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WIKI ANALYSIS
The Shaw Group (NYSE: SHAW) is an engineering firm that provides comprehensive services in the energy industry, with revenue in 2009 of $7.28 billion.[1] The firm builds and maintains nuclear reactors and clean fossil fuel plants, also modifying "dirty" energy plants to match U.S. energy regulations. SGR often contracts with the U.S. government in environmental and industrial remediation following catastrophes like hurricanes.
The rising worldwide demand for energy has driven the company's growth. SGR has expanded its nuclear energy projects. World energy demand has also increased world demand for environmental services; pollution from coal plants in China, for example, has gotten so bad that some experts believe it is responsible for 750,000 deaths a year[2], and SGR can retrofit coal plants to reduce pollutant emissions, or build nuclear plants as an alternative energy source. U.S. pollution control legislation has stimulated domestic demand for power plant retrofitting services, a market of which SGR controls 25-30%.[3]
Demand for SGR's services is cyclical because companies and governments usually pay for larger infrastructure projects when times are flush, and cut spending during economic downturns. Rising commodities prices decrease gross profits, as 52% of SGR's contracts are set at a fixed price, so operating income drops when input costs increase.[4] SGR's engineering projects are also massively expensive, which makes it more difficult for SGR to bring in project revenues in excess of expenses once they account for working capital. The Shaw Group's main competitors are Bechtel, Fluor, Jacobs Engineering Group, KBR, and URS.
Company Overview
Shaw Group is an industrial manufacturer with international operations that are divided into five major segments (Fossil & Nuclear, Environmental & Infrastructure, Energy & Chemical, Maintenance, and Fabrication & Manufacturing). The Shaw Group brings in revenue through contracts with both government and private entities in many facets of project-related services.
Business and Financial Metrics
Third Quarter 2010 Results[5]
Shaw Group reported revenue for the third quarter of $11.79 billion, compared to $1.86 billion in the third quarter of 2009. Net income during the quarter was $68 million, or $0.79 per diluted share. This compares to net income of $10.68 million in the third quarter of 2009. Gross profit margin during the quarter was 8.5%.
Business Segments
Fossil, Renewables & Nuclear Segment
The Company’s Fossil, Renewables & Nuclear segment provides a range of services, including design, engineering, construction, procurement, technology and consulting services, primarily to the fossil, renewables and nuclear power generation industries. The Company provides a range of technical services, including engineering, design, procurement, construction, and project management that support the domestic and international nuclear power markets. The Company’s air quality control (AQC) business includes domestic and international markets for flue gas desulfurization (FGD) retrofits, installation of mercury emission controls, fine-particle pollution control, carbon capture and selective catalytic reduction (SCR) processes used at existing coal-fired electric power plants.
Maintenance Segment
The Company’s Maintenance segment provides a range of technical services to complement its engineering, procurement and construction (EPC) services for the electric power generation, refining and petrochemical/chemical industries. It provides clients with turnaround maintenance, refueling outage maintenance, routine plant maintenance, capital construction, reliability engineering, plant engineering, off-site modularization and other specialty services. The Company provides systemwide maintenance, modification and capital construction services to 40 of this domestic nuclear reactors.The Company offers fossil plant maintenance services for energy generation facilities throughout North America. The Company has presence in approximately 90 United States field locations serving petrochemicals, specialty chemicals, oil and gas, manufacturing, refining and infrastructure markets. Its Maintenance segment also includes a capital construction component serving existing client sites. Capital construction projects include renovations and green-field projects. Its scope includes constructability reviews, civil and concrete work, structural steel erection, electrical and instrumentation, mechanical and piping system erection
Environmental & Infrastructure Segment
The Company’s E&I segment provides engineering, design and construction, construction management, regulatory, scientific, logistics support, operations and maintenance and program management services to both commercial clients and federal, state and local government clients worldwide. The Company provides engineering and design services, including navigation, sediment management, port and waterway development, coastal engineering, environmental services, levee development and construction, shoreline protection and restoration, and marine security. It performs wetland construction, mitigation, restoration and related work for clients around the world.
