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Mcdermott International Inc (MDR) Q3 2018 Earnings Conference Call Transcript


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Mcdermott International Inc (NYSE: MDR)
Q3 2018 Earnings Conference Call
Oct. 30, 2018 , 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the McDermott Third Quarter Earnings Conference Call. At the end of the opening remarks, we will open the line for questions. (Operator Instructions) I'll now turn the call over to, Scott Lamb, Vice President of Investor Relations. Scott?

Scott Lamb -- Vice President of Investor Relations

Thank you, operator, and good afternoon, everyone. Joining us on the call today are McDermott's President and Chief Executive Officer, David Dickson; and Executive Vice President and Chief Financial Officer, Stuart Spence.

I'd like to remind you that we are recording the call and the replay will be available on our website where you can also find our third quarter 2018 results press release and the Form 10-Q we filed today. We've also posted a presentation of supplemental financial information on the website.

Additionally, our comments today include forward-looking statements and estimates. These forward-looking statements are subject to various risks, contingencies and uncertainties and reflect management's view as of today, October 30, 2018. Please refer to our filings with the SEC which are available on our website, including our Form 10-K for the year ended December 31, 2017 and subsequent quarterly reports on Form 10-Q.

Those documents provide a discussion of some of the factors that may cause actual results to differ from management's projections, forecasts, estimates and expectations. Please note that except to the extent required by applicable law, McDermott undertakes no obligation to update any forward-looking statements.

I'll now turn the call over to David.

David Dickson -- President and Chief Executive Officer

Thanks, Scott and good afternoon, everyone. As you may have seen from our earnings release and other subsequent releases issued today, we have a number of things to discuss now that we are nearly six months into our life as a new McDermott. Well we have a lot to cover on today's call. I want to start by emphasizing that customer enthusiasm for our combination with CB&I has reinforced our conviction related to this strategic rationale for the transaction and that the market outlook is even more positive than we had expected it to be.

Our core results and healthy pipeline reflect these dynamics. We have now completed our first full quarter of ownership of CB&I, which has given us the ability to fully grasp the magnitude of the challenges associated with our legacy focused projects and to complete a comprehensive portfolio review. We will get into more detail on each to ensure that you have a clear view of the steps we are taking to bring the projects to close.

First to address concerns about Cameron and the other two focused projects including the feedback from investors that these projects represent an overhang in our stock price. We have taken steps to significantly improve the way we are managing the projects and the way we are interacting with our customers and consulting partners.

Second to address concerns about the company's leverage, we have committed to use anticipated proceeds from asset divestitures to reduce the company's current total debt level by roughly one third. Now let me summarize the key points, I'd like each of you to take away from today's call. Firstly, I would say that the legacy focus projects, the company reported solid operating performance, strong bookings and healthy liquidity, and a rebounding market.

Secondly, we expect no further material changes in the cost estimates on the legacy focus projects which we believe have been significantly and incrementally de-risk, as compared to where we were in Q2. Thirdly, our integration efforts continued to proceed well ahead of the plan. In addition, our combination profitability initiative or CPI is proceeding at a rapid pace that's exceeding our original expectations.

We have received resounding support from the combination from our customers and partners and the values of new McDermott are being applied to strengthen relationships and improve transparency with both of them. Fourth on the list, as separately announced today, we have completed a strategic review of our business, which reaffirms our commitment to McDermott's core capabilities as a vertically integrated provider of technology led onshore and offshore EPC, EPCI services. That review also confirms that our tank storage business and our U.S. pipe fabrication business are not core to the company's long term strategic objectives. And as a result, we are developing plans to seek buyers for the two businesses with a majority of proceeds to be used for debt reduction.

And lastly, we have entered into definitive agreements with the investment funds managed by the Merchant Banking Division of Goldman Sachs, providing for the private placement of $300 million of redeemable preferred stock. We have also separately received commitments for a $230 million increase in our letter of credit capacity. Proceeds from the private placement are expected to fund working capital needs, and increase in the letter of credit capacity will enhance the company's readiness to book anticipated very strong order intake.

Now let me turn to the quarter including detail on the change and estimates on the three legacy focused projects announced today. We generated net income of $2 million with adjusted net income of $89 million and adjusted EBITDA of $275 million. Our underlying results reflect solid operating performance across the portfolio and an improving macro environment. Additionally, we benefited from accelerated progress in identifying and realizing revenue and cost synergies and implementing a new cost culture.

