benthonic wrote:CFO Anne Hayes - Our FY10 operating cash flow included a repayment of a $14.7 million contractual claim we received in the prior year. Adjusting for this, FY10 operating cash flow would be $29 million, against $18 million in FY09, so there was actually an improvement in cash flow, which predominantly came through in the second half.

GoldmanSachs Note on QLD floods: At this stage it is very difficult to assess accurately the financial impact of the heavy rain and floods. Our review has therefore focused on identifying those E&C companies that may be impacted based on their earnings exposure to the rain and flood affected regions of Qld. Key points to note in relation to assessing the potential financial impact on Engineering & Construction stocks are:
• The upper Bowen Basin (a key area of coal production) has not been impacted by major flooding as much as the lower Bowen Basin but heavy rainfall means that mines need to
be de-watered and rail line access has been cut in places.
• Therefore, the key question is: how soon can production re-commence? This will be determined on a mine-by-mine basis but comments from Wesfarmers in relation to its
Curragh mine indicate that production could return to normal by early February 2011.
• This suggests that Qld coal production could be back online by mid-to-late February, which would mean only three months of impacted or lost production.
• We therefore expect the E&C companies to be in a better position to determine the full impact of the rain and floods by the February reporting season.

Companies that may see some potential negative impact are:
Leighton (LEI) - Contract mining
• We estimate that around 8% of our current FY11 group revenue forecast for Leighton comes from Queensland coal operations.
• Note that 1H11 revenues would be largely secure so the risk to FY11 contract mining revenues depends on how quickly production can restart in 2H11.

Downer EDI (DOW) - Contract mining
• Around 17% of our total FY11 revenue forecast for Downer is derived from contract mining services in QLD, WA and NSW.
• Queensland operations generate 40%-50% of contract mining revenues so we estimate that around 8% of our FY11 revenue forecast is exposed to Queensland coal.
• Note that 1H11 revenues would be largely secure so the risk to FY11 contract mining revenues depends on how quickly production can restart in 2H11.

Bradken (BKN) - Mine consumables
• Bradken provides mining and mineral processing consumables to coal producers in Qld.
• Bradken could be negatively impacted by reduced demand for mine consumables products while Qld coal production is delayed by heavy rains.
• We estimate that around 8% of our total FY11 sales forecast for Bradken is sourced from the Qld coal fields.
• Once again, the full revenue impact will be determined by how quickly coal production can restart in 2H11.

Sedgman (SDM) - Coal processing plant operations
• Sedgman's coal operations business is likely to be impacted by the rain through lower levels of coal production volumes.
• One of Sedgman's key clients, Macarthur Coal, recently declared force majeure so Sedgman will see lower production volumes at Macarthur Coal's mines.
• Around 20% of our total FY11 revenue forecast for Sedgman comes from coal oper tions contracts in Qld and, fortunately, Sedgman's operations are based in the upper half of
the Bowen Basin which has not seen major flooding.

Boart Longyear (BLY)
• We estimate that less than 1% of Boart Longyear's drill rigs would be operational in the Qld coal fields and, as such, any lost earnings due to flooding in the region would be
immaterial to the company.
Transfield Services (TSE)
• Transfield has a long-term shutdown maintenance contract across several Bowen Basin coal mines. This contract is not related to production volumes at these mines so we do
not expect the floods to have any material impact on Transfield in FY11.
UGL (UGL)
• UGL Resources operates out of the Bowen Basin providing maintenance services to coal mines in the region. We do not expect any of UGL's current contracts to be materially
impacted by the flooding.
• We believe there is actually potential for UGL to benefit from the floods as we expect coal producers to bring forward planned maintenance while mines are closed or operating at reduced capacity. Furthermore, UGL is well positioned to capture repair work on flood damaged equipment.
WorleyParsons (WOR)
• We estimate that WorleyParsons' total exposure to the Qld coal and CSG fields is less than 1% of global group earnings in FY11 and therefore consider the flooding to be
immaterial to the company.
Seven Group (WesTrac)
• WesTrac does not operate in Qld. WesTrac is the authorised CAT dealer in NSW and WA and, as such, has no direct exposure to the Qld floods.
Ausenco (AAX)
• Ausenco's key exposure to the Qld coal fields is a construction management project that it is delivering at the Kestrel coal mine for Rio Tinto in Emerald.
• While it is unclear what the potential impact of the flooding in Emerald will have on this project, we estimate that the project only represents around 3% of our CY11 revenue
forecast for the company so the impact of the flooding is likely to be immaterial.
Monadelphous (MND)
• The bulk of Monadelphous' revenues are sourced from WA so we do not expect the Qld rains to have a significant impact on its earnings (if at all).
Imdex (IMD)
• Similar to Boart Longyear, we do not expect the Qld rains to have much of an impact on Imdex's earnings given its high exposure to the global resources drilling markets.
WDS (WDS)
• WDS' mining operations are focused on underground mining operations which appear to be largely unaffected by the recent heavy rains.

