KBR Inc (KBR) 2012 Q4 法說會逐字稿

Please standby. Good day, and welcome to KBR's fourth-quarter 2012 earnings conference call. This call is being recorded. As a reminder, your lines will be in a listen-only mode for the duration of the call. There will be a question-and-answer session immediately following prepared remarks. You will receive instructions at that time.

For opening remarks and introductions, I would like to turn the call back to Mr. Zac Nagle, Vice President of Investor Relations and Communications. Please go ahead, sir.

Good morning, and welcome to KBR's fourth-quarter 2012 earnings conference call.

Today's call is also being webcast and the replay will be available on KBR's website for seven days at kbr.com. The press release announcing fourth-quarter results is also available on KBR's website. Joining me today are Bill Utt, Chairman, President and Chief Executive Officer, and Sue Carter, Executive Vice President and Chief Financial Officer. During today's call, Bill will provide an overview of KBR's fourth-quarter operating results, highlighting a number of key areas from each of our business units. Sue will then provide an overview of the key financial take aways for today's call. Lastly, before turning the call over to Q&A, Bill is going to provide brief closing comments.

After our prepared remarks, we will open the floor for questions. Before turning the call over to Bill, I would like to remind our audience that today's comments may include forward-looking statements reflecting KBR's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results, and cause our actual results to differ from our forward-looking statements. These risks are discussed in KBR's fourth-quarter press release issued last night, KBR's form 10-K for the period ended December 31, 2012, and KBR's current reports on form 8-K.

You can find all of these documents at kbr.com. Now, I will turn the call over to Bill. Bill?

Thanks, Zac, and good morning, everyone.

First, I'd like to talk about our fourth-quarter results. You have all probably had an opportunity to listen to our 2012 earnings guidance update call we held in mid-January, or have had the opportunity to download the transcript, so I won't spend a lot of time going over all the detail we discussed on the call. I do, however, want to spend a little time closing out on the final numbers, covering some of the highlights and discussing why we came in a bit better than our revised guidance range for the year.

For the fourth quarter of 2012, we delivered $0.20 of earnings for fully diluted share. This resulted in full year 2012 earnings of $2.16 per share, excluding the Q3 goodwill impairment charge. This was about $0.06 higher than the top end of our guidance range for the year we discussed in January.

As we discussed on our call on January 11, KBR's guidance range revision was primarily the result of charges the Company expected to take in the fourth quarter in its US Construction and Minerals business units, as well as higher than expected labor cost absorption expenses across our resource centers. In the fourth quarter, we took charges of $62 million in US construction, $58 million in minerals, and incurred $22 million in expense for labor cost absorption, with no change in the estimated time of completion of any other related projects. The $0.06 of earnings per share we delivered above our current guidance range was primarily the result of milestone payments achieved and lower than expected cost estimates to complete certain projects in our Gas Monetization business that provided additional job income in the fourth quarter.

Now, I'd like to discuss some of the highlights from Q4 and 2012, as well as discuss some of the trends we are -- we see heading into 2013. Q4 was a strong bookings quarter for KBR, both in aggregate, with a book to bill ratio of 1.1, and across our business units with 9 of 14 business units with book to bill ratios greater than one. At Gas Modernization, 2012 was a robust year with significant backlog growth, strong project execution, the successful attainment of several incentive milestones, lower estimates of costs to complete certain projects than we originally expected as we enter 2012, and the successful resolution of a number of outstanding project issues, including both current projects and projects nearing completion.

As we look forward into 2013 and beyond, we continue to see positive developments and higher margins for this business as Gorgon continues to move forward at a relatively consistent pace. IGDSS continues to ramp up and provide a more meaningful portion of our earnings in 2013 through 2015, and as the Skikda and Escravos projects, which have historically contributed high revenues for the Gas Monetization business unit, achieved completion.

Additionally, we have entered 2013 with a very healthy pipeline of future prospects. For the Kitimat LNG project, we continue to be engaged with the customer on additional FEED analyses and on the open book EPC tendering for the project. We think Chevron's involvement increases the likelihood of that project moving forward. While the project's timing is unclear, it is possible the project may reach FID in the fourth quarter of 2013.

For the Browse LNG project, the customer continues to evaluate the outstanding EPC bids and potential alternatives, and we believe that the customer may determine in which direction it wants to proceed by the end of the second quarter of 2013. For the Gorgon LNG fourth train project, extended pre-FEED activities continue and we expect to transition into FEED in the third quarter. For the Tanzania LNG project, KBR continues to execute pre-FEED activities.

For the two additional LNG projects in Canada we've discussed previously, they continue to move forward in various stages. We are executing pre-FEED work on one of these projects and maintaining an active dialogue with the customer on the other. In the US, we are tracking one large LNG project; it is still in very early stages, but is progressing forward. We are also gaining confidence in the US GTL project we've discussed in the past, as that project moves forward.

Regarding our other projects in Gas Monetization, at Escravos, we are wrapping up construction and we expect to start up and commission the project early this year. At Skikda, we are ready to put in first gas into the LNG plant and expect to commission the plant during the early part of 2013. At Gorgon, we continue to progress well with our subcontractors, and we expect to bring the first train online in late 2014. And on IGDSS during 2013, we will see an increasing impact to the P&L as the project ramps up. We expect 2013 to be stronger than 2012, and think we will reach peak earnings for the project in 2014 and 2015.

