KBR Inc (KBR) 2015 Q3 法說會逐字稿

Good day, and welcome to KBR's third-quarter 2015 earnings conference call. This call is being recorded.

(Operator Instructions)

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

Good morning, and thank you for joining us for KBR's third-quarter 2015 earnings conference call. Today's call is also being webcast and a replay will be available on KBR's website for seven days, at kbr.com. The press release announcing KBR's third-quarter results is also available on KBR's website.

Joining me today are Stuart Bradie, President and Chief Executive Officer; and Brian Ferraioli, Executive Vice President and Chief Financial Officer. During today's call, Stuart and Brian will cover KBR's results in more detail and discuss our market outlook by major segment. Please refer to the accompanying presentation that is posted on our website, at kbr.com. After our prepared remarks, we'll open the floor for questions.

Before turning the call over to Stuart, 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 significantly from our forward-looking statements. This risks are discussed in KBR's third-quarter earnings press release, KBR's earnings presentation, KBR's Form 10-K for the period ended December 31, 2014, and KBR's current reports on Form 8-K. You can find all of these documents at kbr.com.

Now, I'll turn the call over to Stuart. Stuart?

Thanks, Zac. Good morning. Turning to slide 3, our Zero Harm programs and Courage to Care program continue to drive increasingly better performance in the safety and environmental arenas. You can see our performance is trending very much towards the IOGP top quartile -- that's International Oil and Gas Producers top quartile performance. So very pleasing performance, but it's a journey that never ends, safety, and we've got to be vigilant and keep on it. But so far this year, performance is improving, which is very pleasing.

Moving on to slide 4. In a nutshell, I think the quarter was -- we had a very solid performance around the operating side, improved earnings versus 2014. We announced, in December last year, a number of prospects that we felt would go forward, even in this low price oil environment, that Johan Sverdrup being one that we won and it's going ahead recently.

And we've just won the detailed engineering contract for Maersk Culzean in the North Sea -- UK North Sea, again, which we identified last December. We did the front-end design, and that's moving ahead into the delivery phase, and that will be a Q4 booking. We just announced it in the last couple of days. The two mega-LNG projects continue to perform well and, as previously reported, we stick by that statement and they expect to remain significant earning contributers through into 2016.

What was very pleasing in the quarter were the positive earnings that came from our Non-Strategic power projects. You may recall, we did a forecast to complete exercise last December. The challenge then was very much to continue to execute those projects within the forecast. We put very strong management from our E&C Americas group onto those projects. So we very much manage them as part of the E&C Americas portfolio, and, again, very pleasing this quarter that we're starting to see the fruits of that labor.

Realized asset impairment and restructuring costs of $15 million and a $6 million gain on the disposition of certain assets as we adjust our business portfolio. Those very much relate, I guess, to what we -- in the bullet point a couple of bullet points down, when we closed the two strategic partnerships for industrial services and pipe fabrication, which really we hope to accelerate growth in the industrial services arena and the pipe fabrication area.

Our cash performance was pleasing in the quarter. We maintain a very strong balance sheet and a very strong cash balance. And I think this provides confidence to our clients, particularly in a market like this, and it gives us optionality as markets continue to evolve. Also in the quarter, very pleasing, the support of our banks came through and we closed with a new $1 billion bank credit facility, and Brian will talk a little bit more about that in a second.

We continue to be well placed on strong gas and gas monetization prospects under the UK government prospects we reported previously. So no change there. The decision's expected in the near term. So all in all, the strategy is on track to achieve the targeted margins and the cost savings by the end of 2016.

And the segment margins are largely at or at near-target levels, and we continue to be prudent in our planning with regards to the competitive environment, medium term. And more than $150 million of savings have been identified in actions to date and the net benefit will obviously come through into 2015, but also beyond.

So I'm going to hand over to Brian now, who will put a little bit more flesh on the bone around the numbers. Brian?

Thank you, Stuart, and good morning. Turning to slide 5, the backlog for unfilled orders is around $13.3 billion. We had some one-off type transactions going through backlog this quarter. The sale of the Industrial Services -- or 50% of the Industrial Services business that Stuart mentioned before, resulted in a de-booking of $340 million from our backlog, although the work still remains within the joint venture. And like many other companies, the strong dollar had a foreign exchange impact on us, reducing backlog by $391 million, most of which relates to the activities we have in the UK government business which extends out, on one contract in particular, almost 26 years.