Macmahon's revenues are split between civil and mining contracting, but most of the 30 per cent of its spare capacity sitting idle is in civil, highlighting the different forces driving contractors.....

Leighton's woes showed the risks of "underpricing large, fixed-price, fixed-time contracts", when extreme weather, as experienced around the country this year, stirs problems....

...... investors also punished Downer EDI for missing targets on its multi-billion-dollar Waratah train project in NSW.

......But (all this) pales in significance to the excitement surrounding mining services plays, with Goldman Sachs this week initiating equipment supplier Emeco Holdings at a buy and Macquarie starting GR Engineering at a buy.

Indeed, better performers on the market in recent months have been pure play mining services names such as Ausdrill, Decmil Group, Imdex and Forge thanks to the impending boom of mining project work.

...... Another coming theme for contractors could be mergers and acquisitions. Analysts believe Leighton must sell assets, pointing to its almost 20 per cent stake in Macmahon which it has identified as non-core, along with its interests in engineer Sedgman and Devine.

The past weeks have already supplied several key examples of what is yet to become regular headline material. First up was Woodside Petroleum (WPL) which issued yet another increase to forecast costs for its Pluto-1 project, plus another commissioning delay by six months, plus a downward revision in projected output volumes for the year. Investors should note at the now "most likely" outcome of US$14.9bn in costs for the project, the increase since 2007 when the original go ahead was approved by the board is no less than 24%.

Moreover, external calculations now put the internal rate of return at 10% or less, which positions the project at the bottom of Woodside's acceptable project returns guidance of between 10-15%. One more delay or further cost blow-out will push the project below the range. In terms of time, if the current delay proves final, Pluto-1 will have over-run the original time schedule by 14 months, or 33%.

All this triggered the following comments from analysts at Citi: "At the CY10 result, WPL presented a chart using Independent Project Analysis (IPA) criteria to show that Pluto-1 was still defined as a "success". We note Pluto-1 has now breached several of these metrics, and question if the project can still be defined as a success".

I leave the answer to that question for others. It should be clear the risk profile for Woodside overall has increased significantly. Not just because there remains potential for further disappointment at Pluto-1, but because Woodside has more similarly large projects in the pipeline. One can only wonder the risks and potential blow-outs connected to Pluto-2 and Browse.

However, the biggest mistake investors can make is to consider this a company-specific risk or failure. This is not just about Woodside, this is at the very least about the burgeoning LNG industry across Australia.

Specialised industry consultant Wood Mackenzie has pointed out that gas giant Qatar has built 60mtpa in capacity with a peak labour force of 93,000 people. In comparison, the Queensland coal seam methane (CSM) sector is currently targeting 33mtpa with a peak labour force of 20,000. Sure, there will be key differences between the two regions, but at the very least one can see that more than half of Qatar's achievement is being targeted in Queensland with only a third of the labour. Don't take my word for it, but the consultants at Wood Mackenzie have little hesitation in their prediction: delays and cost over-runs are inevitable.

