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SNC-Lavalin to sell oil and gas business in ongoing flight from risk

Deal comes as company reveals liabilities of C$140m arising from ongoing project litigation and C$90m in Covid-related charges on Canadian light rail projects.

Canada’s SNC-Lavalin Group has signed a binding agreement to sell its Resources Oil & Gas business to Dubai-based Kentech Corporate Holdings as part of its strategy to abandon risky lump-sum contracting and move into higher-margin engineering services and project management.

Affecting some 6,000 staff, the move reverses the company’s drive in the last seven years to become a global player in oil-and-gas engineering and construction with the acquisitions of Kentz and Valerus in 2014, and Atkins, Houston Offshore Engineering and Faithful + Gould in 2017.

Kentech celebrated its acquisition, saying it would more than double its headcount from 4,000 to 10,000, and bring a project backlog valued at US$1.1bn. It promised no disruption to ongoing projects. 

Signed on 8 February, the deal is subject to regulatory approvals, with closing targeted for Q2 2021.

SNC-Lavalin said the transaction is expected to create a gain on sale. The Oil & Gas business will be classified as an "Asset Held for Sale" in Q4 2020 and is expected to result in a fair value write down in the range of C$260m to C$295m, almost entirely non-cash in nature.

A charge of C$95m on the retained Resources business, related to legacy positions and one remaining mining project, will be taken in Q4 2020.

The company also revealed further negative impacts of ongoing project litigation after a comprehensive review of its position.

It said it will be recognising extra provisions of around C$140m and a reduction in commercial claims receivable of C$155m in Q4 2020. Some 75% of the total is non-cash in nature, with the balance impacting cash and spread over a number of future years, depending on the timing of litigation outcomes.

"Notwithstanding these provisions," SNC-Lavalin said, "the Company will continue to aggressively pursue all claims receivable, which it believes it is entitled to contractually and will vigorously defend the litigation matters."

More bad news came after a review of its three remaining Canadian light rail projects in light of Covid-19.

It said the projects were progressing well, but that lower productivity attributable to Covid-safety working conditions, plus supply chain disruptions, had created "unprecedented challenges".

As a result, the company expects to take a charge of around C$90m in Q4 2020 related to these lump-sum projects, most of which is due to Covid-19 challenges and its decision to not recognise associated revenue yet.

It said: "The Company strongly believes that it is entitled to these revenues, but until greater clarity is forthcoming, it will continue to only recognize COVID-19 expenses on the ongoing LSTK infrastructure projects."

Ian L. Edwards, president and chief executive, said: "Over the past 18 months, we have made significant strides in advancing our strategy and de-risking the business. Following the introduction of our new strategy in July 2019, we have significantly improved our operating cash flows and demonstrated that our Engineering Services line of business is resilient and can deliver strong results.

"The sale of the Oil & Gas business further simplifies and de-risks our business and allows us to enhance our focus on growing our high potential core Engineering Services business. I would like to thank all of our Oil & Gas employees for their contributions over the years and wish them well in the next stage of their journey."

Image: Render of a paired-column semi-submersible (Courtesy of SNC-Lavalin media centre)

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