Moving on to revenues, $1.2 billion in revenues for the quarter. This is down from a year ago, which is as expected. The winding down of the Canadian pipe fabrication and North American construction projects and reduced activity on one of the LNG projects, as well as the sale of the building group, which we announced in the end of Q2, which is about $60 million in quarterly run-rate revenues that we had sold.

And I also should point out that we announced we have a definitive agreement in place to sell our Industrial Services business and hopefully will close in the fourth quarter, which, again, the revenues should drop correspondingly associated with that sale -- for Infrastructure, I'm sorry, I misspoke. Thank you.

Gross profit and equity in earnings reflects improved business performance in the operational costs that we've been working on for some time. The G&A is down $20 million from September from a year ago. And, if you recall, the September time frame is the point in time where we're measuring our cost reductions from. As Stuart mentioned, we had restructuring and impairment charges associated with the strategy that we're implementing. And we also had a gain on the disposition of certain assets resulting in a net between the two of about a $9 million in pre-tax costs for the quarter. EPS, $0.38, and EBITDA of $86 million.

Turning on to page 6, in the segments. Again, on the revenue side, Technology and Consulting continues to show reduced levels of proprietary equipment sales and lower consultancy services, primarily related to upstream oil projects. E&C, as I mentioned before, reflects the Canadian pipe fabrication and North American construction projects which we are exiting or executing as part of the joint venture. And the Non-Strategic again shows the impacts of the Building group.

Moving on to gross profit, as Stuart mentioned also, E&C, strong operating performance and lower overheads. Government Services had solid performance, increased activity, particularly on the US side. So that's showing up on the revenues and in the earnings side. During the third quarter of 2015, we had about $3 million in annual maintenance expenses incurred in the UK which typically occur in Q4. So in 2015, they occurred in Q3. In 2014, they occurred in Q4. Also, last year had a $21 million award fee on the legacy LogCAP III project, which obviously did not recur this year.

The Non-Strategic Business reflects the power projects. We are down to basically two projects. One is largely complete and two more to go, with the second one to be finished sometime around the end of the year or early part of the first quarter, and the third one to be completed in 2017. EBITDA reflects, obviously, the activities above, but also a year ago, we had a gain of $24 million in the settlement with our former parent that did not recur this year. And it also reflects the impairments of $15 million and the gain on sale of $6 million that we've previously talked about.

Moving on to slide 7 and cash. It was a relatively good quarter from a cash perspective. Operating cash flow was a positive $54 million, which results in a cash balance of $768 million. You see it's up $37 million from the second quarter. You see below that some of these larger unusual activities during the quarter, the cash from the sale of the Industrial Services business, as well as the investment we made in the Pipe Fabrication business resulted in $33 million cash inflow. We continue to fund some of those loss projects that Stuart referred to earlier, the settlement with our former parent, the dividends, pension, and the foreign exchange impact.

On balance, we returned $17 million in cash to our shareholders, reflecting a balanced capital allocation policy that we've had in place for some time. For the year, we've returned $57 million in cash. In a year that had operating cash flow year to date so far of a negative $85 million, we've returned $57 million to our shareholders and we still have a quarter to go for the balance of the year. And, in total, we've returned in excess of $1 billion since we have -- the spinoff from the former parent.

So, as Stuart mentioned, strong balance sheet, good cash gives confidence to our clients and optionality as our markets continue to evolve, which includes looking at some M&A opportunities.

And I'll turn the call back over to Stuart.

Okay, market outlook. Technology and Consulting. Market opportunities led by ammonia, refining, and olefins, very much as we reported previously, but we're seeing a lot more activity, particularly in the revamp arena in the Middle East, North Africa, and across Eastern Europe. We're now starting to see opportunities for our VCC technology coming through again in Eastern Europe, which is good. And although the market is tight in our consulting arena, I think we've now rightsized that business and we're starting to see more activity in upstream oil and gas, albeit sort of smaller-type projects, which is normal in the consulting space. And, as Brian mentioned, we continue to look for additional opportunities to expand our T&C technology portfolio into new products and services.

Moving on. Outlook for E&C. Strategic developments in the quarter. The Industrial Services and maintenance business with the Brown and Root joint venture closed in the quarter, as did our strategic alliance for pipe fabrication and module assembly, which I think is key and derisks some of our execution for EPC prospects in North America. We continue to capture previously identified large offshore projects. Johan Sverdrup, we mentioned before. And, as I said in my opening remarks, we've been awarded the Maersk Culzean offshore gas development for the UK North Sea, which is a Q4 booking.

