We Expect the Accelerating Pace of Reimbursable New Awards to Help Derisk Fluor’s Backlog

Following Fluor’s FLR fourth-quarter earnings release, we have increased our fair value estimate to $33 from $26.50 and upgraded our Morningstar Uncertainty Rating to High from Very High. We had previously assigned the engineering & construction firm a Very High Uncertainty Rating due to the risk of further cost overruns as Fluor’s fixed-price exposure was elevated. Nonetheless, we believe that a High Uncertainty Rating is now appropriate as the company has meaningfully lowered the risk profile of its backlog, having reduced its fixed-price exposure to 37% from 59% at the end of 2021. Fluor is on pace to reach management’s target of lowering the fixed-price exposure to 25% by 2024.

Fluor’s full-year 2022 new awards nearly doubled, to $19.8 billion from $10 billion in 2021, and 87% of the new awards were reimbursable. Management said on the earnings call that the company has recently completed or is currently working on front-end engineering and design and study packages totaling around $147 billion. Given the strong pace of new awards and a healthy prospect pipeline, we expect Fluor to benefit from an acceleration in revenue growth driven by opportunities in mining, LNG, and life sciences. We also note that projects related to the energy transition accounted for 22% of new awards in 2022, up from 13% in 2021.

For full-year 2023, management anticipates revenue growth of roughly 10%, adjusted EBITDA of $450 million-$600 million, and adjusted EPS of $1.50-$1.90. Fluor’s 2023 guidance assumes segment margins of around 5% in energy solutions, 3.5% in urban solutions, and 3.5% in mission solutions. Fluor also introduced long-term guidance, targeting adjusted EBITDA of $800 million-$950 million and adjusted EPS of $3.10-$3.60 in 2026. We are encouraged by the pace of new awards as well as the shift toward reimbursable contracts, which we believe will help lower Fluor’s risk profile.