At Technology, 2012 was another year with greater than 20% growth in job income. This job income growth was combined with extraordinary backlog growth up to 55% for the year. Technology's book to bill was 4.2 in the fourth quarter alone, driven by over $200 million in new awards, including several ammonia projects spread out globally between the US, Indonesia, Nigeria, Bolivia, and Hungary, as well as several VCC projects in Russia and China. We see 2013 and 2014 shaping up to be potentially even stronger as the US further progresses with ammonia projects, China continues to be strong and new opportunities open up in India. In India, there are our plans or discussions for several new projects, and we think that bodes well for our Technology business unit.

At Downstream, activity continues with PMC and CM work on Ambu Export Refinery Project, extensive PMC work on the Sadar Project and PMC work on the Jazan Refinery Project fee. In the US, Downstream has bid and continues in discussion for the EPC of a large new ammonia project. KBR is also doing several FEEDs for a pneumonia revamp, a Urea plant, as well as the recently announced Ohio Valley Resources Ammonia Plant. Additionally, we are tracking several ethylene projects that we anticipate moving forward in 2013.

At Oil and Gas, our book to bill was 1.2, highlighted by an award for FEED and PMC work on the Moon Siri Via gas field for Turkish petroleum in Iraq. We are also excited about expansion opportunities at Shadenese II in the Caspian, where we are performing the FEED and expect to do EPCM on both the onshore and offshore portions of the project when it reaches FID in the third quarter. Oil and Gas is also involved in two floating LNG developments, one with Hogue and one with SUEZ on the Bonaparte project.

At Services, 2012 was clearly a challenged year with significant project charges in our US Construction business. We have talked extensively about these charges and the actions we've taken to mitigate the risk going forward, including exclusively bidding construction-only type work on a reimbursable basis. We do see good potential opportunities on the horizon for reimbursable work as North American project opportunities continue to mature.

Our Canadian Operations business maintained its momentum with a book to bill of 1.1 in the fourth quarter, primarily related to a significant oil sands award for Syncrude Canada Limited, where KBR is executing module fabrication and field construction for a project in Fort McMurray, Alberta. We also continue to see strong opportunities in our Canadian business, both for the execution of current backlog built in 2012 that can be worked off in 2013, as well as new award opportunities in 2013 and beyond. The Canadian oil sands continue to be a robust area of growth where KBR has been able to capitalize on our strengths to successfully win and execute work. In fact, approximately 80% of the $1 billion in total awards in Canada in 2012 were oil sands-related. We see a continued flow of new work in the oil sands ahead of us.

For the Industrial Services business, we had a book to bill of 1.2 and were successful in expanding internationally with SATORP awarding a KBR joint venture the refinery maintenance services at its Jubail facility over the next seven years. At Power, we finished 2012 strongly with a book to bill of 4.1 in the fourth quarter. We were awarded the APC work on the Ghent Backhouse project worth $460 million. We also have several multi-hundred million dollar projects we have either bid or are preparing bids for in the coming months, which we hope will build on the successful sales years we have had in 2011 and 2012. We are continuing to position this business as an EPC contractor for pollution control facilities and new combined cycle projects, and believe KBR has a favorable value proposition in this space.

At NAGL, while we did see some work delayed or cancelled during the year, we finished 2012 off solidly with a book to bill of 2.0 in the fourth quarter. The Department of State exercised the option year for the LogCAP Force Support Program in Iraq and KBR was selected as a prime contract for the US Army's Eagle Program. The uncertainty surrounding sequestration continues to be a challenge at NAGL, but we think 2012 was a bottom for revenues and earnings, and that 2012 should be relatively stable off that base.

At IGD and SS, we also ended 2012 strongly with a book to bill of 1.7 across a wide net of new work and scope additions. We are excited about a number of new opportunities being uncovered by IGD and SS in Libya, public-private partnerships in the UK and Australia, camp support in the minerals market and outsourcing opportunities at both the Ministry of Defense and with the local police forces in the UK. These new opportunities will help mitigate some of the downturn expected in our revenues and profits from this Business as we transition our model from wartime to peacetime activities.

At our Infrastructure business unit, we continue to see stable but solidly growing markets in Australia and in the US. We are most excited with a suite of opportunities we see in the Middle East for roads, railroads, bridges, man camps and airports. At Minerals, we continue to see a challenged environment relative to new opportunities, but were able to achieve a book to bill of 2.6 in the quarter as we expanded our scope of work on the Hope Downs 4 EPCM project.

While we are still a small player in the space, a couple mid- to large-sized winds there could be meaningful upside to KBR. We are also optimistic that the execution issues we've faced during 2012 are largely behind us, and we look forward to stable and improved performance in 2013 and beyond.

Now, I'd like to turn things over to Sue to discuss KBR's financial performance and outlook in more detail.

Good morning, everyone.

We covered the highlights of our businesses in the press release and in Bill's prepared remarks, so I won't spend much time on those items. However, I would like to provide a few details on the fourth quarter, including backlog. I will follow that up with the cash and other key financial items, and I will end with additional color on our 2013 guidance. Fourth-quarter revenue was essentially flat with the prior year fourth quarter when you exclude log cap revenue. We saw some nice revenue growth across many of our businesses, including Downstream, Technology, Power and Services.