The Company offers program management for infrastructure projects related to transportation, water and wastewater systems. It offers a range of technical and management services to design, plan, engineer, construct, renovate, operate and maintain highways, railways, transit systems, waterways and airports. It provides airport-related services for runways, taxiways, aprons, terminals and concourses. The Company offers program management, operations, engineering, design, construction, consulting and technology-based solutions to help various U.S. government clients including the Department of Energy (DOE), United States Army Corps of Engineers (USACE), the Department of Defense (DoD), the Environmental Protection Agency (EPA), Federal Transit Administration (FTA) and Federal Emergency Management Agency (FEMA). Its services include environmental remediation and restoration, regulatory compliance, facilities management and operations and emergency response services.
Energy & Chemicals Segment
The Company’s E&C segment provides a range of project-related services, including technology, project management, engineering, procurement, construction, commissioning/start-up and consulting to the oil and gas, refining, and petrochemical industries worldwide. In addition to fluid catalytic cracking (FCC), the Company offers related technologies, including deep catalytic cracking (DCC) and catalytic pyrolysis process (CPP), which boost production of ethylene and propylene. The Company offers consulting services to the energy, power, process, petrochemical, refining, and government market segments, as well as to the investment and financial community.
Fabrication & Manufacturing Segment
The Company’s F&M segment supplies fabricated piping systems. It provides support and work for both external clients and for other business units within the company. F&M provides pipe and structural steel fabrication for projects, such as the E&I segment’s DOE work and several Fossil, Renewables & Nuclear segment’s power projects, as well as the E&C segment’s project. The Company fabricates integrated piping systems for heavy industrial clients around the world. The Company fabricates the pipe by cutting it to specified lengths, welding fittings, flanges or other components on the pipe and/or bending the pipe to precise client specifications. It operates pipe fabrication facilities in Louisiana, Arkansas, South Carolina, Utah, Mexico and Venezuela and through a joint venture in Bahrain. The Company produces custom fabricated steel components and structures used in the architectural and industrial markets.
Investment in Westinghouse Segment
The Company’s investment in Westinghouse includes a 20% interest (Westinghouse Equity) in Westinghouse. Westinghouse serves the domestic and international nuclear electric power industry by supplying nuclear plant designs, licensing, engineering services, equipment, fuel, and a range of other products and services to the owners and operators of nuclear power. The Company competes with Bechtel, Fluor Corporation, URS Corporation, Black & Veatch, Zachary, Chicago Bridge & Iron Company, KBR, Inc., Jacobs Engineering Group, Inc., TECHNIP, JGC Corporation, CH2M Hill, URS Corporation, TetraTech, Inc., KBR, Inc., Day & Zimmerman/The Atlantic Group, Turner Industries, Areva, General Electric (GE), Mitsubishi, Hitachi and AtomStroyExport.
Acquisitions and Divestitures
On November 4, 2008, Shaw sold its interest in Little Rock Family Housing LLC, Hanscom Family Housing LLC and Patrick Family Housing LLC. On May 7, 2009, the company acquired 52% of Nuclear Fuel Industries, Ltd.[6]
Trends and Forces
Strategic Acquisitions in the Nuclear Sector are Helping the Shaw Group Expand its Operations
SGR purchased a 20% stake in Westinghouse, whose technology is used in over 40% of nuclear reactors built internationally. [7] Domestically, Westinghouse AP1000 reactor designs are being considered at least 12 reactor construction projects. If Westinghouse wins these contracts, it will be the first time they have built this type of reactor in the U.S.[8] As alternative energy sources have become more popular and the price of fossil fuels has increased, Westinghouse has increased its backlog of construction projects. Demand for nuclear energy as an alternative energy source has grown stronger in the past five years, especially in response to climate change legislation.
