SNC Lavalin shares spike after announcing sale of resources oil and gas business
Engineering firm looks to simplify operation to focus on core services.
SNC-Lavalin Group Inc. shares surged more than 11 per cent after the company took steps to reduce risks by moving away from construction and oil to focus on its engineering services business.
The shares gained $2.52 to $25.31 in Tuesday trading on the Toronto Stock Exchange after dipping to an intraday low of $22.62.
The gains came after the Montreal-based company signed a deal to sell its resources oil and gas business to Kentech Corporate Holdings Ltd.
The business, which represents about 90 per cent of SNC’s resources segment revenues, includes a backlog of $745 million and about 7,100 employees.
The transaction is expected to close in the second quarter, subject to regulatory approvals and customary closing conditions.
SNC said the oil and gas business will be classified as an “asset held for sale” in its fourth quarter of 2020 and is expected to result in a fair value writedown in the range of $260 million to $295 million.
At closing, the company said the transaction is expected to generate a gain on the sale in excess of the fair value writedown, after accounting for the elimination of a foreign exchange adjustment.
A charge of $95 million on the retained resources business will also be taken in the fourth quarter of 2020.
“The sale of the oil and gas business further simplifies … our business and allows us to enhance our focus on growing our high potential core engineering services business,” stated CEO Ian Edwards.
SNC decided to dramatically alter its business strategy in July 2019 after sustaining heavy losses from large projects that often generated cost overruns.
The company also announced that it has completed a review of its legacy litigation and commercial claims and will increase its provisions by $140 million and reduce its commercial claims receivable by $155 million.
In addition, following a review of its remaining three Canadian light rail infrastructure projects, SNC says it will take a $90-million charge, most of which it says is due to COVID-19 challenges and the decision to not recognize associated revenue at this time.
It said the projects are progressing well but strict lockdowns have restricted the number of workers it can get to these sites.
The REM electric train project in Montreal is 40 per cent complete, the Trillium Line in Ottawa is expected to be 80 per cent done by the end of the year, and the Eglinton Crosstown in Toronto is most advanced at 80 per cent complete.
Edwards told analysts during a conference call that the company’s efforts are better focused on growing its business than continuing to toil to make the oil and gas business being sold more profitable.
Industry analysts said the changes should allow SNC to alter its focus.
“Overall, the charges/provisions cause noise in the near-term, but these announcements do put the oil and gas business in the rear view, and should allow the company to focus on the engineering services and nuclear business going forward,” stated Sabahat Khan of RBC Dominion Services.
Added Benoit Poirier of Desjardins Capital Markets: “We believe these announcements will significantly derisk the story by reducing the company’s exposure to resources LSTK (lump-sum turnkey) projects, the biggest source of risk for SNC.”
The company’s financial results should be much more predictable beginning in the first quarter, which should trigger a narrowing in the valuation gap between SNC and its peers, added Yuri Lynk of Canaccord Genuity.
“Once the REM, Trillium, and Eglinton LSTK projects are completed, the company will be operating essentially as a highly predictable and cash generative fee-for-service business.”