Fluor (FLR)

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The rise in oil prices since 2002 have led oil and gas companies to dramatically increase their investment in infastructure - new wells, offshore oil platforms, and refineries, and this expansion has in turn increased FLR's oil and gas revenues by 56% from 2006 to 2007. For example, the Kuwait National Petroleum is considering contracting a $15 billion deal to Fluor to upgrade its refineries.^[2] More than half of Fluor's revenue comes from outside the U.S. (56% in 2007).

[edit] Business Overview

2007 Revenue by Geographic Segment ($ in millions): Year ending Dec. 31^[3]

The oil and gas segment continued to earn the most revenue for Fluor, but jumped up from 38.13% of total revenue in 2006 to 50.14% of total revenue in 2007 because of increasing oil prices.^[1]

[edit] Business Segments

2007 Revenue by Segments: Year ending Dec. 31^[1]

• Oil & Gas (50% of 2007 Sales): In this segment, Fluor offers design, engineering, procurement, construction and project management services to energy-related industries. An increase in demand for oil and gas and refined products led to a 55.91% increase in oil & gas revenue from 2006 to 2007. Fluor participates in the Mexican and Central American oil, gas, power and chemical markets through a joint venture with Group ICA known as ICA Fluor. This segment can be divided into the following sub-categories:^[5]

1. Upstream oil and gas production: In this sub-category, the increase in demand and price of oil and gas has led to an increased demand for Fluor's services in this segment. These services include the production, processing, and transporting of oil and gas resources, including the development of new fields and liquefied natural gas (LNG) projects.^[5]
2. Downstream refining focuses on modernizing and modifying Fluor's clients' existing refineries to satisfy environmental requirements, as well as developing new refineries worldwide. Fluor also plays an influential role in the domestic and international clean fuels markets, offering engineering and construction services to oil refineries to meet the stronger environmental policies being enacted by numerous nations worldwide.^[5][6]
3. Petrochemicals market mainly focuses on the expansion of ethylene and polysilicon production, for which Fluor mainly offers project management and procurement services.^[7] On the global scale, Middle Eastern markets play a particular importance for their supply of raw oil, and the Chinese market is significant for its strong need for the company's petrochemical products.^[5]

• Industrial & Infrastructure (20% of 2007 Sales), whose revenue increased by 6.75% from 2006 to 2007, provides engineering, procurement and construction services to industries such as transportation, mining, and telecommunications:^[5]

1. Transportation focuses on providing consulting, engineering, and design services for roads, highways, bridges, railways, and airports.^[8]
2. Mining was a particularly strong area of growth for Fluor in fiscal 2007. In fiscal 2007 commodity prices and business, along with consumer demand, increased, and Fluor's mining opportunities have increased with them.^[8]
3. Life Sciences primarily consists of providing services in the pharmaceuticals and biotechnology industries, along with erecting new medical facilities and keeping existing facilities operating.^[8]
4. Telecommunications encompasses various designing, engineering, and construction services in the telecommunications industry, and gets most of its business from European markets.^[8]
5. Manufacturing offers manufacturing services to a variety of industries, and as of 2007 has seen particular growth in consumer electronics, especially in the area of glass manufacturing.^[8]
6. Healthcare: A relative newcomer to the healthcare industry as of 2007, Fluor is pursuing projects such as the construction for-profit and nonprofit healthcare centers and university medical centers.^[8]

• Global Services (15% of 2007 Sales) focuses on helping industrial clients improve the performance of their plants and facilities through services such as operations and maintenance activities, small capital project engineering, site equipment and tool services, and temporary staffing and supply chain solutions. Its revenue increased 15.06% from 2006 to 2007. Fluor uses a variety of subsidiaries to perform these services, such as:^[9]

1. Plant Performance Services LLC performs small capital engineering and construction, electrical, mechanical, turnaround, and demolition services.^[9]
2. American Equipment Company, Inc. (AMECO) provides construction services at plant sites of both third party clients and company clients throughout North and South America, South Africa, and the Middle East.^[9]
3. TRS Staffing Solutions, Inc. is a global enterprise of staffing specialists that provides both company and third party clients with recruiting and permanent placement services.^[9]

• Power (8% of 2007 Sales): In this segment, Fluor offers services in the gas fueled, solid fueled, renewables, nuclear, and plant betterment marketplaces. Fluor places particular attention to the coal-fired generation market, the gas fueled power market, and the nuclear power market. As of fiscal 2007, Fluor has also used its power segment to make significant strides in the market for alternative fuel sources such as wind farms, a move that has played a significant role in the staggering 115.50% increase in revenue from this segment from 2006 to 2007.^[10][11][12]
• Government (7% of 2007 Sales) Fluor's Government Group provides services to the United States government, focusing on the Department of Energy, the Department of Homeland Security, and the Department of Defense. Examples of these services include disaster relief and operations services to the military. In fact, from 2005-2007 the company obtained a great deal of revenue from its military services in Iraq. Fluor continues to pursue attractive domestic and international opportunities in this segment with the Department of Energy, the National Nuclear Security Administration, and the Nuclear Decommissioning Authority (United Kingdom). This segment's revenue decreased by 54.27% in 2007 primarily because Fluor lost the revenue it obtained in 2005 and 2006 from hurricane relief efforts.^[8]