In the fourth quarter, hydrocarbons had strong job income margins due to solid project execution, lower estimated cost to complete certain projects and achievement of performance milestones in our Gas Monetization business. As expected, the Escravos and Skikda projects contributing lower revenue as these projects near completion and we expect this trend to continue as these projects are successfully completed in 2013.

Oil and Gas and Technology performed well from a margin perspective and in line with our expectations. Downstream margins were a bit higher this quarter with the FAO settlement as outlined in our press release last night. G&A was $59 million in the fourth quarter, consistent with our expectations. We came in better than our original guidance for 2012 due to ongoing prudent cost controls. G&A continues to be a key focus area for the Company as we move through 2013. KBR under absorbed its labor cost in our centralized engineering pool by $22 million, slightly higher than the $20 million we estimated in mid-January.

As we discussed at that time, some potential work we anticipated was delayed or failed to materialize. We have continued taking steps to right size our organization and reduce cost for the levels of work we now anticipate for 2013. Going forward, we should see an improvement in our labor cost absorption in 2013 as we've progressed throughout the year. We will flex our labor force back up as appropriate to better optimize our labor absorption. KBR's effective tax rate in the fourth quarter was 20%, primarily due to favorable tax rate differentials on foreign earnings, as well as a number of favorable discrete tax items.

Lastly, KBR's backlog at the end of the fourth quarter was $14.9 billion, up 37% from December of 2011. It was up $109 million from September 2012 for a book to bill of 1.1. We had several good awards in work scope additions during the quarter, which Bill detailed earlier in his comments. As of December 2012, 43% of our backlog was fixed price and 57% was reimbursable. This is a slight mix shift from the 40% fixed, 60% reimbursable we reported at September of 2012. The increase in the fixed price work was primarily related to the addition of the EPC Ghent project the power business was awarded and booked into backlog in Q4.

Of the overall fixed-price backlog, if this LNG and the new Ghent project are the two largest fixed-price projects in our portfolio. As I discussed last quarter for the IGDSS LNG, approximately 89% of the $3.28 billion of fixed-price work added to our backlog in Q1 was back-to-back work, or represented KBR work scope, where we have funded contingencies and provisions to limit our ultimate fixed-price exposure. So the net open fixed exposure in KBR's Q1 bookings related to the IGDSS LNG project is approximately $350 million. For the Ghent project, approximately 50% of the $460 million added to backlog represents either back-to-back work, fixed unit rate or home office services. The remaining 50% is net open fixed exposure to KBR.

Turning to KBR's balance sheet, we finished out 2012 in a strong cash position with cash and equivalents of $1.1 billion, up $207 million from the previous quarter. Contributing to the fourth-quarter increase was cash provided from operations of $153 million, as well as $127 million received from proceeds related to the sale of certain non-strategic assets, including the Clinton Drive and KBR Tower properties. Offsetting a portion of this cash increase was cash deployed on share purchase, dividends, pension contributions and CapEx totaling approximately $50 million.

I've mentioned previously that I expected to see better operating cash flow results in the fourth quarter, and we did make some progress on that front from plan. However, we have greater cash generation potential than we are realizing today, so this will remain a key focus area for the Company going forward.

Let me spend a bit more time on the subject of cash. We have almost $1.1 billion on the balance sheet, of which $201 million is in joint venture. The remaining KBR cash is split approximately 29% domestic cash and 71% offshore cash. Our domestic cash is utilized for operating requirements, dividends, share repurchases, capital spending, and US acquisitions. Our international cash is primarily used for operating requirements, capital expenses, foreign acquisitions and pension contributions.

KBR's working capital increased $251 million in 2012 as revenue declined $1.3 billion. One driver of this issue is our US government receivables related to LogCAP. We have $140 million of Form 1 withholds in accounts receivable, which is flat to 2011. We are working diligently with our customer to resolve these outstanding withholds, but progress is slow.

In addition, we have unbilled receivables in the amount of $115 million related to cost for work performed at the customer's request in either the absence of funding or in excess of funding on task orders. This balance increased $26 million in 2012. The second driver of working capital increases, costs incurred on an LNG plant in 2012 that represent claims to be resolved in 2013. These amounts appear in Note 4 of the Form 10-K filed last night.

In general, we are seeing a fairly static amount of past due receivables. KBR is focused on collection of these items and making sure our contracts are cash neutral or better whenever possible. Before turning the call over to Bill, I would like to provide some additional details on our 2013 guidance. KBR's full year 2013 earnings per diluted share guidance is between $2.45 and $2.90. We expect to see continued strength in job income at our hydrocarbons business unit with Gorgon delivering continued strong execution, IGDSS ramping throughout the year, and Escravos and Skikda continuing to wind down as both projects are substantially complete.

As you saw in the fourth quarter, we experienced a fairly significant reduction in revenue versus the third quarter in Gas Monetization as the dynamics I just discussed between the Escravos and Skikda project plays out on the revenue side. Going forward, we expect revenues to be more similar to Q4 than to Q3, as Skikda and Escravos roll off, IGDSS ramps and a chunk of the revenue backlog from IGDSS does not flow through the P&L. We also expect to see good financial performance of both the Power and Canadian operations business units building off our strong 2012 performance.

Additionally, we should see improved margins in Minerals and US Construction, as these businesses stabilize execution around the key problem projects and we have strong execution against other projects in the portfolio. We are not expecting substantial improvements year-over-year, excluding the charges taken in 2012, and we think that is the correct way to plan for these businesses over the next year or so.

