The Middle East has become an important region for US engineering firm CH2M Hill, accounting for a 10 per cent share of business. The firms order book includes major government-led infrastructure work for events such as Expo 2020 in Dubai and the 2022 Fifa World Cup in Qatar.
CH2M Hill is emerging from a difficult 2014, with business now more focused on the companys core strengths. Although employee owned, it reports financial accounts to the US Securities Exchange Commission, and last year saw revenues decline by 8 per cent, or $464m, to about $5.4bn.
At a divisional level, the companys 2014 financial performance was mixed, with some units seeing growth while others lost ground. Its energy business has seen two straight years of decline, with revenues down from about $1.8bn in 2012 to about $1.1bn in 2014, and its facilities and urban environments business fell 14 per cent to $789.5m. However, its water business saw revenues increase 3 per cent to $1.2bn, environment and nuclear was up 4 per cent to $1.4bn, and transport rose 1 per cent to $947m.
We prefer to see more partnering arrangements where designers, clients and contractors work together on the solution
Neil Reynolds, CH2M
The biggest challenges we had last year were around some fixed-price engineering, procurement, construction (EPC) deals, primarily in a discontinued business, Jacque Hinman, CEO at CH2M Hill tells MEED. Our combined-cycle power plant projects we had taken on in 2011 and 2012 [were tendered] at a very highly competitive [and commoditised] time in that industrys market, so we took some losses on those.
Jacque Hinman, CEO, CH2M
While the company focuses on consultancy and project management in the Middle East, in the US it also operates in the EPC market, and it was there that project work pushed CH2M Hill into the red. We have now finished several of them and are in the process of finalising a few others over the next year or two, so the decline was really based on the losses from those projects, says Hinman.
The company has also reorganised into five global business units: water; environment and nuclear; transportation; industrial and urban environments; and oil, gas and chemicals a process that Hinman says began before 2014. In April, the firms corporate image was rebranded to simply CH2M. The reason behind the rebranding was to integrate better the companies it has bought over the past decade, which have included the UKs Halcrow, and the US Lockwood Green and Veco.
It was about time to come out as a new brand, just with the nickname CH2M to embody the integrated companies, says Hinman.
Its global business units, which are responsible for strategy, to identify growth markets, decide resourcing and set CH2Ms global risk policies, are supported by its geographic divisions, which have the stronger local knowledge required to win and execute work.
The people closest to our clients and projects, since all projects are ultimately local, are the best ones to deliver on those promises, says Hinman. We have this intersection of the global business units as well as our local regions that deliver our work.
With stronger risk management processes now in place, in an effort to minimise bidding on unprofitable jobs, and a greater focus on engineering consultancy and programme management, Hinman expects a return to growth. CH2M will continue to bid on design-and-build contracts in the water sector, and provide design work across its markets, but she argues that by becoming a nimbler organisation with a global view we can see whats going on in markets around the world, and [choose] interesting projects and long-term [global] clients.
The Middle East represents about one-tenth of CH2Ms business, and is the companys fastest-growing region. The Middle East is our second- or third-largest region overall, says Hinman, with the US still the firms primary market.
All its business units operate in the Middle East, where the core focus is the GCC, although it also works in other countries in the region. Its usually better to focus where you are strong, and then where there are developing opportunities to go into them when they have started to develop and when we understand the culture and geopolitical nature of the situation, says Hinman. We will watch with interest, as others do, to see what happens in the rest of the Middle East moving forward, but [the GCC states] are the main countries right now.
The company has a long history in the region, having worked on major projects in the Middle East, and Hinman says CH2M is attracted by the innovation and range of projects that move ahead, be that infrastructure, in hydrocarbons, government or technology. Its a draw for our people, who like the variety of work. So we are heavily invested in the Middle East; we expect it to grow to become one of our most important regions going forward, she says.
But with oil prices falling so heavily since last summer, there is concern about whether work could begin to dry up, particularly as globally, about 20 per cent of CH2Ms business comes from the oil and gas sector.
The company says that so far it has not seen a negative impact on workloads due to low oil prices. We know the global oil and gas market can be challenged and there may be some softness in the market in the second half of this year or early next year, says Hinman.
