Shares in Sydney-based contractor UGL were hammered 33% lower yesterday after it shocked the market with another warning about more problems with a big LNG project off the northern Australian coast.
The shares lost $1.15 in a selling wave and ended the day at $2.30, the lowest since last August.
UGL warned that it may need to asset aside an additional $200 million to end disputes on its two contracts for INPEX’s Ichthys LNG plant near Darwin. That could take the total provisions on the project to close to $400 million.
It said both contracts were experiencing "substantial delays and disruption”.
The two contracts with the Ichthys plant are a structural, mechanical and piping contract (SMP) in a joint venture with Canadian-owned engineering group Kentz, and another contract to build a combined cycled power plant project in a joint venture with the US’s CH2M Hill.
Both contracts are with JKC Australia LNG Pty Ltd, a consortium of Japanese engineering groups JGC and Chiyoda and US engineering giant, KBR. "While commercial negotiations are continuing on the SMP project, they are becoming protracted with a satisfactory commercial outcome yet to be agreed," UGL said on Monday.
"If timely resolution of the claims cannot be achieved, it is likely that the claims will need to be concluded through formal dispute processes in order to achieve an outcome which appropriately reflects UGL’s entitlements."
UGL and CH2M Hill have also been arguing with JKC on the power project over concerns the joint venture had not been given correct instructions and the project’s original scope had been altered.
"Due to the protracted negotiations on the SMP project, UGL is no longer confident of timely resolution of the CCPP claims," UGL said. UGL has previously taken $175 million in provisions for the delays on the power project.
UGL CEO Ross Taylor said a year ago that he believed the provisions were sufficient and that he hoped to “cut a deal” with JKC to sort out disputes over cost blowouts.
That obviously has failed. But in interviews with the media after the announcement Mr Taylor attempted to put the best spin on the news by saying the $200 million was a worst case.
UGL was “bullish” about the strength of its claims but was worried that negotiations “could get messy,” Mr Taylor said in an interview with Fairfax Media.
"I don’t think that will happen, but I don’t know that it won’t," he said, adding that while he thought $200 million would be sufficient for possible provisions, he could not guarantee the final amount.
“Hopefully we will do better than [$200 million], that’s why we’re not providing yet." Shareholders would agree with him.
