Poor labor productivity and rising construction and subcontractor costs are said to be what triggered the cost overrun issues that were plaguing McDermott International Inc. on two of its major construction projects, leading the company to submit a prepackaged bankruptcy filing that it says will eliminate more than $4.6 billion in debt.
It’s been two days since the Houston-based company announced it would file for Chapter 11 bankruptcy protection and go through a restructuring process, financed by a $2.8 billion debtor-in-possession financing plan that McDermott says will allow it to stabilize its cash flow, continue normal business operations and fulfill its commitments to all stakeholders.
Looming behind the filing: A $19 billion backlog of projects that McDermott inherited in 2017 when it acquired CB&I in a $6 billion all-stock transaction. (Previously, CB&I had purchased the Baton Rouge-based Shaw Group for $3 billion in 2013.) The move lifted McDermott’s debt burden to some $4.3 billion.
The CB&I backlog includes two major liquefied natural gas construction projects—the Cameron LNG facility in Hackberry, Louisiana, and the Freeport LNG facility in Freeport, Texas—which, largely due to cost overrun issues, have further strained the company’s finances after years of low oil prices.
With this backlog, the company has had problems securing letters of credit, as it’s already reached capacity and cannot exceed the limit.
Louisiana shows one case where it’s been difficult for the company to maintain a timely balance between the cash it receives from customers and the cash it spends on projects. In 2014, a joint venture between CB&I and Chiyoda International Corporation was awarded a $6 billion contract to construct the Cameron LNG facility under fixed terms. The project was promised to create approximately 3,000 on-site jobs, as well as several hundred jobs at CB&I’s fabrication facilities in Louisiana and several hundred engineering and project management jobs in the company’s Baton Rouge office.
It’s unclear how many construction jobs—or local office jobs—have been created as a result of construction on the Louisiana facility, which is approximately 93% complete and now estimated to cost $10 billion. But according to some in the industry familiar with the phrase, “poor labor productivity” means McDermott thought its construction workers could accomplish more tasks in fewer hours than they actually did; in other words, the workers were performing less efficiently than management estimated during the bid process.
Is this a reflection of statewide construction job shortages or other labor force issues unique to Louisiana? David Helveston, president of ABC Pelican, doesn’t think so.
“Our indication is that this is company-specific, but generally the construction industry within Louisiana is well-positioned for the future,” Helveston says.
As for the rising construction and subcontractor costs (for which there is no estimated price tag), state economist Loren Scott says he’s “a little surprised” subcontractor costs would be going up, considering employment is down within Louisiana in the midst of a construction lull.
“Normally when you’re in a lull, there’s decreasing pressure on subcontractor costs, not increasing pressure,” Scott says. “Last I checked, construction employment is down 10,000 jobs.”
It’s not the only cost overrun issue playing out in Louisiana, Scott adds, pointing to the recent $2 billion cost overrun for the Sassol project in Lake Charles, which resulted in the firing of two C-level Sassol executives.
“Is it a Louisiana thing, a company thing or what?” Scott says. “What’s going on here?”