Lastly, in our other non-minerals and non-US construction businesses in IGP and Services, we expect to see solid results, generally speaking, as we build off relatively modest awards in 2012 and work to build out a stronger base for 2013 and beyond. It's still early in the year, so it's difficult to call with any certainty, but these are some of the dynamics we see playing out relative to our performance in 2013 into 2014. We also highlighted on our January 11 call that we expect the first half of 2013 earnings per share to be in the range of $0.90 to $1.10 with the second half progressively stronger.

Building on my comments on guidance for 2013, our current expectation for stronger second-half earnings is based on a number of factors. First, we are expecting labor cost absorption expense to continue to be a drag on earnings through the first half; we expect labor cost absorption to gradually improve as the year progresses, however. Second, we expect the number of projects, one in 2011 and 2012, to gradually ramp and contribute progressively more income throughout 2013. A few examples include the IGDSS LNG project ramping, and a number of significant projects in Canada operations and power projects such as SWA and Ghent making greater contributions to the P&L.

Finally, as we've highlighted previously and in my comments earlier, we are actively bidding work and anticipate winning some awards in the first half of 2013 that will have some burn later in 2013. These are some of the dynamics to consider as you look at KBR's first half versus second half of 2013. The 2013 earnings guidance also includes the following -- capital expenditures guidance between $80 million and $100 million, including approximately $50 million to $60 million associated with the Company's ERP implementation.

General and administrative expenses between $230 million and $250 million, including approximately $30 million to $40 million associated with the Company's ERP implementation. Excluding ERP spend, we expect to keep our base G&A about flat with 2012 levels. And overall, effective tax range of approximately 26% to 28%, and an expected share count of approximately 148 million shares outstanding.

Now I will turn the call back over to Bill for his final remarks. Bill?

Thank you, Sue.

When I look at the business broadly, 2012 was a disappointing year for KBR where issues at our Minerals and US Construction businesses offset strong performance across our Hydrocarbons business group. As we begin 2013, we continue to see a robust series of new opportunities across each of our 14 market-facing business units. The potential opportunity set for KBR is tremendous, and I am confident in KBR's ability to successfully win and execute this work.

Now, we will open the call up for questions. We ask that you please limit your comments to one question and one follow-up. Thank you.

Thank you.

(Operator Instructions)

We will take our first question from Steven Fisher with UBS.

Hi, good morning.

Morning.

Just a question on the labor cost absorption, the $22 million. I know, Sue, I think you said that could start to improve. I'm wondering how quickly you could bring that number down? And are we talking about being able to achieve the $5 million to $10 million range that we saw in the second and third quarters of 2012?

I think, Steve -- let me take a shot at that. I mean, we can go back and look at the progression of the LCA by quarter on our financial statements, and 2011 was a positive contribution, 2012 was negative. And a lot of it's going to turn on how quickly we get engineering work in that we can burn, and take some of that overhead drag into an over-absorption phase. Certainly, as we are looking at some of the awards that are expected in the first part of 2013, that would have a contribution.

So, we do expect this thing to start improving from fourth quarter into 2013, and we hope by the end of the year, as we look at the opportunity set for awards, we could get this back to a breakeven number, or even slightly positive. But it will depend on the engineering content of the awards we receive, not only in the fourth quarter, but also some of it's -- that's to come in the first part of '13.

Okay, so it probably sounds like a more material ramp down in the second half of the year relative to the first half of the year?

Well, ramp down or ramp up, we should see LCA better from a P&L standpoint in the second half than the first half.

Right, right. And then, I guess a broader question for you, Bill. You have mining, hopefully, under control, and the LOGCAP ups and downs hopefully behind us, US construction, focus more on cost plus. My question is -- how confident are you that we could start to see a series of cleaner type quarters over the next three, four quarters to kind of re-inspire the confidence in KBR's good execution?

Well, I think we are going to execute well going forward; I feel very confident about that. But as far as the -- trying to hit numbers, we do have a lot of things that we're continuing to chase on some projects that are nearing completion. We have talked extensively in the past about some of our provisions, we've taken on the Skikda project, given some delays we encountered without having the clear path to the customer release.

So, I think that the -- as I look at the balance of things, I still think that we are appropriately provisioned on the conservative side on a number of these projects. And as things continue to bounce around, there will be more positives than negatives. But I can't tell you, Steve, that I'm going to be able to dial a straight line in there. And regrettably, this is still KBR and the accounting nuances we deal with and how we look at the projects, we try to be conservative and only recognize things when they become certain for us.

Okay. Thanks very much.

Thank you. We will take our next question from Andy Kaplowitz with Barclays.

Hi, guys, good morning. It's Alan Fleming standing in for Andy this morning.

Hey, Alan.

Wanted to ask you about the Gas Mon backlog this quarter. It did take a step down, a good bit, and I wanted to see if there was anything unusual in there, and then ask you about the momentum you are seeing in the small- to medium-size award activity. Can you just comment on that?

Yes, the Gas Mon backlog, if it went down, would have been certainly the work-off we have on the existing backlog on Gorgon. The work-off you have on [Ichthys] that doesn't quite flow through the P&L because of the accounting we have there. And then, we are getting on both the Skikda project and on the Escravos project to the Asymptote, where we've finished construction. We're into the -- getting ready to start those plants up, and there's not a lot of revenue generation, so there was some decline in the backlogs of those projects. You also may have some FX issues bouncing through there, but nothing we saw that was terribly material.

