Goldman Slaps A Sell On KBR Shares, Cites 'Challenging Outlook For LNG Awards'

  • The share price of KBR, Inc. KBR has appreciated 15.36 percent over the past three months, with the shares currently trading close to their 52-week high.
  • Jerry Revich of Goldman Sachs has downgraded the rating on the company from Neutral to Sell, while maintaining the price target at $19.
  • Revich believes that there could be challenges to the company’s earnings growth in the medium term, along with risk of multiple compression.
  • Analyst Jerry Revich expressed concern regarding the impact of “significant cuts to large scale energy projects – particularly for LNG – and slowing nitrogen capex, a key KBR market,” on the company’s earnings growth in the medium term, as well as risk of multiple compression.

    Turnaround Progress 'Positive,' Margin Expansion 'Challenging'

    “We are positive on the company’s turnaround progress, but believe further margin expansion will prove challenging amid an extended commodity deflation cycle,” Revich stated.

    Related Link: Traders Brace For OPEC Downside In Big Energy ETF

    The outlook for large scale energy projects appears challenging, given that there could be multi-year capex reductions outside of U.S. shale, driven by “challenging energy company returns on capital, peak reinvestment rates, and the completion of prior generation projects.”

    In addition, the global LNG capex award cycle appears to be significantly weakening, with increasing LNG oversupply, driven by the 45 percent capacity additions in the U.S. and Australia. This in turn has been driving spot prices meaningfully lower.

    According to the Goldman Sachs report, “While KBR’s Magnolia project appears to be on track, the prospects to replace completed KBR projects in Australia are limited.”

    To add to this, the nitrogen capex cycle is also close to its end, and declining global nitrogen prices, along with rising project costs, have adversely affected returns.

    The EPS estimates for 2015 and 2017 have been raised, while that for 2016 has been lowered to reflect project timing, including Magnolia LNG.

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    Posted In: Analyst ColorShort IdeasDowngradesPrice TargetCommoditiesTop StoriesMarketsAnalyst RatingsTrading IdeasGoldman SachsJerry Revich
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