Analysis: CB&I has early-bird edge as U.S. approves LNG export plants


Engineering companies like Chicago Bridge & Iron and their shareholders are salivating at the prospect of more U.S. natural gas exports as regulators begin to sign off on the plants needed to move gas abroad.

Last month's approval of Freeport LNG Development's liquid natural gas (LNG) project in Texas indicates more will come, and analysts expect maybe five or six will be built.

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CB&I did the front-end engineering and design for Freeport and is seen as the outfit to beat, given its long track record building terminals to import LNG - before the shale gas bonanza reversed the U.S. natural gas equation. Even Warren Buffett has taken notice: Berkshire Hathaway recently became the top shareholder with a 6.1 percent stake.

Rick Scott, chief investment officer at wealth manager L&S Advisors, increased its CB&I holding last quarter by 10 times to 88,528 shares, or 2.4 percent of its $218 million portfolio. "These guys have know-how, and they've been there first," he said. "Others have talked, but they're going to play catch-up."

Manufacturers with a stake in cheaper gas have lobbied against exports, but gas producers are suffering from a glut from the shale boom that even official U.S. estimates say will only grow in the decades ahead.

So the engineers are stepping in to build infrastructure to ship LNG to more profitable markets.

This is seen as good news for engineering companies broadly because many contractors will be needed for all the projects: CB&I and rivals Fluor Corp and KBR Inc all rose 4 percent when Freeport got a nod from the U.S. Energy Department.

DoE approval is needed for gas exports to countries without free-trade deals, or everywhere except several mostly smaller nations in the Middle East and Latin America, as well as Canada and Australia - who are gearing up to export LNG themselves.

CB&I has worked on U.S. LNG import terminals at Elba Island, Georgia, and Golden Pass, Texas. It built the first LNG tank in 1958, at Lake Charles, Louisiana - where an export terminal is next up for DoE approval - and did the front-end work at Cove Point, Maryland, due to be okayed after that.

Over the past year, CB&I shares have outperformed rivals. After its $3 billion purchase of rival engineering firm Shaw Group in February, CB&I rose to the No. 2 spot among U.S.-listed engineers by the value of its project queue, after Fluor. The stock is up 57 percent in the past year, or about double that of KBR and Fluor.

Chase Jacobson, analyst at William Blair, said CB&I expected Freeport to determine whether it hits the low or high end of its estimated $13 billion to $16 billion of 2013 awards. "Freeport could be at least $3 billion for them." Doing the front-end engineering and design on projects often leads to winning the whole thing.

Much of the work will be awarded in the next two years, with CB&I executives telling investors at a Credit Suisse conference that more than $70 billion is lined up globally for LNG in 2014 and 2015. CB&I is taking a close look at bidding on 14 projects.

CB&I shares have retreated to $58.09 from a record $64.89 in May as analysts anticipate a cautious pace of permitting even after Freeport.

But CB&I could trade at $71.61, according to Thomson Reuters StarMine's intrinsic value model, which considers analysts' estimates for five years and projects that over a longer period.

CB&I did not respond to a request for comment.

RBC Capital Markets, considering other potential winners of the "dawn for North American LNG," pointed to British engineer Kentz Corp for its work with CB&I on Chevron Corp's Australian LNG megaproject, Gorgon.


The United States is not alone in looking to satisfy LNG demand. In Canada, KBR won front-end engineering and design contracts for two new plants in British Columbia: the Kitimat terminal - being built by Chevron and Apache Corp - and one backed by Malaysia's Petronas.

Exxon Mobil Corp just became the latest to seek a British Columbia LNG export license.

In Australia, the biggest market for LNG plants so far, work went to various firms including Bechtel, Jacobs Engineering , KBR and Fluor. Yet opportunities appear to be drying up there because of cost over-runs and the looming North American competition.

Speculation now swirls around how many LNG projects U.S. regulators will allow. More than 20 have been proposed.

"Where's the level at which too many exports would increase the price domestically?" said Deb Palmer of law firm Schiff Hardin, who has worked on the issue. "It's a fine line that the regulators are trying to draw."

Analysts say the DoE will consider the export applications in the order they received them, and timing will influence who lands contracts with key Japanese and Korean buyers over the rest of this decade.

"There is a finite market demand for LNG in that time frame," said Deepa Poduval at the management consulting arm of engineering firm Black & Veatch. "So there's a race to market."

(Reporting by Braden Reddall in San Francisco; Editing by Patricia Kranz and Prudence Crowther)