[edit] Key Trends and Forces

Domestic Crude Oil Prices per Barrel: Inflation adjusted for 2007 prices^[13]

[edit] Rising oil prices greatly benefit Fluor's business

Every year from 2002-2008, the price of domestic crude oil has increased, up to nearly $118 a barrel as of May 2008. The 6.91% increase in the price of oil per barrel from 2006 to 2007 contributed to the 55.91% increase in oil & gas revenue over that same span of time.^[13][14] In addition to these domestic increases, international demand for energy has increased significantly over the past decade, particularly in Asian markets such as China.^[15] Furthermore, the 76.8% increase in the price of crude oil from 2007 to May 2008 has resulted in a 32% increase in Fluor's Q1 revenue from 2007 to 2008.^[12]

[edit] Fluor's services depend heavily on the unpredictable cyclical demand of the markets it serves

Fluor depends on the economic well-being of the wide range of industries it serves, the majority of which are cyclical in nature. In particular, the oil and gas, mining, and petrochemical industries are cyclical and undergo fairly severe economic downturns from time to time.^[16] In fiscal 2007, there was an increase in the demand for oil and gas, along with the demand for commodities in the mining industry. The government segment was significantly more profitable in 2005 and 2006 due to Katrina relief efforts and dropped 54.27% in 2007 to baseline levels. Analysts say that the continuing rise in oil prices and demand for mining commodities outweighs the drop from the government segment.^[17]

EUR to USD Exchange Rates^[18]

[edit] Weak U.S. Dollar benefits Fluor's international sales

Because Fluor reports its revenues in U.S. dollars but does over half of its business internationally (56% in 2007), it is affected by exchange rates. When the value of the dollar depreciates, Fluor's international sales grow in dollar terms. From 2006-2008, the dollar depreciated relative to the Euro, Brazilian Real, and Japanese Yen.^[18][19][20] Although exchange rates had caused a $32.95 million loss in Fluor's 2005 revenue, favorable rates led to a $10.31 million increase in revenue in 2006 and $53.76 million in fiscal 2007.^[21]

[edit] Competition

• Jacobs Engineering Group (JEC) provides various professional technical services for a wide range of industries, and competes with Fluor's infrastructure and oil and gas segments.^[22]
• Shaw Group (SGR) is an engineering firm that provides services that compete with the power, infrastructure, global services, and oil and gas segments of Fluor.^[23]
• KBR Inc. (KBR) is a service provider based in Houston, widely regarded as the energy capital of the world. It competes with Fluor in providing services in the government, infrastructure, oil and gas, and power areas.^[24]
• Foster Wheeler Ltd. (FWLT) is a main competitor of Fluor because it provides services in all of the same areas as Fluor. Its main interests lay in the global services and oil and gas industries.^[25]
• URS Corporation (URS) is a worldwide technical services company that competes with Fluor for services in the government and infrastructure industries.^[26]

[edit] References

1. ↑ ^{1.0 1.1 1.2 1.3} FLR 2007 10-K, Index to Consolidated Financial Statements, page F-32
2. ↑ Kuwait considers Fluor, others for refinery deal.
3. ↑ FLR 2007 10-K, Index to Consolidated Financial Statements, page F-33
4. ↑ ^{4.0 4.1} Google Finance: FLR
5. ↑ ^{5.0 5.1 5.2 5.3 5.4} FLR 2007 10-K, Item 1: Business, page 4
6. ↑ Goliath: Fluor's Clean-Fuels Expertise Tapped by Marathon Ashland Petroleum LLC.
7. ↑ Fluor: Chemicals & Petrochemicals
8. ↑ ^{8.0 8.1 8.2 8.3 8.4 8.5 8.6} FLR 2007 10-K, Item 1: Business, page 5
9. ↑ ^{9.0 9.1 9.2 9.3} FLR 2007 10-K, Item 1: Business, page 6
10. ↑ FLR 2007 10-K, Item 1: Business, page 7
11. ↑ FLR 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition, page 31
12. ↑ ^{12.0 12.1} SeekingAlpha: Fluor: Waiting for a Signal to Buy
13. ↑ ^{13.0 13.1} Inflation Data: Historical Oil Prices
14. ↑ SeekingAlpha: Excellent Stocks When (If) Oil Hits $150
15. ↑ The Economist: A large black cloud
16. ↑ FLR 2007 10-K, Item 1A: Risk Factors, page 11
17. ↑ RedOrbit: Quest Minerals & Mining Revels From the Increased Demand for Coal
18. ↑ ^{18.0 18.1} EUR to USD Exchange Rates
19. ↑ USD to JPY Exchange Rates
20. ↑ BRL to USD Exchange Rates
21. ↑ FLR 2007 10-K, Index to Consolidated Financial Statements, page F-5
22. ↑ Jacobs.com: Overview
23. ↑ The Shaw Group: What We Do
24. ↑ KBR: About KBR
25. ↑ Wikinvest: Foster Wheeler
26. ↑ URS: About URS Corp
27. ↑ Google Finance: JEC
28. ↑ JEC 2007 10-K, Item 1: Business, page 8
29. ↑ Google Finance: SGR
30. ↑ SGR 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition, page 42
31. ↑ Google Finance: KBR
32. ↑ KBR 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition, page 39
33. ↑ Google Finance: FWLT
34. ↑ FWLT 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 107
35. ↑ Google Finance: URS