Engineering firm SNC-Lavalin on a roll with Russian energy contract

MONTREAL – SNC-Lavalin’s chemical and petroleum division scored its second win this week with a multi-million dollar contract for an energy expansion project in Arctic Russia, the Canadian engineering and construction giant announced Wednesday..

The Montreal-based company said Wednesday it had been selected by Globalstroy-Engineering as the prime sub-contractor for detailed engineering and procurement for Phase III Package 4 of the Kharyaga oilfield project.

SNC-Lavalin will also provide project management support and commissioning services, the company said.

Financial details of the contract were not revealed, but analysts believe the contract is worth $40 million to $60 million for SNC, or 10-15 per cent of the US$400 million contract won by Globalstroy.

On Tuesday, SNC-Lavalin said it was awarded a contract for front-end engineering and design for an offshore gas-condensate development project in Venezuela.

No financial details were provided but analysts estimated the contract could be worth $20 million to $50 million for SNC-Lavalin.

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“We believe that these two contracts, together with the recent GES+ (general engineering services plus) contract win with Saudi Aramco, provide confirmation that SNC continues to be a credible global player in the oil and gas business,” wrote Pierre Lacroix of Desjardins Securities.

The Russian contract will be performed under a “service lump sum” model, which suggests low risk without construction and gross margins of 25 to 30 per cent, he added in a report.

The Kharyaga oilfield lies 60 kilometres north of the Polar Circle in the Nenets Autonomous Territory in Russia’s oil-rich Timan-Pechora province.

Phase III involves developing additional reserves, sustaining a daily output of 30,000 barrels a day, achieving 95 per cent associated gas use and eliminating flaring.

The work, which will be carried out over a 23-month period, has already begun and will be handled in the Canadian company’s London and Moscow offices and at its partially owned Russian design institute OAO Vnipineft in Moscow.

“We have been active in Russia and the former Soviet Union for many years, and have great confidence in this market,” said Jean Beaudoin, executive vice-president of SNC-Lavalin.

“We are particularly pleased that we can benefit from Vnipineft’s knowledge and experience on this challenging project.”

Maxim Sytchev of Northland Capital Partners said the contract leverages SNC-Lavalin’s 48 per cent stake in oil and gas engineer OAO VNIPIneft, acquired in August 2009.

Challenges include the site’s harsh environment, the fluid characteristics of paraffin and remoteness of the site.

Sytchev said the chemicals and petroleum segment is doing better than expected as contracts replenish its $841 million backlog, which represents nine per cent of SNC’s total order book.

“In addition, we believe that the competitive pressures in geographies such as Venezuela and Russia are materially less severe when compared to the Middle East where Asian-based engineering companies have been very aggressive over the past 24 months,” he wrote in a report.

Consequently, there is an opportunity for increased margins in the segment, Sytchev said, adding that it’s an opportune time for a sizable oil and gas engineering firm acquisition.

On the Toronto Stock Exchange, SNC-Lavalin’s shares lost 61 cents at C$56.42 in afternoon trading.