We continue with a strong base of large projects for the remainder of 2015 and into 2016. The LNGs, you're well aware of. And if we get favorable resolution of our pending change orders provides the opportunity for 2016 LNG income to be comparable to 2015, as we previously reported, and we are standing by those statements. Significant backlog of ammonia/urea refining and oil and gas projects, and also in the construction sector in North America.

Good pipeline of near-term and long-term prospects focused on the Middle East, as we're identifying a number of opportunities in that market. Onshore upstream opportunities in the Middle East and Caspian, and our joint venture in Azerbaijan with SOCAR is tendering heavily for some good opportunities in the offshore brownfield arena. As many of you know, we've been in Azerbaijan for many, many years and have a very good reputation there.

Offshore developments continue, some in the Gulf of Mexico, some in the North Sea, obviously in Azerbaijan, as previously mentioned, and some in Thailand. But again, very specific opportunities that we are targeting in those markets. We continue to pursue a $2 billion fertilizer complex in the Midwest US. And the major LNG developments continue to evolve, which provide additional support for backlog growth in 2016 and, of course, beyond 2016.

On Magnolia, LNG sole-source activity, the EPC pricing and contract award is expected in Q4, as previously reported. And on Tangguh, the FEED continues and EPC bidding is now set for early in Q1 2016. Again, as previously reported, work on the Shell Global LNG Agreement continues. What's interesting is we're working also on four additional FERC FEEDs in North America. Clients are confidential, but again, more in the developmental arena. But quite a lot of activity in that space and pre-FEED work and tendering is ongoing for two major FLNG projects, as previously reported. There's continued pursuit of LNG developments in North America, where the economics are promising, given low forecasted cost of development costs and, particularly, low gas prices versus most regions of the world.

Government Services, confirmed preferred bidder for the UK MoD Fixed Wing Training contract. Again, we expect award in Q4, as previously reported. The UK Army rebasing discussions continue. There's a strategic review the Ministry of Defense is doing, with decisions to be made this month, which will give us a strong indication around that opportunity. Strong operational performance continue for our ongoing UK PFI contracts. And we continue to see a number of opportunities around overseas-based operational support, for example, in Kuwait. As Brian mentioned previously, the work in Iraq continues to ramp up, as we support the US military in their fight against ISIS.

And we continue to progress in successfully closing out US government audits and dealing with some of the legacy LogCAP III issues and RIO billings. An example of that is we recently -- the court dismissed -- and this is on the sodium dichromate case -- the court dismissed the plaintiff's only remaining claim in the last week or so. And, although we can expect an appeal, I think this is still a significant and positive ruling for KBR.

So, in summary, I think a very solid earnings and operational performance in the quarter. The E&C management made good progress, I think, in derisking the business through strong performance on Non-Strategic power projects. We very much look at those power projects as part of the E&C portfolio, which was a big, big change in the way that we execute those projects in the past, putting E&C management across them, rather than the old structure from what was called IGP. So, really good performance in that area, and obviously, closing out the Canadian pipe fab and module assembler projects.

We continue to capture prospects we specifically identified some months ago. We have a new credit facility in place. Strong balance sheet, which gives us optionality going into the future. Our near-term prospects remain strong, with backlog growth opportunities going into 2016 and beyond. And our strategy is progressing and is on plan.

Thank you. Zac?

And with that, we'd like to turn the call over for questions. Operator?

(Operator Instructions)

Tahira Afzal, KeyBanc.

Hello, folks, and congratulations on the quarter.

Thank you.

I guess first question is, Brian, if I look at your guidance for the full year and what's implied for fourth quarter, can you provide any color on how you see that shaping up? To the extent you can. (Laughter)

Yes. You'll notice that we did not give guidance, because we don't give guidance on a quarterly basis. So I'm going to refrain from being too specific about what will happen in Q4. But as Stuart mentioned, one of the things that's most pleasing or important to me is the derisking of some of these projects that has occurred over the last several months. If you recall, we've shipped the last modules up in Canada, so those legacy pipe fabrication contracts are virtually complete. And now on the power projects, one is completed and the second one is in an outage, which will be completed, as we said, around year-end. So that will be, again, the significant reduction in risk. So I remain optimistic for Q4, but I can't be too specific in terms of quantifying it, at this point.

Got it. Okay. That's helpful. Second question is probably on backlog growth. So you've found balance in terms of your macro framework, but it seems you've steered KBR to a point where perhaps you're getting market share in realizing a lot of opportunities. So even in that environment that's tough, do you still expect backlog growth in 2016, at this point?

