Greenlight Capital's fourth quarter positions

Part 4
Greenlight Capital's fourth quarter positions (Part 4 of 8)

Why Greenlight Capital opened a new position in McDermott

Greenlight Capital and McDermott

David Einhorn’s Greenlight Capital initiated a 0.99% position in McDermott (MDR), which operates as an engineering, procurement, construction, and installation (or EPCI) company. McDermott designs and executes complex offshore oil and gas projects.

MDREnlarge Graph

Shares fell in November last year as the Houston-based company reported a net loss of $64.07 million or $0.27 per share for the third quarter, compared to a net income of $50.61 million or $0.21 per share in 3Q 2012. Revenue for the quarter decreased to $686.86 million from $1.03 billion in the same quarter in 2012 and missed street estimates. The year-over-year decrease was primarily due to the completion of several significant projects that were active in the third quarter of 2012. Due to lower utilization and project charges, gross profit in the third quarter declined by $138 million compared to 3Q12. The third quarter results also included approximately $4.0 million in restructuring costs.

In the third quarter, all projects in the company’s Middle East segment contributed to gross profit and were in a profitable position. A deepwater Malaysian project in McDermott’s Asia Pacific segment experienced vessel mechanical downtime that contributed to $66.0 million of additional project costs, the company said.

The company reported a contract backlog of $4.61 billion at the end of the third quarter, lower than $5.34 billion at the end of the same quarter the previous year. In November of last year, the company was awarded an Engineering, Procurement, Construction and Installation (or EPCI) project for a customer in the Arabian Gulf for a value of approximately $200 million, which will be included in McDermott’s fourth quarter 2013 backlog.

An August report on Bloomberg said the company was a potential takeover target on the back of a share price decline due to cost overruns at some of its projects. The report said the company’s “still-strong industry brand and manufacturing operations” made it attractive. McDermott also underwent a management change, with CEO Stephen Johnson being replaced by David Dickson in December last year.

The company said on its earnings call that it has “got a strong balance sheet, is very well-positioned to take advantage of a great upstream oil and gas market,” and sees “compelling opportunities in the subsea sector, especially in deepwater.”

MDRHEnlarge GraphMcDermott provides both shallow water and deepwater construction services and delivers and installs fixed and floating production facilities and subsea infrastructure. Its customers include national, major integrated, and other oil and gas companies. During the 12 months ended September 30, 2013, the company reported revenue of approximately $3.01 billion, with about 42% of revenue generated in the Middle East region, 39% in the Asia Pacific region, and 19% in the Atlantic region. In August 2010, McDermott spun off its Power Generation Systems’ and Government Operations businesses into an independent publicly traded company, Babcock & Wilcox Co. (BWC).

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