Demand for Environmental Restoration Services is on the Rise
Following such catastrophic disasters as Hurricane Katrina, many state and local governments are installing new damage control and prevention measures. SGR earned revenues of about $1.0 billion in 2006 from work done in the aftermath of Hurricane Katrina and Hurricane Rita draining water out of New Orleans and providing temporary housing services for displaced residents.[9] Though revenue growth in the Shaw Group's Environmental and Infrastructure segment has declined since these disasters, the American government is actively pursuing infrastructure restoration and protection efforts. This has traditionally been a neglected area when budgets are tight, but SGR uses a number of strategies that lead it to win contracts over its competition. The company sets a fixed price for many of its projects rather than asking its clients to reimburse costs, which can escalate quickly for larger tasks. Also, the firm's wide range of services and history of successful projects with the Department of Energy, Army Corps of Engineers, and FEMA often lead to repeat business. SGR's task focus has shifted to catastrophe prevention from catastrophe response in the last two years, with major projects in levee and irrigation canal construction.
Reduced Emissions Technology is a Growing Industry
Demand for cleaner energy sources is rising, especially amidst public pressure for tighter U.S. Energy Regulations. Following issuance of the Clean Air Interstate Rule (CAIR), sulphur dioxide and nitrogen oxide emissions in 28 eastern states are required to drop to 70% and 60%.[10] SGR controls 25-30% of the market for retrofitting domestic coal plants to make them compliant.[11] As a result of CAIR and other environmental legislation, air quality control is becoming a much bigger contributor to SGR's revenue. Pollutant emissions abroad are growing, as foreign, emerging economies industrialize, especially visible in Chinese air pollution. Though current emissions reduction initiatives in China have been limited at best, there is potential for the demand for SGR's services to grow as pollutants become more dangerous (over 750,000 deaths a year are caused by air pollution and other environmental damages[12]).
Cyclicality in End and Factor Markets is a Risk to Engineering Firms
SGR's customers mostly function in the energy and petrochemical industries, which are susceptible to cyclical changes in demand. Especially with respect to oil prices, energy company revenues (and, correspondingly, their ability to pay for contracts) are relatively volatile. Oil is a commonly used factor of production for the Shaw Group and many of its customers. For SGR in particular, rising oil prices increase the cost of petrochemical manufacturing and, thus, the cost of goods produced. This introduces volatility in revenues to SGR's manufacturing segments. With its construction and design clients, SGR's revenues come from fixed-price contracts (a fixed payment for an entire project is agreed upon) and cost-reimbursable contracts, (the client agrees to pay for project costs as well as a value-added premium). With fixed-price contracts, SGR is not reimbursed for over-budget spending on resources like oil if prices rise quickly. A little over half (52%) of SGR's projects are fixed-price and the remainder are cost-reimbursable. Therefore, the company can even take a loss on a project if factor costs increase sharply, though price volatility can also increase profit margins if production costs drop.[13]
Foreign Energy Demand Drives Growth in Overseas Operations
Growing economies abroad have lifted energy demand over the last ten years. China in particular expects to increase nuclear power generation by five-fold in the next 12 years.[14] SGR's Fossil & Nuclear segment has grown as energy demand has surged. Aside from increased crude oil and petrochemical consumption abroad leading to more projects for SGR, alternative energy sources are becoming more popular. After acquiring a 20% equity stake in Westinghouse, one of the two major global nuclear reactor builders, the Shaw Group has benefited from industrial growth in China and South Korea. In addition to 30 new domestic reactors, Westinghouse has been contracted to build 6 reactors in South Korea and 4 reactors in China.[15]
Competition
The Shaw Group's main competitors include Bechtel (privately held), Fluor Corporation, Jacobs Engineering Group, KBR, URS, and Washington Group International.