To the question of the small- and mid-size opportunities, I think we are fairly bullish of what we are seeing in downstream, in terms of that opportunity set. We have talked about that in terms of its relationship with the shale gas evolutions in North America. We are still pretty bullish on continuing to sell work in Canada. The prospects we see in our Power and Industrial business unit -- on the Power projects is anecdotally about double what we saw this time last year. In terms of what we are chasing, or the opportunity sets that are out there to bid. So, we are seeing a much more robust power market than we did a year ago.

You know, the other businesses, as I think about them, Infrastructure and Minerals -- I think we will continue to hit our singles and doubles there. But the big drivers we will see are -- what can we do in terms of these sales in downstream, power, Canada, and maybe even a little bit on Technology that will complement some of the bigger stuff we are going to see in the Gas Mon business we hope later this year. Also, Oil and Gas, we think, is going to see some good changes for us in the second half, once [Shah Deniz], and some of the other projects we're looking at, go to FID.

Okay, that's helpful. If I could just ask a follow-up on cash deployment. It looks like you did accelerate your repurchases -- your share repurchases in December. To Sue's comment about better cash generation expected in '13, I wanted to see if you could comment on your appetite for doing more buybacks in '13.

Well, I think, Alan, as you look at our cash and our history, and what we have said on the share repurchase, we have said that in past repurchase authorizations, we've gone very quickly and executed the authorization. And in the September '11 authorization, what we have said is we were going to opportunistically buy back shares. And so, as we went into late in the year, we saw an opportunity and we bought some shares. And as we look at 2013 and beyond, when I talked through the opportunities in the script for basically operating requirements, dividends, share repurchase capital, those are generally in the order that we would consider them for priorities with the cash. So, I think the bottom line of 2013 is improve our cash generation, and we have -- certainly have the ability to do that, and then deploy that as appropriate.

You'll also see some sweeping of shares vesting in our equity programs that will take place in March and April, so that will be something that we will see in the future statements in terms of retiring shares that are vesting on the employee programs.

Okay, guys. Thank you very much.

Thank you. We will take our next question from Jamie Cook with Credit Suisse.

Hi, good morning. Bill, a quick question. One, I mean, you were one of the first of your peers to talk about some of the labor constraints that you are seeing in the Gulf Coast. Since then, your peers have come out and sort of confirmed what you said first. Can you talk about -- your peers have said margins and backlog are higher; as a result, there is a little more pricing power. Are you seeing that in your current backlog, or as you bid stuff for 2013, do you expect the margins to be better?

And then my follow-up question is -- we did have an issue in the quarter related to rising labor costs. Could we see another -- could that hurt you again? You know what I mean? I guess before things get better. Just given what you know out there with your fixed price exposure.

Yes, I guess this was the case of the earliest Christian getting the hungriest lion, being first out of the box with that discussion. We do see labor constraints; we have talked about those being certainly regional. We have other fixed-price work that is out there that is working fine, and we are not seeing the volatility on labor.

As far as margin changes, I think we are seeing maybe more impact in terms of what the customers are willing to transact. What I mean by that is, we are seeing customers who previously would have wanted to be doing fixed-price construction, now moving to reimbursable, and we think that is the more important movement there. Now, are margins expanding? Well, that's probably a second order effect at our view. We are certainly seeing more impact on our Business with respect to the changing mix from fixed-price to reimbursable construction.

In terms of labor costs, we are very sensitive to that. We think we have been -- proved in our provisions, it's clear that it is a different market than we have seen in prior years. We are seeing higher wages, we are seeing increased per diems being offered in the craft labor. It's something that we are tracking, and trying to make sure we stay on top of those movements. I think as we look at the projects we have in place today, that they do reflect the current market and what our expectations of the future evolution of that market will be, and that's the call we have made on that work.

Okay, great. Thank you. I will get back in queue.

Thank you. We will take our next question from Tahira Afzal with KeyBanc.

Good morning, everyone.

Hello, Tahira.

First question is on Shah Deniz, you provided a little more color on the types of portions of work you will be going for, and you indicated offshore and onshore, which is pretty exciting. Now, when I look at the project, it's fairly notable in size, so would you help us, to some extent, find the potential scope that KBR could see from this?

Well, I think the scope that we have probably commented on in the past, which I will elaborate further here, is that we would do the engineering, we would provide procurement services, and we are looking to do construction management on that project. So, what we are also saying is -- we are not expecting at this stage to run procurement through our books on that, which would be a high-revenue, lower-margin type of impact for us. Nor are we looking to run the construction labor, materials and other costs related to construction through our books.

So, Shah Deniz, in the scope that we are anticipating, would be a very large dollar award with a more traditional oil and gas margin associated with it, as opposed to a bigger revenue base but a smaller margin that you'd see on an EPC, so it is an EPCM for us. It would be very large for our Oil and Gas business, probably the -- one of the largest ones we have done in quite some time. And we believe it would have more traditional margins that we've seen in the Oil and Gas business.

Got it, okay. And second question is in regards to one of your peers yesterday commented on the upcoming cycle potentially being or exceeding the peak levels of activity seen in '07, '08. As you look at the upcoming cycle for KBR, could you comment and put it in perspective versus your historical activity levels?