Tahira, we've been very specific on, and tried to be as transparent as possible on, the key prospects that we're going after. And as we said last quarter, many of the decisions around those will be made in Q4. And if the stars align and with a fair wind, as they say, if we can be successful in what we've identified, yes, there's opportunity for backlog growth going into 2016.

Good. Thank you and I'll hop back in the queue.

Jamie Cook, Credit Suisse.

Good morning.

Good morning, Jamie.

Just a couple questions. Brian, can you just remind me year-to-date, I know you've identified $150 million in actions, but what you've realized through the first nine months of the year? And then as we shift forward, it looks like most of the benefits -- the G&A has come down year over year, but on a sequential basis we're sort of flattish. I'm just trying to think about when I think about future savings, is it more on the G&A line or up at the segment level? So that, I guess, is my first question.

My second question is, Stuart, you guys sound fairly constructive with regards to LNG. If you think about some of your peers, like Fluor, last week they were a little more pessimistic on awards moving forward in the short term, just because of the size of the projects, just for a lot of reasons. So if Magnolia or Tangguh doesn't happen, can you talk about what else is left in the pipeline?

And then third, I think in the Q there was mention of losses on a petrochemical facility, so can you give us a little color there? How much it was, unless I'm reading it wrong, where we are in terms of percent completion; any color on that? Thanks.

Okay, Jamie. I guess I'll go first, on the cost side. The way I like to think about it, if you look at the G&A line, it's down $20 million from the third quarter from a year ago. So on a run rate basis, that's $80 million alone. And even with the performance, we've had some of the compensation accruals are probably a little bit higher than target. So there's certainly more room on the G&A line there on a run rate basis as we go forward.

But in general, what I would suggest to you, the savings have roughly been about 57% in the businesses and 43% on the G&A line, just to give you some order of magnitude on where the savings are. And as we mentioned before, as we roll through the year, actions we take in the first quarter don't appear until the second quarter, and actions we took in the second and third quarter, obviously don't appear until later on. So this is a blend which occurs throughout the year.

So we've said at least $150 [million]. And as I mentioned in the past, that's kind of a dynamic number where, as people roll off projects and they don't have another project to work on, those costs would sit in overhead and that would result in a reduction in the savings. So the $150 million reflects where we are as of today, and we remain highly confident that we'll get the remaining $50 [billion] by the end of next year.

Steven Fisher, UBS.

Hang on. I don't think we answered all of Jamie's questions.

Jaime's couple of questions was actually three. I think on the LNG piece, Jamie, again, we've been very specific on the prospects that we're going after and where they are in the evolution. We remain positive around those opportunities progressing. And that's really where our focus is today. As I mentioned before, there's a number of development projects that we're working on at the moment. Will they all go ahead? Probably not, but there's a number of them. And we will work with the developers to the maximum extent we can to try and get those to move forward.

But I guess the statement around where we will be in LNG remains the same, and that is that the work that we have in LNG will continue to contribute strongly in 2016. And beyond what we've identified, we will continue to grow backlog if those prospects come in.

Now on the petrochem, I think the petrochemical project was really an issue around more -- wasn't an execution issue, it was more of squaring up some withholding tax, which we did have to take in in the quarter. So no real operational trip up there. I think the pluses and minus overall in projects was positive. I think that's a minor issue. No real concern.

Steven Fisher, UBS.

Great. Thanks. It sounds like you're pretty confident in the potential to get these two UK government awards in the fourth quarter. Is that your base case? And then can you remind us the magnitude of these? Will these take your backlog back above that Q2 level, assuming you have, say, another $1.2 billion of sales in Q4?

Steve, this is Brian. I'll try that. In terms of the size of these contracts, these are going to be measured in the hundreds of millions. And as we've said, we expect the decisions to be taken in the fourth quarter. Question exactly on the timing of the bookings, one of them is tied to third-party finance. We think that will be done and completed in the fourth quarter. But there's always the likelihood that one of these could roll over into the first quarter, just given the financing timing. In terms of the bookings of them, as I said, these are in the hundreds of millions. They are certainly not the size of the LNG projects, which in the floating LNGs, which are measured in the billions.

Okay. That's helpful. Stuart, how has your thinking and your customer thinking around some of these large E&C projects changed in the last few months, specifically thinking about the $2 billion fertilizer complex, Magnolia, Tangguh. Is the degree of confidence still there and just the timing shifting out a little bit? And what do you think it's going to take for these things to actually move forward?

