SNC-Lavalin shares fall to lowest since 2005 as company announces plans to exit many lines of work

Canadian engineering giant SNC-Lavalin announced a major organizational change on Monday, one that will see the company possibly get out of the oil and gas business, and stop pursuing a different type of contracting work entirely.

Firm withdraws previous guidance for earnings because of uncertainty

SNC-Lavalin Group Inc. warns its 2019 results could be significantly lower than anticipated, largely due to cost overruns at some construction projects and says it will undergo a reorganization to exit or section off its poorer performing segments. (Christinne Muschi/Bloomberg)

Canadian engineering giant SNC-Lavalin announced a major organizational change on Monday, one that will see the company possibly get out of the oil and gas business and stop pursuing one kind of contracting work entirely.

Before stock markets opened on Monday, the company announced it will take a $1.9 billion writedown on its quarterly earnings to reflect the changes it plans to make, including a pivot back toward the kind engineering work that it sees as key to its future.

SNC says it plans to get out of the business of what it calls "lump-sum turnkey contracting," which is work that a contractor such as SNC would do for a fixed cost to a customer, with the company on the hook for delays and cost overruns. That made up about 43 per cent of its revenue last year.

In light of the overhaul, the company says it has withdrawn all of its previous guidance for its earnings this year, because of the uncertainty of the new strategy.

SNC shares fell to just over $23.55 a share in early trading on the Toronto Stock Exchange Monday, the lowest price in 14 years. When markets closed, shares were trading at $23.80, down 6.7 per cent.

An example of such a contract would be the Réseau express métropolitain transit system currently under construction around Montreal. SNC says it will live up to the obligations of that deal, but plans to pursue fewer contracts like that in the future.

Another such contract would be a $260 million deal at the world's largest open-pit copper mine in Chile, a deal that the mine's owner Codelco recently tore up, accusing SNC of failing to live up to its obligations.

Nuclear power, infrastructure

"Lump-sum, turnkey projects have been the root cause of the company's performance issues," the company's interim chief executive officer Ian L. Edwards said in a release.

"By exiting such contracting and splitting it off from what is otherwise a healthy and robust business, we are tackling the problem at the source, and as a result we expect to see a material improvement in the predictability and clarity of our results."

SNC says it will live up to the obligations it has to existing contracts, but in the future it plans to focus more on different types of engineering consulting work, nuclear power and some infrastructure projects.

SNC says all options are on the table for its oil and gas business, "including transition to a services-based business or divestiture."

The company warned about that part of its business in January, after a diplomatic spat between Canada and Saudi Arabia had made it extremely difficult for SNC to win any new energy business in the country.

Reaction from Caisse

SNC's biggest shareholder is the Quebec provincial pension plan, known as the Caisse, which issued a reaction to the news on Monday that was well short of a vote of confidence. 

"The new strategic direction must be comprehensive and capable of reversing the current unacceptable trend of the business," said the Caisse, which owns almost 20 per cent of SNC shares. "We also expect this strategy to be accompanied by a realistic plan for its execution.

"La Caisse continues to believe that with the necessary changes in strategy and in execution, SNC-Lavalin has the capabilities to be a successful global business. We will continue to follow closely the company's decisions over the coming weeks."

The investment community was split on the news.

Desjardins analyst Benoit Poirier said he thinks "the negatives more than offset the positives."

He doubts a sale of the oil and gas business would fetch much, since it has fallen so far.

"We question the value that it could unlock from a potential divestiture given the division's disappointing performance," he said in a note to clients. "Bottom line, we would not be buyers of the stock this [Monday] morning as we prefer to wait for further improvements in the company's financial results."

TD analyst Michael Tupholme, however, is among the optimists. He believes the company will have extricated itself from about 80 per cent of its turnkey contracts by 2021, but two main ones could stick around until 2024, so buyers of the stock today would need to be patient.

"Although we believe that SNC's new strategic direction will be perceived as a favourable change by some investors, we note that it may not appease those that had been calling for change that would result in a more immediate surfacing of value," such as a sale or breakup of the company, he said.