| Company | Operating Segment | Revenue |
| Bechtel (privately held) | All | $20.5 billion[16] |
| Fluor Corporation | Fossil and Nuclear, Maintenance | $16.7 billion[17] |
| KBR, Inc. | Energy and Chemical, Environmental and Infrastructure, Maintenance | $8.6 billion[18] |
| Jacobs Engineering Group, Inc. | Energy and Chemical, Maintenance | $8.5 billion[19] |
| URS, Inc. | Environmental and Infrastructure | $5.83 billion[20] |
| Shaw Group, Inc. | All | $5.7 billion[21] |
While SGR may be among the smallest of the large engineering firms (by revenue total), it is among the most diversified. The scale of operations for many of its competitors, notably Fluor Corporation, are larger. After its expansion into nuclear design and construction with the 20% purchase of Westinghouse, however, SGR is positioned to provide a variety of services. This variety of businesses exposes SGR to competitors in other markets as well. The main competitors for the Westinghouse segment are Areva, General Electric, Mitsubishi, Hitachi, and Atomstroyexport.
- Backlog - This is the value of contracts received for projects that have not yet been completed. Below are the figures for the backlogs of SGR and its competitors in 2007. A fixed-price contract is one where the client agrees to pay a set amount before the project begins, while a cost-reimbursable contract requires the client to cover production costs as they are incurred.
| Company | Total Backlog (billions US$) | Backlog Fixed-Price Contracts Value (billions US$) | Backlog Fixed-Price Contracts Percentage | Backlog Cost-Reimbursable Contracts Value (billions US$) | Backlog Cost-Reimbursable Contracts Percentage |
| Fluor Corp.[22] | 30.2 | 7.2 | 24% | 22.9 | 76% |
| KBR Inc.[23] | 13.1 | 3.7 | 28% | 9.4 | 72% |
| *Jacobs Engineering Group, Inc.[24] | 13.6 | - | 12%* | - | 88%* |
| Shaw Group, Inc.[25] | 14.3 | 7.4 | 52% | 6.9 | 48% |
URS has a backlog of about $18.7B but uses different types of contracts than the other companies.[26]
SGR has accepts a greater proportion of fixed-price contracts than its competitors. This exposes the Shaw Group to greater risk in factor cost variation, though it helps the company to compete for project contracts.
References
- ↑ SGR FY2007 10-K, Item 8, Page 73
- ↑ The Wall Street Journal, Blog by Mark Gongloff, July 3rd, 2007
- ↑ SGR FY2007 10-K, Item 1, Page 5
- ↑ SGR FY2007 10-K, Item 1, Page 3
- ↑ 5.0 5.1 "Shaw Group Third Quarter 2010 Earnings Call Posting Presentation", July 12, 2010
- ↑ Reuters: Shaw Group Profile
- ↑ SGR FY2007 10-K, Item 1, Page 10
- ↑ Wall Street Journal - "Toshiba Unit Nears Nuclear Deals"
- ↑ SGR FY2007 10-K, Item 7, Page 38
- ↑ EPA: Clean Air Interstate Rule
- ↑ SGR FY2007 10-K, Item 1, Page 5
- ↑ The Wall Street Journal, Blog by Mark Gongloff, July 3rd, 2007
- ↑ SGR FY2007 10-K, Item 1, Page 13
- ↑ The Economist - "China's Quest for Resources: A Ravenous Dragon," Mar. 13th, 2008
- ↑ SGR FY 2007 10-K, Item 1, Page 10
- ↑ Bechtel Corporate Fact Sheet 2006
- ↑ Fluor Corp. FY2007 10-K, Item 8, Page F-3
- ↑ KBR, Inc. FY2007 10-K, Item 8, Page 64
- ↑ Jacobs Engineering Group, Inc. FY2007 10-K, Item 8, Page F-4
- ↑ Yahoo! Finance - Competitor Profile for SGR
- ↑ SGR FY2007 10-K, Item 8, Page 73
- ↑ Fluor Corp. FY2007 10-K, Item 1, Page 8
- ↑ KBR, Inc. FY2007 10-K, Item 1, Page 11
- ↑ Jacobs Engineering Group, Inc. FY2007 10-K, Item 1, Page 8
- ↑ SGR FY2007 10-K, Item 1, Page 3
- ↑ URS FY2007 10-K, Item 1, Page 13
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