U.S. and the Middle East. And it's all just good, solid flat-bottom tank LNG, high-tech cryogenic type stores, just a good variety of work. And that's just, again, good, solid, bread-and-butter type work for us that we estimate well, we execute well, and deliver strong profitability on.

    Well, it's hard to be enthusiastic after a Q like that but I'm going to stick with the plan and improve the position as it bottoms and hope we stay in the teens while we wait for a turnaround in profits.

    GNC/Jabob – We initially sold 15 Jan $17.50 puts for $4,950 ($3.30) back on 8/26/16 and we bought 30 of the 2019 $12.50 calls on 12/21 for about $3 and rolled the short puts at $6.15 ($9,225) to 30 of the 2019 $12.50 puts at $4.14 ($12,420) so that was +$3,195 on the roll plus the $4,960 we originally collected is net $8,155 or $2.72 per $12.50 put so our net entry on 3,000 shares is $9.78 and GNC is now $9.60.  We ended up buying those puts back for $17,310 and then sold 60 of the 2019 $7.50 puts for $20,400 – taking advantage of the 4/7 collapse so another $3,090 in our pocket is now $11,245 net collected on 60 2019 $7.50 short puts is $1.87/share and a net entry on 6,000 at $5.63.  Anything over $7.50 makes an $11,245 profit.  I don't really feel that's a problem and our worst case is owning 6,000 shares of GNC for $33,780 in a $1.6M portfolio (2%).

    Once we had the established puts, we also sold ($5) calls for $3.70 (not including the $5,250 we made on short $12.50 calls we closed) and then we bought stock twice to average $9.50 so $9.50 – $3.70 for the short calls and – $1.87 for the puts is $3.93 on 6,000 shares and it will be net $5.71 if we are assigned another $6,000 at $7.50.

    At each stage of the process, BEFORE we lose more than 20%, we have to decide if we want to take the loss (very little at the time) or if we REALLY want to own 2x GNC at the roll price.  In this case, we made that decision twice – as we got new information along the way (a full year now) – and decided we REALLY want to own 12,000 shares of GNC for $68,580 (if it goes lower) and, in fact, we'll be DISAPPOINTED if all that happens is we get called away at $5 with a $6,420 profit.

    Of course, that's not our plan, we plan on rolling up the short calls and selling more puts in 2019 but, at the moment, GNC is really high at $9.50 so it may be one of those positions that are so deep in the money that we have to let it go.  

    The main point is that, yes, GNC was at $17.50 when we started but BECAUSE we take conservative entries and sell puts with the INTENTION of buying the stock at a lower price, we will end up making more than the $4,950 we originally sold the puts for – even if we ultimately get called away at just $5.  

    THAT is the system we use and THAT is what you should be discussing and learning from and learning how to size and manage things over the long-term, rather than screaming about things from the sidelines.  This is the most productive discussion on a position we've had in years and I'll be happy to fill in the blanks on the others when I have time but the key is you have to make the effort to LEARN what we're doing here – which is mainly to make sure we don't lose money – even on "failures" – so that the ones that the "winners" can drop straight to our bottom line (giving us more money to put into the failures).  

    Since starting the LTP in Nov 2013, the only really significant losses we've had are on companies that actually went BK on us – almost everything else is recoverable if you stick with it.

    Allocations are key though, always go into a position assuming you will end up owning 4x what you are committing to with your initial put sale (or stock entry).  If you are not comfortable with that amount – scale back the trade to fit.  

    As I've often said, this started as a $500,000 portfolio and my goal is to find a $4,000 short put to sell every month so we are getting 10% annual returns on our money from premium sales alone.  All of those put sales are for companies we REALLY want to own if they get cheaper and the ONLY ones we end up owning are the ones that have TROUBLE and GET CHEAPER – that is the entire system so OF COURSE we have stocks that are going down – WE WOULDN'T OWN THEM OTHERWISE.  

    Once we "own" them (including having short puts that are losers), we re-evaluate the positions and, if we think the market is overreacting and we still like the long-term prospects THEN we make our 2nd round investment – with the goal of buying another round EVEN CHEAPER THAN THE FIRST.  If we get to the point of "having" to commit to the next round (the FU zone), then we look at the stock again and evaluate whether or not we still believe in it enough to commit a full allocation block to what is likely to be a very long-term hold.

    THOSE ARE THE STOCKS WE REALLY LOVE – those are the stocks Warren Buffett really loves.  We are doing the same thing he's been doing for 60 years, we buy a small stake, watch the company and, when we feel it's unjustly beaten down, we buy more.  Our biggest holdings (PSW and Buffett) are the stocks we were able to pick up when they ran into real trouble but we still had long-term faith in.  

    As it is, our LTP is outperforming Berkshire's portfolio in their first 5 years by a wide margin.  

    I can teach you how to play for a long-term investment but I can't teach you the patience it takes to be a long-term investor – that's up to you.

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