Fluor: A Strong Balance Sheet Is a Good Thing (FLR, STO, XOM, JEC, FWLT, KBR)

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When everyone else is ducking for cover, it often pays to stick your neck out. That seems to be what Fluor Corporation (NYSE:FLR) is doing with the announcement of a new business that it is calling Fluor Offshore Solutions. Fluor has been in the offshore business for decades, but is more well-known for its onshore engineering and construction business.  Where it gets interesting is how it is stacking up against peers.

The company expects to continue providing engineering, procurement,construction, and project management to offshore drilling projectsaround the world. The business group president acknowledged that theoil business is in a funk right now, but "our clients will continue tohave the need to go to more remote and harsh environments to access oil& gas."

He’s got that right. Drilling, if it ever happens, off the north coastof Alaska or Russia is an expensive and time-consuming process. Thereare very few companies with expertise in getting those projectscompleted. Interestingly, the most experienced are probablyStatoilHydro (NYSE:STO) and Exxon Mobil (NYSE:XOM). Statoil for itsNorth Sea projects, and Exxon for the Sakhalin-1 project off the eastcoast of Russia.

But companies like Fluor or Jacobs Engineering (NYSE:JEC) or FosterWheeler (NASDAQ:FWLT) or KBR Inc. (NYSE:KBR) could compete for theengineering part of these projects independently of the big oilcompanies. These guys work for a fixed rate; the oil companiestypically want a piece of the action. One of the reasons every oilcompany wants the US to open the north coast of Alaska and the outercontinental shelf of the lower 48 is because the US is one of the lastplaces in the world where a big oil company can negotiate a productionsharing deal just like in the good old days. And unless its the automakers, no company yearns for the good old days more than a big oilcompany.

But Russia, for example, is perfectly happy to have a company likeFluor come in and do the design, engineering, and construction work andthen leave. Welcome to Russia; now go home.

The other danger in designing these harsh-climate projects is that theproject cost will outpace the price of oil. That’s happening already insome places. But in the long run, and nearly everything in the oilbusiness is long run, crude prices will rise and these projects willpay off for Fluor.

Fluor’s share price has fallen about 56% from its 52-week high. But thecompany, with third quarter revenues of $5.67 billion, has virtually nolong-term debt. Competitors Foster Wheeler and Jacobs are off 52-weekhighs by 73% and 59%, respectively.

Paul Ausick
December 4, 2008