Strong customer acceptance of the recent combination contributed to the robust second quarter and a record setting revenue opportunity pipeline of 80 billion. We have continued our momentum with strong awards earlier in the fourth quarter including the recently announced ONGC KG 98/2 award in consortium with BHGE and Larsen and Toubro. Our portion of the contract is approximately $700 million.

We continue to make good progress implementing the one McDermott execution strategy across all of our projects. However, as those of you who are following our story know, there are three legacy focus projects that have continued to be a challenge. Cameron LNG, Freeport LNG and the Calpine power project.

Today, we announced $744 million of charges in estimates on those three projects. I'm sure you are as disappointed as we are to see these additional changes in estimates. Given the magnitude of the changes, I want to take a step back and provide some context. Over the course of the third quarter, we gained a much deeper understanding of the projects and took steps to improve productivity and address labor related cost overruns. Still we'll provide more detail on the changes and estimates for each project, but I want to emphasize after five months of ownership, we now believe we have a thorough and definitive understanding of the schedule and the cost position on each of the projects and clear visibility into the operational and financial path to completion.

We also have much better alignment with our consortium partners on cost and schedule. As a result, we now expect there will be no further material changes in cost estimates on these jobs. Now let me give you some insight into some of the changes that have been made. We have taken significant steps to address performance issues on the three projects. Specifically we have installed a new executive leadership team including our new Chief Operating Officer who joined us in July and the area Senior Vice President, it was announced with a combination.

We have also installed a new on site management personnel. On Cameron in particular, we expect to continue to add to and strengthen our on site management and supervision until completion of the projects. Across all three of the legacy focused projects, we have made improvements in reporting structures execution plans forecast cost based methodology and the flow of communication with our consortium members and customers. Additionally, we have completed the review of the remaining projects in the portfolio and have not identified any other projects with significant execution risk, thus confirming our original analysis.

We now have the right people in place, using the best information to make the most productive decisions. All of this has part of our one McDermott

way. Specifically on Cameron, our confidence on the path forward is now bolstered by three things. First is a productivity improvement initiative set out to identify ways to improve the execution plan. Second is a cost reduction plan that aims to review and improve the economics of our subcontractor and service relationships.

Third is a revenue recovery plan that which we expect to obtain meaningful reimbursements from the customer for certain incremental costs. The Cameron project has been especially frustrating for us. Take a minute to consider that the headwinds on this project began the day the contract was signed. The widely held view in the industry is that the job was significantly underbid.

This generally results in a situation in which the contract is in essence subsidizing a portion of the project cost. So the contract was unfavorable to begin with, and then moved into a lengthy period in which CB&I and I underperformed. At the same time, the quality and availability of labor in the U.S. Gulf Coast became much more of a challenge than anyone had anticipated.

All of this has had a cumulative effect to bring us to where we are today. Nonetheless, I still believe that in the final analysis Cameron will deliver LNG at a cost per ton as competitive with the U.S. market.

I say this in particular because a rigorous analysis of our estimated cost at completion for the legacy LNG projects has helped us benchmark Cameron and Freeport against each other where we see very similar metrics for the EPC scope. Make no mistake, however, we still must work diligently to ensure that Cameron, Freeeport and Calpine remain on track and proceed to the scheduled completion dates.

We are confident that in each case, we will deliver a state of the art facility to our customer that will operate as advertised for decades to come. And the lessons learned on these projects have been incorporated into a drive for continuous improvement. Now turning to McDermott's markets, we have very good news to report.

New awards for the quarter totaled 3.1 billion, which represents a book to bill ratio of 1.3. In addition, a revenue opportunity pipeline reached over 80 billion as of the end of Q3 primarily driven by our operating segments in the Americas and Middle East.

The revenue pipeline is comprised of backlog of 11.5 point five billion bids and changeovers outstanding of 21 billion and target projects of 48 billion. We continue to see market recovery in the offshore/subsea, LNG and downstream markets, particularly petrochemical as reflected by a strong revenue opportunity pipeline increased backlog and increased bids outstanding.

In addition from day one, we have been imposing our bidding discipline on new prospects under our one McDermott way which we believe will ensure that all bids we submit, will be based on the clear expectation that new projects will meet their key performance metrics. As I've said before, we will never chase backlog simply for the sake of winning new awards.

Post-Combination integration continues to progress well and is focused on five elements: culture; work processes; revenue synergies; IT systems; and CPI. A Cultural Integration Team facilitated six cultural integration summits around the globe to lead the effort in creating a new common McDermott culture. Input from the summits was used to develop and roll-out a new, unified purpose and set of values. As discussed last quarter, we have adjusted our operating model to account for our new, broader portfolio and footprint and implemented the One McDermott Way across the current project portfolio and prospective bids, driving value for customers and shareholders.