Analysts at stockbrokerages never were 100% in line with guidance provided by companies in Australia's LNG sector, as delays, labour and equipment restrictions and cost over-runs were regarded as "logical". Regardless, the recent weeks have seen analysts making further adjustments to their assumptions. The downward revisions have placed energy companies and miners at the forefront of the latest round of cuts to earnings forecasts. And yes, Woodside has been the "leader" of the pack in the week past.

The Woodside announcement has once again highlighted tomorrow's outlook for growing gas demand is not simply a license to print money in Australia, no matter the level of hype and/or optimism. There will be winners and there will be losers. Right now, it seems, companies such as Santos (STO) and Oil Search (OSH) are loosely regarded most likely as winners amongst Australian peers. Others, including Woodside and Origin (ORG), are under stress to avoid being labeled losers.

Analysts at Macquarie see much wider consequences for the sector in Australia as a whole. Predicts Macquarie: "Notwithstanding the short-term Fukushima effects and a near-term tightening in global LNG markets, longer term movements look set to expose Australia’s higher cost base at a time when demand is expected to trend towards more price sensitive markets. As a result, we see growing pressure on local operators to exploit the current market window by sanctioning greenfield projects quickly so that as the market gets more competitive."

As a result, it is widely expected the industry is approaching the point where disciplined boards and management teams will walk away from projects that do not warrant ongoing expenditure. Others might be forced by shareholders or by the market to abandon sub-par investments.

Note that analysts at Macquarie have decided to lower forecasts and price targets for all LNG players under coverage post the Woodside announcement, including for their sector favourite Oil Search. While all targets remain well above current share prices, it seems rather unlikely investors will try pushing these share prices to the maximum anytime soon while such big question marks remain.

Only days after the Woodside news, BHP Billiton (BHP) followed up with the announcement the expansion at the Worsley alumina refinery in Western Australia would cost a lot more (58%) than initially budgeted for. While some analysts have been quick in pointing out this news represents only a minor set-back for the company in the bigger scheme of things, this does not take away the fact the company's risk profile has made a significant jump for the worse. This not in the least because the board has allowed for US$80bn in capital expenditure in the years ahead and US$10bn of this is dedicated to potash, which is relatively new to the Big Australian.

The news about Worsley has already generated a few stand-out comments. Probably the most expensive alumina refinery expansion - ever, suggest analysts at Macquarie and Citi. But also: doubts whether the board would have given the greenlight for the expenditure if it had known the ultimate costs would be so much higher. Probably not. On current metrics, the Worsley operation will require 25 years of uninterrupted operation to pay back its costs. And that's not taking into account alumina prices disappointing at some point over that period, or a further increase in costs.

No doubt, some investors are experiencing flashbacks about BHP's chequered legacy with new technologies that end up costing shareholders a lot more than initially anticipated: Beenup in mineral sands, Hartley platinum, two HBI plants and Ravensthorpe nickel.

In between both announcements, China's Sinosteel effectively placed a big question mark over the Oakajee Port and Rail project in WA by ceasing its $2bn Weld project, leaving the other foundation partners in the port project, including Murchison Metals (MMX) scrambling for a quick Plan B solution.

Iron ore stocks have experienced their own "winners and losers" contests these past few weeks. Note that experts seem united in the view that prices will hold up for another two years, but will then likely come down by stealth. Which is why any junior with immature financing or a project time-line past 2014 has now received the label of "loser".

The same process is taking place inside the most popular among popular sectors since October last year; the "pick and shovel" service providers to the energy and mining sectors. Widely anticipated to reap a lot of contracts and revenues from the capex tsunami in the years ahead, stocks such as Monadelphous (MND), Walter Diversified (WDS), WorleyParsons (WOR) and Lycopodium (LYL) have enjoyed only rising share prices in what has briefly seemed like a race with only winners. The market is now coming to grips with the fact that this sector, too, will have some winners but likely many more losers.