Well, I think you -- we will try to break it down regionally. Clearly, we are heading, in the US, to a cycle that is far larger than what we have seen in the last several years. I will tell you that I think in the Middle East, that's pretty steady, but it's not approaching the peak cycle that we saw in the '06, '07 timeframe in the Middle East. In Australia, I think that market has really slowed down, and that we expect that the future volumes out of Australia are not going to reflect what we saw in 2009 and 2010. So, North America, clearly doing better than it has in recent years; Middle East, not as good; Australia, not as good as '09 and '10.

Overall, I do think it's probably a net positive when you look at all three regions and the business that we see in front of KBR. I think we are clearly optimistic about where we are for '13 and beyond, in terms of new awards and the amount of new awards across the globe. But it is a very much a regional cycle we are going through in the US, and it's not replicated, at least in our views, in what we see in the Middle East or Australia, for example.

Great, and just last question. We have had sort of a month, last go by, since you gave us your revised fourth-quarter outlook. It seems like when I went through your 10-K form that the cost issues on the problem projects haven't escalated; and for me, that's typically a good thing. So, any kind of color you can provide on those? It seems everything is going as per plan. Is there any unforeseen risk that you would like to point out over there?

Well, if there are any unforeseen risks that we thought were going to manifest themselves, they would have been in the K, and certainly, covered in our comments. As we took our provisions, we took operating contingencies and management contingencies that we felt were prudent to allow us to deal with some unknowns that would -- that could evolve on those projects through their completion. Right now, we are still on the construction projects, feeling good about where we are overall. Right now, what we told you on January 11 hasn't changed as we look at the impact on Services or at the Minerals business.

Thank you very much.

Thank you. We will take our next question from Chase Jacobson with William Blair.

Hi, good morning.

Good morning.

Hi. So, a couple questions on projects here. With regards to Kitimat, obviously there's a lot of news about that project. From your comments, it feels like that project keeps moving slowly to the right. From your view, how much of that is because of the change in the ownership structure of that project versus uncertainty related to US gas exports? And how confident are you that they can reach a final investment decision in the fourth quarter, standing here today?

Well, in Kitimat, I think it's simply related to the ownership change. We've gone a long way down the road with Apache and its partners on the project; Chevron has just come in at year end. And Chevron is a very systematic company. We do a lot of work for Chevron; we've got a great relationship with them in terms of our performances on Gorgon and Escravos. And just knowing the thoroughness with which Chevron looks at things, they are going to make sure they understand fully what they are getting ready to begin, in terms of commissioning the construction of that project.

And so, we think it's -- the delay that we've commented on, or the comments on when we think FID could take place today, relative to what we thought previously, are simply the time required for Chevron to get in and get this project shipshape according to Chevron standards. We aren't anticipating any changes in the project, but it is a due diligence and thoroughness that Chevron brings on all of these projects that reflect the changing schedule in our comments.

Okay, that's helpful. And then on the -- you mentioned that you are doing some very early stage work on a US LNG project. Can you give any more color on what project that is? Is that a project that was proposed before the [Nero] study was done, and is it at a site that has an existing import terminal? Any other color on that?

I can't give you any more than what we've said already.

Okay, and then the last thing that I will ask. As a follow-up here to some of the other comments, you were pretty positive on a lot of the markets, and you talked pretty positively about the small- and medium-sized awards that you are anticipating in 2013. Last month on the update call, you had, I think, mentioned that you expected pretty strong awards in the first half of the year, and backlog growth in the first half of '13. Is that still the case?

I don't think we made any outlook on backlog growth. We were optimistic about awards moving forward in the first half of '13. Certainly, much stronger in the second half, just with the delays we are seeing on the big projects, but we don't comment on backlog guidance and what we think will -- where we think we will be relative to our backlog today at June 30.

Okay, but maybe just, I guess then, awards though, still look pretty optimistic for the first half? Is that accurate?

Well, we are optimistic about the prospects that we are chasing, and some of the markets that I talked about in my comments will have awards coming in the first half. I can't give you a sense of -- I think you are trying to -- you get to a number, and I really can't give you a number on that.

Okay, that's fair. Thanks.

Thank you. We will take our next question from George O'Leary with Tudor, Pickering, Holt.

Good morning, guys.

Hi, George.

Just a quick question. You talked a lot about LNG projects, and listed a good swath of opportunities that you are involved in and are chasing currently. When you look at the global picture, and you think back over the last six months, how has that landscape changed in terms of which projects are moving ahead of others? Whether that be some Aussie projects slipping right, versus US projects, and then kind of lumping Canada and Tanzania into that bucket, as well.

In terms of what we have seen change in the last six months, I think we have seen a recognition across the space in Australia that the cost to build an LNG project has gotten very expensive. And we've seen that in terms of the announcements related to Gorgon, the announcements on Curtis Island, we have seen that in terms of the completion at the Pluto project, and I think Australia is at a point of reset. Some of the drivers for that, George, as we look at the US market, we can get craft labor all-in at about $50 an hour nominally, and that includes the burdens and benefits. When you look at Australia, that cost is about $108 an hour, so it's more than double what we are seeing for labor. And then when you factor an 85% productivity inefficiency in Australia, the cost of building things gets very, very expensive very quickly relative to the US and relative to other areas.

So, Australia, I think they are going to be really thoughtful about new projects going forward, and you really have to find existing sites, expansions where you've got a very good and productive reservoir to go forward. But just the excitement and rush that we saw in Australia, maybe that being rethought in some of the comments we made on Browse in terms of the options they are looking at clearly reflect this.