We have also begun to realize the benefits of the combination through revenue synergies with a third quarter booking of a mega contract that we believe neither legacy company would have won independently. Progress on streamlined IT systems is progressing well, as a company has now completed the global enterprise systems blueprint and initiated the global ERP system design phase. We will take a measured approach to implementation.

CPI is achieving great progress with $319 million of annualized run rate savings action so far and we are now raising our target from $350 million to $475 million.

Now, let me summarize our recently completed portfolio review. As I said earlier in the call, we conducted a comprehensive review of our entire capabilities portfolio. The review reinforced our strategic direction, but also led to the determination that our tank storage business and the U.S. pipe fabrication business are not core to our strategy. In particular, we determined that these operations offer limited pull-through or cross-selling opportunities for the rest of our combined business and in some cases, their ability to aggressively pursue third-party work can be hampered by internal constraints. Accordingly, we are beginning a sale process for both businesses.

We intend to use a majority of the proceeds, which we expect to be in excess of $1 billion to reduce total debt. We anticipate completing the transactions into 2019. The tank stories in USA fabrication operations continue to perform well and offer competitive differentiation on a stand-alone basis in their respective markets. The tank business in particular is known as a world leader in the markets it sales. We will be seeking owners who value the significant long term growth potential of each business and would thus provide attractive prospects for employees and customers.

The fifth item on the headline list relates to a step that strengthens our balance sheet. We are pleased to take this step with Goldman Sachs Merchant Banking division, it is a private placement of $300 million of redeemable preferred stock as we believe it strengthens our capital structure.

Proceeds from the private placement are expected to fund working capital needs. We have also separately received commitments for $230 million increase in a letter of credit capacity. The expected increase in our letter of credit capacity will enhance the company's readiness to book anticipated very strong order intake.

Sure we'll talk about segment operating results, but before we turn to that, I'd like to offer a few comments on our technology business which continues to generate terrific value for us. The segment posted very strong results with sequential quarter gains in all key metrics. In particular, new orders quadrupled, backlog was up 26%. Revenues increased by 41% and adjusted operating income was up 66%.

The technology of license awards announced in the third quarter provide McDermott with an opportunity for the sale of additional products and services. On this point in particular, we continue to view the technology business as providing McDermott with a huge competitive edge and winning EPC contracts in the petrochemical and refining markets. In the past five years alone, the company has won about $8 billion of pull-through EPC work that resulted from the initial sale of technology licenses.

With that, I'll turn over to Stuart for details on the third quarter financials.

Stuart Spence -- Executive Vice President and Chief Financial Officer

Thanks, David and good afternoon, everyone. Before I take you to the results, I'd like to take a second to remind you that this quarter represents the first full quarter as a combined company. I would also like to remind you that when you look at the tables accompanying our earnings release, the information that is presented for the year ago period does not include the acquired business of CB&I. With this in mind, comparisons to the year ago period do not provide much insight. So I'll focus my comments on the drivers of performance within the quarter.

McDermott reported net income of $2 million or $0.01 per diluted share for the third quarter of 2018. Results reflect solid execution across the portfolio projects partially offset by costs of $103 million related to intangibles amortization, the combination profitability initiative and transaction costs associated with McDermott's combination with CB&I. Net income in the quarter was also unfavorably impacted by higher than expected tax expense, the $103 million of items includes $68 million of intangibles amortization which is up from the second quarter due primarily, to the impact of the changes in estimates on the three legacy focused projects.

The fact that Q2 was an abbreviated period for the combined company and the inclusion of our joint venture equity arrangements in the amortization. $31 million of restructuring and integration costs which is largely the cost of implementing our CPI program and $5 million of cost related to the combination.

Excluding the $103 million of charges, McDermott's adjusted net income for the third quarter was $89 million and adjusted diluted earnings per share was $0.20 which includes the $68 million of intangibles amortization. The adjusted per share figure also reflects an usually high effective tax rate for the quarter of 100% which translated to $44 million. This was a reflection of the jurisdictions in which the company generated income and losses.

McDermott's revenues of 2.3 billion in the third quarter of 2018 were largely driven by the execution of downstream projects and NCSA and offshore projects in MENA. The Company's operating income and operating income margin for the third quarter of 2018 were $129 million and 5.6%. Adjusted operating income for the third quarter of 2018 was $232 million and reflected the same primary factors that drove revenue performance in the quarter. The adjusted operating income margin was 10.2% aided by strong performance in the MENA and technology segments. McDermott increased its CPI annual run rate savings target to $475 million, up from the previous target of the $350 million. McDermott's operating results in the three months ended September 30, 2018 included approximately $40 million of such savings and cash savings of 57 million.