They are all different, I think, Steve, is probably the first statement. Magnolia is well advanced in terms -- we've agreed to the contract terms and conditions. It's a development project. The off-take arrangements have been made public. So I guess the input in the off-take are progressing well. It's really the EPC pricing in the middle, and there seems to be, the capital market seems to be quite positive around their ability to stand behind a project with the arbitrage, it's a tooling arrangement that's in place. So that's Magnolia.

Midwest, being in the Midwest, it's got a logistical advantage, so therefore a cost advantage in producing fertilizer close to market. And again, there's a number of financial instruments backing that. So again, we feel quite comfortable that it will go ahead, should we be able to get to the EPC pricing levels. No guarantees, of course, but that's the way it's working.

Tangguh, it's a third train, as we said before, of existing two train facility where the associated infrastructure is largely in place. There's been a number of announcements from BP in Indonesia around the structure and deal they've got with the Indonesian government. So again, no guarantees, but the likelihood of that going ahead looks favorable.

Okay. That's helpful. Thanks a lot.

Anna Kaminskaya, Bank of America.

Good morning, guys. Can you hear me okay?

Yes, Anna.

Hello. So I just wanted to quickly follow up on Magnolia and Tangguh, just from the timing of awards for Q4 Magnolia and Q1 for Tangguh, when would they actually matter for your EPS? Because it's my understanding, you would still have to wait for FID for Magnolia, right, if you put it into the backlog. When would they actually move the needle, from EPS perspective?

Anna, as you know, these will start to ramp up next year. We start with the engineering. So they won't hit their peak until, what, 2017, 2018? What's fortunate is the timing on the two existing LNGs. As you know, they're further to the back end of those projects. So as they start to ramp down, you have hopefully two more that we would book would be ramping up, and those lines would cross somewhere probably in 2017.

Okay. So you would still have some initial work starting in 2016, so we can still have some contribution?

That's correct.

Okay. And when do we have better visibility on overall (Indiscernible) projects' co-provision. Is it 4Q? Is it 1Q?

You're referring to the change orders?

Yes, the change orders.

I think that's difficult to predict an exact timing, Anna, on that. Obviously, the commitment we will make is that when we do resolve them, we'll tell you. But it's an ongoing negotiation, and there's no line in the sand as to when that will be resolved.

Okay. And then finally, I'm not sure if you can comment on it, but just looking at the structure of the Magnolia project, and you carry, I believe, 70%, and your Kareem counterpoint is another 30%. What will they be responsible for in the project versus your scope of work? What is that 30% of economics, what will they be doing? Because I'm thinking about you having the labor relationship and the engineering know-how, just trying to figure out how the scope of work will be divided.

[SK] will contribute greatly for their 30%. At the end of the day, KBR leading it, the engineering will be driven out of our house. But if we're doing module fabrication and that happens to be in Asia, you can see where SK can play quite an important role in construction management and site management of what's happening in that activity.

Okay. Thank you very much.

Thank you.

John Rogers, D.A. Davidson.

Good morning.

Good morning, John.

Following up a little bit more on some of the pending work out there, Stuart, are you fairly comfortable in terms of the margin profile or the risk profile with these projects? One of the fears always is that as the market's slowing down or some of your competitors are hitting air pocket that there could be some margin pressure, more competitive pricing on not only the LNG, but the fertilizer projects.

I think in both -- your observation is correct, John, in that there could be a tendency in the marketplace to be overly aggressive. I think that we've been very considered in what we're doing. I think we've proven that with the way we've dealt with Lake Charles and not taking on something we felt that was either too risky or at margins that we didn't want. In both Magnolia and on the fertilizer project in the Midwest, I guess the message is very much, we're in sole-source negotiated position.

Okay. That makes sense. Brian, just in terms of the cash flows, the big swing factors coming into the end of the year, is it the LNG project close outs or finishing those off, are there anything else we should be thinking about?

We think we're going to have a good cash quarter in the fourth quarter, just from normal operations as the funding of the problem projects continues to drop off. We also have the sale of the infrastructure business that we hope to close in the quarter. So we think it's going to be a relatively good cash quarter. That does not assume we do any M&A type transactions.

Okay. And priorities on M&A are still technology?

Yes. I would say that remains. It's what we set out. It's not the only thing we look at, but certainly that's a preference.

Okay. Great. Thanks very much.

Jerry Revich, Goldman Sachs.

Good morning.

Good morning, Jerry.

I'm wondering if you could talk about US government opportunities that are in front of you. We're seeing in some of other parts of the budget that are left (Inaudible), like military vehicle sales moving higher, which is typically correlated with your business. You alluded to it in your remarks about opportunities to support US in the ISIS war. Can you flush out for us what the magnitude of the opportunities could be or (Inaudible) help us understand the discussions you're having with your customer there?