As we look at Africa, that's much more slowly developing, we're at pre-FEED in Tanzania. The Canadian projects do look to be the -- to have the absence of the export constraints that some of the US projects may be facing. We are much more optimistic about those projects going forward, the challenges, like Australia, is Canada and British Columbia, in particular, is not a terribly highly populated area. So, you will probably see a lot of modular construction in the BC projects in an effort to reduce the reliance on the number of people you need to build the projects. Certainly, in the US, you have some -- on the Gulf Coast, not only some of the issues about exporting the LNG, but also what impact will that have to the overall labor situation in the US Gulf Coast. So, a lot of things we are watching, and a lot of things we expect to follow very closely over the next 18 to 24 months.

Okay, thanks. That's very helpful. And then just a follow-up. All the ammonia projects you are chasing, both in the US and in India, any color around timing for that opportunity? And then as a follow-on along with that, are some of these you guys chasing on a stand-alone technology basis, or are you chasing EPCM on the bulk of these projects, as well?

Well, we are chasing technology on all of them. That's -- we think -- the packages that we are selling now have not only the basic engineering design and the license, it also has a lot of proprietary equipment and catalyst, which has allowed us to grow our scope of supply to a much larger level than we have seen previously. The EPCM work is predominantly US-centric, where we think we have the integrated engineering procurement and construction capability, and we could see some awards in the first half related to the US ammonia.

In terms of internationally, we look at that on a case-by-case basis, and try to decide to compete where we think we've got a chance of winning. But it -- certainly, as you go into other markets, it's a much more -- outside the US, we have a much more what we see aggressive international construction groups participating that make it a little more challenging for KBR to create a competitive advantage to participate on the international ammonia side, but we will continue to monitor that. But EPCM -- primarily EPC -- EPCM, primarily US-centric; Technology, international and US.

Thanks. Very helpful, guys.

Thank you. We will go to Randy Bhatia with Capital One Southcoast next.

Good morning, guys. Thanks for taking my questions. George just asked my question on ammonia, so I just have one left. I looked through the K, and I saw the update on the sodium dichromate case. I was just wondering if you could just broadly give us a recent look at KBR's litigation risk profile, and how you see that profile changing over the course of the year?

Well, I think it moves in broader circles than simply a year. You know, as we look at sodium dichromate, it is clearly an emotional issue, and there is a lot of opinions that are being offered, in our mind, as science, which we don't believe will stand the test of time. The things that we rely on with respect to sodium dichromate are that the Army was required to give us a clean site to do our work, and the presence of sodium dichromate on the site, in our minds, is -- was not a clean site. Additionally, as we look at these cases and then we go through litigations, we do have the ability, when we have instances like this, to bill those charges back to the government in terms of recovering our cost.

The other thing we look at is the body of law that has been established at the appellate level. And we've seen that in the Convoy case and other cases that we have taken to completion, which really get into what kind of tort liabilities should exist to contractors on the battlefield conducting work for the US Army. You know, those protections are increasing -- have been and are increasingly being extended to other circuit courts where the tort liabilities related to our performance of work really don't stand. We feel there is good law that's at the appellate court level that would take cases like sodium dichromate and turn them back, should they not go in our favor at the trial court level.

So, we've got a couple different -- on sodium dichromate, a couple different things we are looking at, which allow us to feel very comfortable about our ultimate liability. There first is the provision in the contract related to clean site; the second is the opportunity to rely on the circuit court for the political question doctrine and other bodies of law. And then the third is, ultimately, our ability to bill the government for litigation costs incurred and the performance of our contract.

Great, Bill. Thanks very much.

So, broadly, we don't see the risk profile changing terribly this year, and really, the trend has been an improving risk profile on our government work with respect to those litigations.

Very helpful, Bill. Thank you.

Thank you. We will go next to Brian Konigsberg with Vertical Research.

Yes, hi. Good morning.

Good morning.

Just a quick question. You mentioned Gorgon, you think that the expansion project pre-FEED -- or I'm sorry, the FEED can actually start getting traction in mid-year or so. I guess the project sponsor was being a bit more cautious about the outlook there. I'm just curious your view of that project, just given the scope of the comments about Australia in general, and your confidence that it actually comes to market in the timeframe you suggested.

Well, I think the comments we make are based on information that is shared with us by our customer, and that is the source of it. And so, as we look at that project, and we are talking about moving into FEED in the third quarter, not into execution, and there is -- if you are talking about what the customer would be saying about execution, we are not making any comments about that. Clearly, as we have read and we have talked with our customer, the Gorgon resource is a very good resource basin to have a lot of gas; they've had a lot of success in their E&P there. We believe that in contrast to maybe some of the other projects, that the resource could easily support a fourth or possibly fifth train on Gorgon.

The other thing that we are going to look at as we get into FEED is the timing of execution and how the fourth train could be knitted into the process of constructing and commissioning the first three trains on Gorgon. So, there is an exercise that needs to be done during the FEED process to see when is the best time to commission train four so that you can seamlessly, and at the lowest cost, bring a train four into production, taking into consideration where you stand on trains one, two and three.

Got you. And maybe if you could just talk a little bit more about gas to liquids in the US. Maybe your perception of timing as far as when FEEDs can actually start to be awarded, and maybe your positioning and how those projects will be broken down. Is it going to be multiple scopes awarded, and maybe just get a little color on how that plays out.

