Clough’s cash crunch crisis a long time in the making
The century-old contractor is under financial strain as it battles to deliver some of Australia’s biggest energy projects.
Awaiting Clough’s 2500 employees as they started work this week was a missive from the company’s chief executive.
Peter Bennett confirmed that the engineering contractor was in talks with its South African owner Murray & Roberts about its future – as first reported in The Australian that morning. Bennett told staff there were setbacks on several major projects.
Later that day, Murray & Roberts went a step further. It cut its earnings outlook – pointing the finger at two major Clough contracts – and telling shareholders a shortfall in working capital was becoming “especially acute”. The company’s shares plummeted by more than a third.
In Australia, a raft of alarmed clients – including the government-owned Snowy Hydro and TransGrid – were making calls.
They wanted to understand whether the turmoil was a short-term blip or a major restructuring that could flow through to big nation-building projects such as Snowy 2.0 and the South Australia-NSW electricity interconnector under construction.
With a raft of contracts in both Western Australia and the east coast, Bennett crisscrossed the country, eager to maintain momentum among its huge workforce. By the end of the week, Clough was circling the wagons to buy time to close a company-rescuing recapitalisation deal.
For Clough, there are two options on the table: either Murray and Roberts comes up with a financing deal to inject fresh cash into the business, or it finds a buyer among its rivals or joint venture partners. Italy’s Webuild – Clough’s partner on Snowy 2.0 – is thought to be interested.
If neither eventuates, the company faces the risk of voluntary administration. That would represent a capitulation for a company founded by one of Perth’s most prominent families over a century ago, one which has been involved in some of the nation’s biggest resources projects.
On Friday, through its lawyers, Clough denied it had failed to close a deal to sell the company and was at imminent risk of collapsing into administration.
Clough’s lawyers told The Australian that the boards of both Clough and Murray & Roberts were “working diligently through various solutions, negotiations in respect of which remain ongoing, to strengthen Clough’s working capital and facilitate its continued growth and ability to deliver its secured order book … and preferred contractor status”.
“Clough as a brand and business is highly sought-after, and the business is confident that should Murray & Roberts’ balance sheet not be able to sustain the business strategy, one of the other solutions that Clough is evaluating, will enable Clough’s continued growth and ability to deliver its secured and future record order book.”
Cash crunch
But while Clough is keen to talk up the billions of dollars of work it has in hand, the fact that the company has faced a cash crunch over the last year is not in doubt.
The contractor has consistently pointed to its growing order book as a sign its business is recovering, and that its diversification away from oil and gas is paying off.
Its financial accounts show that revenue has risen sharply since its $631m nadir in 2019, hitting $941m in 2021. Clough is believed to have booked revenue of $1.5bn last financial year.
But the revenue tells only part of the story. Every new contract requires start-up spending, and cash payments are only made on a milestone basis. Multiple subcontractors who spoke to The Weekend Australian say Clough’s financial problems appear to have accelerated in late 2021, when the company started delaying and even missing payments.
The problems coincide with the sharp rise in energy and input costs across the globe.
Even before Russia’s invasion of Ukraine disrupted coal and oil and gas markets, China and other major Asian economies were scrambling to secure fuel ahead of the northern hemisphere winter, pushing up gas and coal prices.
In turn, steel prices were on the rise, peaking in November and crunching construction costs.
At the same time, Clough’s industry peers were reporting the impact of critical skills shortages across the resources and construction industry, as Covid lockdowns ended and stalled projects began to ramp up again.
That combined to create a perfect storm for lead contractors on major projects, particularly for those – like Clough and partner Webuild – that had agreed to fixed-price contracts on major infrastructure projects like the $5.1bn Snowy Hydro 2.0.
The Snowy contract was signed before the pandemic in April 2019, but hit major troubles a year later as the Covid-19 spread around the world.
As international borders locked down in early 2020, importing supplies and getting enough people in place turned into a big problem at Snowy.
At an accounting level, insiders said the repeated reporting of significant uncertified revenue in project forecasts may have obscured long-term cash positions.
Murray & Roberts was upfront about its use of uncertified revenue – describing in its latest accounts as common practice for engineering and contracting companies. It pledged confidence that revenue recognised as uncertified will be certified and paid once certain commercial matters had been resolved.
Cost overruns
Still, as the Snowy 2.0 situation shows – where Clough and Webuild have put in for $2.2bn of cost overruns – there is often little chance of recouping that money under a fixed-price contract.