Many of our oil and gas clients believe that sometime in 2016, the oil prices will rebound. Within the Middle East, it has not affected our portfolio too much, and because we have a balanced portfolio, we see some of the other factors in the Middle East, particularly the investments in infrastructure, some of the industrialisation and defence opportunities coming up. We think the Middle East is a balanced region for us.
Chances of rebound
A rebound next year could be a little hopeful, with many analysts predicting that low oil prices could last several more years, particularly if sanctions are eased on Iran. An additional issue likely to weigh on crude prices is that storage capacity is reducing. It is estimated that by May, there could be a glut of stored oil reaching the market and pushing the price down further.
Neil Reynolds, senior vice-president and managing director at CH2M in the Middle East, also expects work in the region this year to continue unaffected, but is preparing for a softer 2016. My greater concern would be going into 2016-18, he says. Of course, we are thinking of ways to mitigate that. It could be diversification into some new markets or going deeper in some of our markets such as Saudi Arabia, or Kuwait, which appears to be moving a bit.
Neil Reynolds, CH2M Hill
If a projects slowdown does emerge next year, as many expect, there will be more pressure on costs, particularly if the market becomes more competitive due to the reduced number of contracts available. To counter this, Reynolds says the company is trying to draw the focus of clients to the need for innovation rather than on costs during contract negotiations. If there is more competition for less work, clients would or should take advantage of that, he says. To counter that, what we are trying to talk to clients about is more on the innovation side because youre not going to get much innovation when you push costs down.
We prefer to see more partnering arrangements where designers, clients and contractors work together on the solution and through that you drive down cost and have pain/gain share arrangements, where it gets everyone working as a team in a less adversarial manner.
Because just driving down cost normally means its going to become adversarial at some point and everyones working towards change orders as opposed to the solution.
Reynolds also warns of a potential currency risk as a challenge facing international companies in particular, which could become a global issue that also affects the Middle East. Could there be an overlay of a financial crisis on top of a slowdown in oil prices? he asks. There is a potential risk that we must all be mindful of.
To an extent, CH2M has built-in protection due to some of the contracts it has won. The firms work includes acting as programme manager for the construction of the World Cup stadiums in Qatar and the Dubai Trade Centre Jebel Ali for Expo 2020 in Dubai, where it is partnering with the UKs Mace. Neither will face cancellation and both have firm deadlines for completion, and so will not suffer project slowdowns should market conditions get tough.
No matter what happens to the economy, those projects are going to get done because they have that definitive end date, says Reynolds. Other projects potentially could slow down, but having said that, theres a lot of infrastructure involved to make the Expo and the World Cup work. So all that key infrastructure also needs to be in place to make those events happen.
In Qatar, more projects associated with the World Cup are expected to be awarded this year. Now that the politics is over, therell be a lot more focus on the delivery of the project, says Reynolds. Theres more certainty on when that end date is.
CH2M is also strong in the defence industry, where the Middle East has become a major market. Saudi Arabia and the UAE [are] spending a lot of money on national security, says Reynolds. All these projects need bed-downs, runways and hangars.
Elsewhere, Reynolds sees growing opportunities around tunnelling and airport expansions, as countries expand their facilities. Projects include the Strategic Tunnel Enhancement Programme in Abu Dhabi, due for completion in 2016, and the Inner Doha Resewerage Implementation Strategy in Qatar, as well as a drill-and-blast contract with the Sharjah government for a road route through the Hajar mountains.
Neil Reynolds, CH2M Hill, part 2
In Saudi Arabia, CH2Ms work includes being programme manager for the Riyadh Metro scheme. Additional contracts are expected to be awarded this year and contractors have been mobilised in particular for the tunnel sections.
We are seeing some challenges there in terms of mobilising people into Saudi Arabia, says Reynolds. Maybe that will become less, I think, if there is a downturn somewhere else in the economy; Saudi Arabia could benefit from that also.
The Middle East can become a barometer for the health of CH2Ms business, with its contribution to the companys global income expected to increase in coming years. Despite predictions of a difficult market ahead for major projects, which could dent the firms local income, its strategy of targeting marquee, government-sponsored schemes does afford it some insulation from a projects downturn.