As of September 30, 2018, McDermott had taken actions that are expected to result in $319 million of annualized run rate savings. The $475 million annualized run rate is expected to be fully actioned by the end of 2019.

Anticipated cost to achieve CPI savings has been reduced by $20 million to $190 million as a result of a recent accounting pronouncement that provides for the capitalization of certain cloud computing software implementation costs to the balance sheet. Costs of $31 million were recognized in the third quarter of 2018 and were $106 million cumulatively. Additionally, McDermott had onetime cash benefit of $52 million resulting from the sale of the former CB&I administrative headquarters which is included in investing activities on our cash flow statement.

Now, let me turn to the legacy focus projects. As a point of clarification, the changes in estimates are not reflected in the determination of net income for the third quarter, as those amounts have instead been reflected in purchase accounting adjustments related to the Combination. This is the same way that we treated the changes in estimates in the second quarter of this year. Cameron's $482 million in changes in estimates resulted primarily from a detailed reassessment of the schedule and cost-base. The analysis included a comprehensive review of the work to go, including work for which we may not be compensated such as rework and a reduction in the productivity estimates.

To reassess schedule and estimates reflect regional limitations on labor availability and quality, the elimination of an incentive opportunity and the addition of liquidated damages associated with the completion schedule. As of the end of the third quarter 2018, the project was 83% complete and had about another $557 million of McDermott revenue to go until expected completion in Q1 2020. During the quarter, the Cameron LNG project accounted for $191 million of revenues and $34 million of negative cash flows from operations. We expect negative cash flow on this project to be about $81 million in Q4 and $320 million in 2019 and then to turn positive in 2020 providing about $43 million of cash flow.

At Freeport, the $194 million of changes in estimates is due primarily to a reduction in forecasted labor productivity resulting from regional limitations on labor availability and quality. The change was also impacted by the Company's decision reached in conjunction with ongoing customer discussions to include liquidated damages associated with the pre-hurricane Harvey schedule.

The updated schedule and forecast is based upon rigorous reassessments and views by the project team and site management including the area supervisors assessment of work to go. As of the end of the third quarter, the project was 82% complete and had about another $622 million of McDermott revenue to go until expected completion in Q2 of 2020.

During the quarter, the Freeport LNG project accounted for $220 million of revenues and negative $115 million of cash flows from operations. We expect negative cash flow in this project to be about $174 million in Q4 and 64 million in 2019. And then to turn positive in 2020 providing about $47 million of cash flow.

The $68 million increase in cost on the Calpine project resulted from our decision to decrease the productivity factor on the future work by 20%. As you have heard us say previously, the major factor at Calpine has been labor productivity involving both direct hire and subcontract employees. We believe the newly assumed productivity factor is realistic and achievable. As of the end of the third quarter of 2018, the project was 91% complete and had about another $27 million of revenue to go until expected completion in Q1 2019.

During the quarter, the Calpine gas turbine power project accounted for $29 million of revenues and negative $14 million of cash flows from operations. We expect negative cash flow in this project to be about $29 million in Q4 and $41 million in 2019.Now let me walk you through summary comments on the financial performance of each of our segments. In our NCSA segment, revenues of 1.5 billion were primarily driven by the Cameron LNG, Freeport LNG, LACC and the Total ethane cracker projects.

Additional contributors were the Shintech, Abkatun-A2 and the Entergy Power projects. Operating income was $97 million with an operating income margin of 6.4% during the quarter excluding the impact of intangibles amortization, adjusted operating income for the third quarter of 2018 was $109 million representing an adjusted operating income margin of 7.2%. In our EARC segment, revenues of $77 million were primarily driven by the continued activities on two downstream projects in Russia and offshore activity on the Total Tyra project.

Operating loss of $13 million and margin of negative 16.9% were impacted by fixed costs. Excluding the impact of intangibles amortization, adjusted operating loss for the third quarter of 2018 was $8 million, representing an adjusted operating loss margin of 10%. In our MENA segment, revenues of $473 million were primarily driven by high levels of fabrication and marine activity for offshore projects in the segment.