Snowy had so far paid less than half of the amount claimed by its builders after assessing that the joint venture was not entitled to receive payment for the items claimed, a report authored by the Australian National Audit Office concluded on June 15.
Sources say that Clough’s precarious financial position was reaching critical levels by May 2022, when rumours began to circulate in financial markets that it was looking for a financing package to battle through financial difficulties.
Clough appointed FTI Consulting to look through potential restructuring options.
Multiple subcontractors working for Clough told The Weekend Australian that payments from Clough for projects such as WA’s Waitsia gas facility and Snowy 2.0 slowed markedly in early 2022, with invoice payments running weeks or even months beyond their payment terms.
One contractor said they had been told in June that invoice payments worth more than $500,000 were being held up because Clough was waiting on the release of bank deposits on one of its US projects, or the receipt of a loan from an associated company within the group.
Sources say that Clough was receiving complaints with subcontractors ringing them directly to complain about late payments, after receiving no joy from the company’s accounts department.
At the same time Clough’s woes were being exacerbated by disruptions across global supply chains, with the company unable to complete work sections on major projects such as Waitsia because of stalled equipment deliveries from suppliers in Asia.
With some subcontractors now complaining directly to Waitsia operator Mitsui E&P, The Weekend Australian understands Clough was able to win early milestone payments from the Japanese giant – but only in exchange for assurances the cash would be passed directly to contractors, rather than going into Clough’s general revenue pool.
As rumours spread through WA’s business community about Clough’s troubles at Waitsia and Snowy Hydro, alarm bells began to ring at the company’s other major clients.
In May, when The Australian first reported that Clough was seeking restructuring advice, the company was deep in final negotiations over a $US2.7bn ($4.3bn) engineering and procurement contract with Italy’s Saipem to build Perdaman Industries’ urea plant in the Pilbara.
So concerned was Perdaman at rumours that Clough’s work at Snowy Hydro was endangering their financial position that a Perdaman representative reached out to a WA-based minister in the then Morrison government, seeking a meeting over Clough’s unpaid claims in the Snowy contracts. Sources say that meeting request was turned down.
Parental problem
If the solution to Clough’s problems now lies with its South African parent, so does the fundamental source of its troubles.
Clough has never quite recovered from its acquisition by Murray & Roberts in 2013.
The engineering firm, then being run by current Santos boss Kevin Gallagher, effectively funded the transaction, lending the South African buyer $200m of the $446m needed to buy out its minority shareholders. Clough also took on $120m in debt held by the South Africa contractor.
That loan has never been repaid, and accrued interest has been only partly offset by the regular dividends paid by Clough to its parent each year. By the end of June 2021, Murray and Roberts owed Clough $342m, financial filings show. It declared dividends to its parent in the 2020 financial year, when it booked a $30.9m loss for the year – although the $3m dividend, its accounts show, was used to offset a $3m receivable to another member of the group.
But Clough’s accounts tell a stark tale of its acquisition. Earnings before interest and tax peaked at $115m in the 2014 financial year, and rapidly declined as global investment by oil and gas majors hit its core business.
Financial statements filed with the corporate regulator show that its cash position fell from about $440m at the time of its acquisition to $220m the following year.
For Clough, a big shift in the industry was also beginning to hit home. The reimbursable model – where companies were able to recoup costs for work incurred on a project – had been put in place to build Australia’s big LNG projects as some contractors did not have capacity to manage financial risk.
But once that boom ended and the bread and butter work of smaller contracts became the norm, Clough and its rivals were forced to sign fixed-price contracts with little room for slippage. It also shifted from an oil and gas focus to new areas such as infrastructure, mining and water deals which required different approaches from big LNG plant contracts. Company insiders said that change – combined with Clough’s modest liquidity after Murray & Roberts assumed control – started to pile pressure on the contractor.
Essentially, it lost a cushion to deal with cost overruns and external shocks – which the Covid-19 pandemic was about to underline.
Clough’s cash levels had fallen to $141m by the end of December 2021, according to an accounting note contained within Murray & Roberts half-year accounts, with $100m of that required to be held “unencumbered” under the terms of performance bonds extended to the contractor by HSBC.
While Clough has not yet filed its latest financial reports, it is understood the company had only $75m in cash at the end of the 2022 financial year – of which a substantial portion was still held as security against performance bonds taken out by Clough over its Australian project work.
All of Clough’s immediate problems could be solved by the repayment of the $342m owed by its parent company – but there are doubts Murray & Roberts has the capacity to do so.
Either way, a deal appears imminent. For now, Bennett has told staff it’s business as usual.