A lot of the stuff we do there, Jerry, is obviously in the classified arena. It's difficult to give too much disclosure around that. I think all we would say is that our relationship with the US government is vastly improved, and I think that we continue to support them and I think we have a very solid performance ongoing and that's recognized. I think the opportunities to grow that business going forward exist and are being realized. But to give more color around that is tricky, as I'm sure you can appreciate.

One thing, just to clarify, Jerry, to make sure it's clear, in terms of supplying equipment, vehicles and so forth, that's not really what we do. It would be more the base support and supporting troops on the ground, feeding them and power, water.

Managing logistics.

All the logistics of base support, things like that.

For sure. It's definitely all correlated. In terms of if you could, just on slide 10, as you lay out at the top of the page, a number of projects that could be meaningful for you folks. Can you flush out for us the magnitude of the opportunities on each project? Are we talking about a number of singles and doubles on the first five bullets that you have? Or are any of these multi-billion dollars in KBR scope opportunities?

If you start at the bottom and work up, the size of Magnolia has been disclosed in the press at the $3.5 billion to $4.5 billion type range. There's the $2 billion fertilizer opportunity would be a KBR -- if that goes ahead -- a full KBR booking, in that area. The offshore developments in the North Sea are all varying levels of magnitude, but significant. And similarly with what we're trying to do with SOCAR in Azerbaijan. And some of the Middle East opportunities are also significant.

There's a good -- I think what really is important here is there's a portfolio of opportunity and across a number of geographical areas where we feel that not only are we reasonably well placed, but the opportunity for those projects to proceed is in the high side.

All right. Thank you.

Brian Konigsberg, Vertical Research Partners.

Good morning. Most of my questions have been asked, but maybe a little bit more on cash and cash flow. Maybe just with the puts and takes you're talking about, some of the legal items that you've been facing, sounds like those are coming in a little bit better. How do you anticipate -- I know you don't want to give guidance at this point -- but getting out of 2016, we know Q4 is to be a good cash flow quarter, but going into 2016, do you anticipate we're going to start seeing free cash flow in line or maybe potentially in excess of earnings?

Certainly, that's the goal, Brian. Once we get through funding some of these problem projects, you would expect the earnings to be much more -- the cash flow to be much more in line with earnings. A lot's going to depend upon the mix. In terms of timing, if it's fixed price, you have more opportunities to have the cash maybe as good as or even better than earnings. If it's reimbursable, then obviously the cash will lag, because you have to fund a little bit of working capital. But all in all, we would expect next year's cash flow to be certainly much better than this year.

Fair enough. And maybe just an update on Pemex, where that stands today. Is that potentially a collection over the next 12 to 18 months?

Your guess is as good as mine. The vagaries of the American legal system continue to frustrate. And the position is the same as we reported last quarter. That position is that we've -- all the arguments have been made and we're waiting for the courts to rule. We understand it's the final step. The only step after this is, if we get a favorable ruling, if for Pemex to go to the Supreme Court. And certainly, our advice from the third-party counsel is that it'd be unlikely that the Supreme Court would want to hear a case that was not really a matter of law or constitutional change, so as a consequence, it would be pushed back down for the lower courts to administer and that would be the end of it.

I think the important point is that the fact that the cash, or the majority of the cash, is actually in a bank account in New York under escrow. So it wouldn't have to be extracted from Mexico. But as to the timing, we wait.

Fair enough. Thanks.

George O'Leary, Tudor, Pickering, Holt.

Good morning, guys.

Good morning, George.

I see on page 10, the increased focus on Middle East opportunities, both refining and pet chem. Maybe just some more color on what the composition of those opportunities look like. Is it really more refining driven? Is it naptha-based cracking for ethylene? Is some of this increasing gas production driving some petrochemical opportunities there? Just more color on what you're seeing in the Middle East, from an opportunity standpoint.

The Middle East is a market where we historically have done quite a bit of work. I think what we've managed to do there is to go in and then execute projects and essentially -- other than Saudi Arabia, where we've got a firm presence -- is [leave] that market. So we feel, with a renewed focus in the Middle East and trying to build businesses there and establish relationships there, there are opportunities from a geographical perspective, as well as a sector perspective. We're looking at opportunities in Kuwait. We're looking at opportunities in Qatar, in Oman, in Abu Dhabi and also in Iraq, in addition to Saudi Arabia.

