Clough faces ‘acute’ working capital issues, says its parent company
Australia’s oldest contracting company has an ‘acute cash crunch’ and admits to new blowouts on two major contracts, as it awaits for a corporate white knight.
Clough is facing fresh contract blowouts as the company looks for a corporate white knight, with its parent company flagging a major earnings downgrade on Thursday amid an “acute” cash crunch at the embattled contractor.
On Monday, South African-listed Murray & Roberts cut its earnings outlook, pointing the finger at two major Clough contracts and told shareholders a shortfall in working capital was becoming “especially acute”. The company’s shares plummeted by 33 per cent in early trade in Johannesburg.
The disclosure by Clough’s parent company comes after The Australian revealed the West Australian contractor had put itself up for sale, inviting joint venture partners and rivals including Italy’s Webuild and Saipem to participate in a sales process.
Sources said Clough was also considering more drastic options if solvency concerns deepened, with McGrathNicol said to be in the box seat as voluntary administrators if talks to find a buyer or fresh credit lines were not successful.
On Monday, Clough chief executive Peter Bennett told staff the company’s problems had deepened since it last updated its workforce about its financial condition in September.
Mr Bennett told staff the board of Clough and Murray & Roberts were exploring several options aimed at getting the contractor through a worsening outlook for its business.
“Since my last communication on September 9, we have become aware of material increases in the cost-to-complete forecasts on two of our projects,” he said. “This has obviously had a marked impact on our 2023 business expectations.”
In an announcement to the Johannesburg Stock Exchange late on Monday, Murray & Roberts pointed the finger at Clough’s engineering contracts on the Mitsui-operated Waitsia gas project in Western Australia and a $US650m ($1bn) petrochemicals plant under construction in Texas, Project Traveler.
“Shareholders are advised that the disruption in supply chain delivery and delay in project milestone payments continue to persist with a number of projects progressing slower than planned, impacting margin and working capital requirements,” the company said. “Margin deterioration has recently been recorded at the Traveler project … and the Waitsia project in Australia, both of which will be close to completion by the end of financial year 2023.”
Murray & Roberts did not put a figure on the likely size of the blowouts, but said its December half financial results were likely to “be at least 100 per cent down” on the R337m ($29.7m) profit it booked in the first half of the last financial year.
In early September, Mr Bennett told analysts on an earnings call that the company’s energy, resources and infrastructure division – which includes Clough – did not “have any loss making projects in the portfolio”.
While Murray & Roberts financial director Daniel Grobler acknowledged that Clough had “zero working capital facilities”, he said the company was in negotiations with two banks to finalise term sheets to extend the company credit facilities.
On the same call Mr Bennett told analysts the “trend in revenue and EBIT is in the right direction”. The company expected “robust earnings growth over the next three years”, Murray & Roberts told analysts on the call.
Clough is yet to lodge its 2022 financial statements with the corporate regulator, but The Australian understands it told staff earlier this year it expected to book profits of about $65m in the current financial year, up from a profit of around $36m.
The discovery of fresh cost blowouts at Waitsia and Traveler will punch a hole in those projections and Clough’s lack of working capital facilities suggest the company has only limited head room to cope with additional project costs. Sources say negotiations over fresh working capital facilities have not yet come to fruition.
But Credit Suisse analyst Saul Kavonic said it was likely that Mitsui and Waitsia partner Beach Energy could come to Clough’s rescue, given the potential loss of revenue if the project was not completed on time.
“When a contractor faces difficulty like this, it makes it more likely the operator will need to pay more in order to ensure timely delivery, regardless of the contract terms,” he said in a note. “A three month delay would see up to $250m lost for each cargo, assuming spot price for ramp up cargoes at a forward curve of about $40 per mmbtu. So it is in Mitsui and Beach’s interest to try to maintain start-up in 2023, even if it entails higher cost, in our view.”