Yes, we -- obviously, we have a great deal of experience from our Pearl project in doing the EPCM on the Pearl GTL project, and that has given us a chance to talk to several folks about US GTL. You know, the projects are very large. You are going to see those done by project sponsors, we believe, with very strong balance sheets.

From our role, it's -- and you look at the complexity of the projects involved, it's likely going to be split into packages, just like the Pearl GTL project was. In terms of timing, the customers are very thoughtful that we are dealing with, and it is possible you could see some FEED work take place in the second half of 2013 as the discussions continue to mature.

Great. Thank you very much.

Thank you. We will take our next question from Robert Connors with Stifel Nicholas.

Just on the housekeeping, what was the $33 million gain in the Other segment, and its EPS impact? As well as, did you guys disclose what the equity -- or excuse me, the Ichthys equity income line was that flowed through Gas Monetization?

On the first question that you had on the Other, that was the sale of the real estate assets -- the non-strategic assets that we had. In specific, it was primarily our Clinton Drive property that we had vacated some time ago. So, that was the gain that was in there.

And then on the Ichthys LNG, we did not specifically disclose project margins on any of the projects.

I guess, should I just apply sort of like a 35% tax rate on that gain, or was there anything different?

No, there wouldn't have been anything different.

(multiple speakers) I'm just trying to get to a --

Yes, it's a US property, so US tax rates, yes.

Okay, and then just regards to US LNG, if you look at a lot of these owners, their balance sheets and even CapEx numbers tend to be a lot smaller than, say, the traditional LNG project owners, which for the most part tend to involve NOCs and majors. I was just wondering, what does this mean for contractors such as yourself? And essentially, are you able to capture more billable hours when it comes to some of these smaller clients versus like when you are doing projects for much larger clients on the international front?

I think the biggest distinction is that, on these international projects, those are completely greenfield. And you are building tanks, you are doing a lot of marine works and jetties, and incurring a lot of cost on civil works. Now, when you look at the existing LNG receiving terminals that are located in the Gulf Coast or other parts of the country, you see where tanks have already been built. You see where jetties and other infrastructs -- civil infrastructure are already in place, because you bring a ship in to unload, you can bring a ship in to load. So, the reason those costs appear to be a lot smaller than the international assets is that the marginal cost on a conversion are less because of the prior investment in infrastructure for the re-gas terminals.

Now, from a business standpoint, you still have the capital investment and the need to recover those sunk costs on the re-gas terminal added to the marginal cost of building the liquefaction terminal to -- because you have to service when you look at the business. So it's -- your marginal cost going forward is one thing, but the total cost to plan is different given the sunk cost.

Okay, and then if I could squeeze in one more. Just looking at Kitimat, Gorgon, Tanzania, and even some of the US GTL projects, it seems like those in '13 are going to start to transition towards FEED work. But when you look at your FEED prospects and your FEED portfolio as a whole, I'm just wondering if you are closer to the detailed design sort of phase of it, or are we just still beginning to ramp up on initial prelim FEED work in the earlier stages?

Well, that's mixed. Kitimat, we've been involved in an extended FEED for some time, so the next logical step is FID there. Clearly, Browse and Pluto, we have completed FEEDs on those projects, and we talked about some of the challenges facing Australia at the moment. You know, the other projects are pre-FEEDS, and we will be looking to move those into FEEDS. Hopefully, we will get some FEED awards done in 2013, but our portfolio has got a little bit of mix. There are some projects we are chasing for pre-FEEDS, some that we have the pre-FEED chasing for FEED, and some where we have done the FEED and are looking to get to FID.

Okay, thanks a lot.

Thank you. We will take our last question from Sameer Rathod with Macquarie.

Hi, a couple of quick questions. First, I think there's been a lot of talk about the upcoming US cracker build-out. Is it fair to say that KBR SCORE and SUPERFLEX technology is more naphtha versus ethylene? Or how do we think about KBR's positioning in the upcoming build-out?

Well, I think on the ethylene side, it's -- we are naphtha-centric on -- is where we compete best. The other element, too, is the nature of the ethylene technology. You've got a series of low-cost gas in the region, and our high-efficiency process probably is not as competitively advantaged in a low gas price environment compared to the more international scene where gas is $10, $12 a million BTU. We do see opportunities, though, for furnace rebuilds where we have existing technology in place, and as furnaces wear out and need to be rebuilt, we think there is a bit of an installed base out there for us that we should be competitively advantaged for as we look at executing that work. Certainly, as the gas prices have come down, these crackers have worked very -- literally overtime, and we think we will see some opportunity coming out of the rebuilds.

Okay, great. I guess my last question is -- given the lack of co-products with ethane cracking, how big do you think the market in the US is for the on-purpose olefins, excluding ethylene, as well as aromatics and the respective derivative in the US, and KBR's positioning there?

If I had a good information on that, I'd probably have another calling of tradings on that. We really don't have a view on where they are going. We are aware that if you are ethane-only and you have the limited co-products, that does give you a different financial perspective than another FEED that gives you more co-products, but we are an E&C firm, and we design and build stuff. The others who are our customers are better placed to answer that question.

Oh, okay. No problem. Thanks a lot.

Thank you. Ladies and gentlemen, this does conclude our question-and-answer portion of the call, and does conclude our presentation for the day. We appreciate your participation, and you may now disconnect.