In terms of what we're seeing in terms of those opportunities, there's some in the refining arena. There's some in the petrochem arena. And some, in what I would call, upstream onshore arena, particularly in and around Iraq. In Saudi, they continue to have a need to diversify their economy. We're seeing how do they monetize oil in a better way, to take it into chemicals, for example, or to take it through the traditional refining process. So there's a couple of opportunities, significant opportunities in that space. We're doing offshore work in Abu Dhabi today. And there's a number of projects that they will have to do to continue to develop their fields and maintain their reservoirs in that arena. And similarly in Qatar, there's offshore work that, again, we see will have to go ahead.

So I think there's a balance, again, across the geographies and the portfolio. It's not one specific area. And I think each of the countries is different. You can't paint them all with the same brush. I think you have to be very specific, as we said on numerous occasions, on the client and the opportunity and really try and get your arms around the drivers as to whether these projects will go ahead or they will not go ahead. And obviously, with the ones you think have got the best opportunity, that's where you place your focus

Great. That's helpful color. And then maybe just one more. Were there any bookings in the third quarter? I know you guys laid out the puts and takes of the currency effects and the other items that impacted backlog in the quarter, but any of that in the third quarter?

As associated with what, canceled projects?

Yes.

No.

Okay. Thanks very much for the color, guys.

Thank you.

Michael Dudas, Sterne Agee.

Good morning, everyone.

Good morning, Michael.

Brian, on the billion dollar credit facility, could you remind us, or share with us, covenant issues relative to potential capital reallocation to shareholders through dividends and share repurchases?

And maybe for Stuart, is the improved confidence level of a couple of these projects get book for 2016 may improve the confidence level of returning to cash for shareholders, or is there going to be a cash need here that might preclude some of this going forward, given that your stock price is probably fairly attractive?

First of all, on the new credit facility, there's a new cap that's been established of $750 million. That's on my page 50 of the document. It's called a distribution cap. So there's certainly plenty of firepower under the credit facility in terms of how we allocate capital. There are some constraints, obviously, about incurring debt, if we were to do a large transaction or something of that regard. But I think the liquidity footnote spells that out pretty clearly in the document.

And in terms of capital needs for these projects going forward, no, nothing significant. As I mentioned earlier on the call, anything that's a fixed price or approximating a fixed price type contract allows us some flexibility in terms of structuring the payment terms. So that should be not a significant use of capital. Reimbursable type contracts, obviously, you do have a little bit of working capital build, but nothing substantial. So we hope to get back into the generating cash mode next year. So that, again, will increase flexibility for us on how we allocate our capital.

And it's probably worth just emphasizing that our share buyback program is still in place. That's not changed.

Excellent. Thanks, gentlemen.

Robert Connors, Stifel.

Good morning, guys. Congrats on the good quarter.

Thanks, Robert.

Thanks, Robert.

Can you paint for us in some broad strokes just terms and conditions around some of the JV contracts that were signed recently regarding the industrial maintenance services, whether we can expect -- will it be cost-plus or fixed price type work, and any other general payment type terms you can relay over to us?

The Industrial Services, by its very nature, is brownfields. It tends to be long-term and relationship-based. As a consequence of that, the majority is reimbursable, which is typical for that business is that we're not doing anything unusual there. That's just typical for that business.

Okay. And then on page 10, the list of the future petrochemical prospects, I didn't really see anything related to the second wave of US ethylene crackers. Just wondering if you are involved in the six to seven that are being talked about out there. Just because looking back in KBR's history, traditionally KBR has had solid relationships with some of the Asian-based petrochemical producers, and I'd figure that maybe you'd possibly play a role on this second wave.

It's certainly our intent to play a role in the second wave. We've got, on the ethylene side, we've got a strong technology component to our offering, in conjunction with Exxon Mobil's technology. We most certainly are working hard to be placed in that second wave.

Okay. Great. Thanks for taking my question.

Thank you, Robert.

Vishal Shah, Deutsche Bank.

Hello. This is Chad Dillard on the line for Vishal. It seems like you're gaining some momentum in the offshore business, so can you share with us how you're positioned in that market, given where the current environment is?

Yes. As we said before, I think we recognized way back in December of last year that we felt the reduction in oil price was not a flash in the pan. We thought it was going to be a tough market going forward. As a consequence of that, we lined the company up to be very much a gas facing company, and our technology plays to that, and the oil side of our business is actually quite a small component. But an important component, nonetheless.

So as a consequence of the market and the oil price, we felt that we needed to be very, very clear on the opportunities for these projects to proceed. Johan Sverdrup was a perfect example, where we looked at that opportunity, we spoke at length with the customer. And there's a number of partners in that customer, and making sure that we understood the economics and the political drivers. And we really lined up, thinking that project would go ahead, and worked hard to secure our role in it, which we ultimately did. And the project is proceeding. And certainly, with Maersk Culzean, exactly the same process.

So I think the answer to the question is that there will be opportunities in the offshore sector. Those opportunities will be less than in history, particularly for this little while in the medium term. And the key is really understanding your customer and which projects are going to go ahead. And that's really the effort we put in really hard upfront, and working really, really strongly and aligned with the customer to try and get these projects over the line economically. And I think we're proving when we identify the prospects, we've done our homework and those jobs are going ahead.

That's helpful. The Company has done a great job of executing on cost reduction, but assuming the booking environment remains soft, can you talk about what additional latitude you have to cut costs over and above the $200 million run rate you've laid out?

We've got the $200 million, which we're confident of doing through 2016. I think that's a good effort. There continues to be opportunities. The biggest risk in our business is really around people not booking their time to projects, so sitting on overhead, so to speak. So we've got good opportunity to manage that very closely and make sure we minimize the time that people sit around that are not charging to customers' projects. And we're working very hard to make sure we've got systems and processes in place globally now that we manage that very closely in an ongoing and timely basis.

Great. Thank you. I'll jump back in queue.

Tahira Afzal, KeyBanc.

Hello, guys. Just a quick follow-up on the M& A statement you guys made earlier on. Stuart, can you -- we're a quarter more in, can you talk a little more about what you're seeing out there in terms of this ability?

M&A is always -- what's the phrase, you've got to kiss a lot of frogs? We're continually looking at opportunities. As the market continues the way it is today there, will be more opportunity, you would think. We need to stay across that. And as Brian said, before our focus has been in the technology side. But technology only becomes available when it becomes available and you've got to have the ability to move quickly.

So having that optionality that we have now, in terms of our balance sheet, is really important. I think that we're seeing an increased level of M&A opportunity, yes, but I think that's maybe because we are more actively in the market looking than before. That's probably the best way to put it.

Got it. And last question is really on the -- I know there's been a change in management in regards to the ownership of execution of some large nuclear projects in the UK -- sorry, in the US. Does that create a fabrication opportunity for your new venture?

(Laughter)

Brian?

Yes, potentially. Potentially. I think there's enough fabrication opportunities out there, regardless, is probably the way to put it.

I'd say that fabrication on the Gulf Coast, in particular, is relatively tight. We view it as a strategic benefit for us to have access to these facilities for our EPC projects. So yes, theoretically. But our main purpose of doing the transaction is to support our EPC activities in our traditional businesses.

Got it. Okay. Thank you guys.

Jamie Cook, Credit Suisse.

Sorry, Tahira stole my question there. But back on the M&A, Brian, you mentioned specifically M&A in your prepared remarks. You mentioned it again when you were answering John Rogers' question. And then when you talked about your credit facility, you talked about if we were to do a large transaction. So I don't know if I'm just reading into something that -- is there something more eminent here?

And then my second question is, given what you guys have going on in terms of the restructuring and refocusing the business, do you feel like KBR is at a point in time where you could handle a larger transaction? Thanks.

Okay. Since I'm the one who made the statement, I guess I have to respond.

Well, you brought it up three times.

It remains an area of focus, in all seriousness. We've said this from the beginning of the year, it's part of our strategy. And to Stuart's point, we've been looking at this quite closely. There are some activities underway. So I'm just trying to make sure that people don't forget about it. Obviously, we don't have much to say about M&A until we actually have a transaction to announce, t which time we would announce it. But wait and see.

But would you feel comfortable -- you've made some good progress on the restructuring and right sizing KBR -- would you feel comfortable with a larger transaction, just given where you are, or what it still be small, like niche technology-type stuff?

I think, Jamie, again, it depends. The niche technology ones are very -- much easier to absorb. You do a larger transaction, it depends where the geographical overlap is, it depends where the industry overlap is, it depends what the cultural fit is. I guess to answer the question, it would be done in a very considered way. And if I felt that we could not manage it, we wouldn't do it.

Okay. I'll get back in queue. Thanks.

At this time, I would like to turn the call back over to Stuart Bradie for any final remarks.

Thank you very much. Just again, thank you very much for the interest and taking the time this morning and the questions. As ever, they're considered and cause us some challenge sometimes. But thank you very much for your interest. And again, we look forward to your continued support and we look forward to getting on the road soon and meeting you again face-to-face. Thank you.

That does conclude our conference for today. We thank you for your participation.