Key contributors were the Saudi Aramco projects, Safaniya Phase 5, Safaniya Phase 6, LTE II and 13 jacket's as well as the ADNOC crude flexibility project. Operating income was $89 million with an operating income margin of 18.8%. Excluding the impact of intangibles amortization, adjusted operating income for the third quarter of 2018 was $96 million representing an adjusted operating income margin of 20.3%. In APAC, revenues of $75 million were driven by close activities on the Woodside, Greater Western Flank 2 project.

Also, procurement and engineering progress on the Reliance KG-D6 project and activities on a tank storage project in the Philippines. Operating income of $9 million and a margin of 12% were primarily attributable to close our improvements on the completion of the pipeline and offshore construction campaign on the Greater Western Flank Phase 2 project on Australia and various other projects.

In our Technology segment, revenues of $148 million and operating income of $20 million for the third quarter of 2018 were primarily driven by licensing and proprietary supply in the petrochemical and refining markets. Approximately, half of the revenue was attributable to proprietary supply, including catalysts. Operating income was positively impacted by strong execution progress, earned fees and process performance. Excluding the impact of intangibles amortization, adjusted operating income for the third quarter of 2018 was $63 million, representing an adjusted operating income margin of 42.8%.

In the Corporate segment, expense in the third quarter of 2018 was $73 million mainly attributable to selling, general and administrative and other expenses of $22 million, $31 million of cost to achieve CPI and unallocated direct operating expense of $20 million. Unallocated direct operating expenses were primarily driven by lower than standard utilization of certain marine assets.

McDermott's cash from operating activities during the third quarter of 2018 was negative $221 million due largely to the continued funding of the increased costs on the Cameron, Freeport and Calpine projects. Those three projects had negative cash flow of approximately $160 million during Q3. The remaining negative cash flow was due to the expected unwind of significant cash advances on certain onshore projects. Total cash availability was $1.4 billion at the end of the period, composed of $580 million of unrestricted cash and $858 million available under the revolver.

Additionally, we had $1.1 billion of combined letter of credit availability through our principal letter of credit facility. Uncommitted bilateral facilities, surety lines and our cash secured letter of credit facility. The company was in compliance with all financial covenants as of the end of the third quarter of 2018. The supplemental steps we are taking to strengthen our balance sheet are not included in the figures I just spoke to.

Moving now to our guidance for the second half of the year, there have been a few changes as compared to the guidance we provided in our Q2 call. As many of you know, we're providing guidance for a comprehensive set of metrics and this detail is included in our earnings release and our supplemental deck.

I want to take time to go through every metric, but let me provide the highlights. I will start with revenues and adjusted operating income, where our guidance is unchanged with revenues expected to be between $4.8 billion and $5.1 billion and adjusted operating income expected to be $405 million to $435 million. We expect adjusted EBITDA to be in the range of $450 million to $490 million.

We have modestly lowered our expectations for adjusted net income and adjusted earnings per share for the second half, due largely to a higher level of intangibles amortization and higher taxes. Specifically we now expect adjusted net income for the second half of this year to be in the range of $150 million to $160 million with adjusted earnings per share of $0.31 to $0.36. They've also revised our second half guidance regarding cash flow, free cash flow, total cash and working capital, where our projections have all incrementally -- with our projections have all been incrementally impacted by the Q3 changes in estimates on the legacy focused projects.

As I just mentioned, we saw negative cash flow of approximately $160 million from the three legacy focused project in Q3 and we expect another incremental $284 million of negative cash flow in Q4. As a result, we now expect the company's negative cash flow from operations in the second half of this year to be in the range of $520 million to $540 million with negative free cash flow of $580 million to $600 million.

We believe our total cash position at the end of the year will be in the range of $450 million to $500 million. Our net working capital position is expected to be approximately 1.5 billion at the end of the year. The supplemental steps were taken to strengthen our balance sheet are not included in the figures I just spoke to. And with that, I will turn the call back over to David.

David Dickson -- President and Chief Executive Officer

Thanks, Stuat. In summary, let me recap today's key messages. Firstly our confidence in the strategic rationale of the combination continues to be validated by the solid performance of our onshore and offshore portfolio, a book-to-bill ratio of more than 1.3 and a rebounding market that has enabled us to generate in revenue opportunity pipeline of 80.3 billion as of the end of the third quarter.

Secondly, we expect no further material changes in the cost estimates on the legacy focus projects because of the steps we have taken to improve execution, manage costs and become further aligned with our consortium partners and customers. Thirdly, all aspects of our integration efforts are ahead of plan. In particular, our combination profitability initiative, our CPI is proceeding at a rapid pace that's exceeding our original expectations and we have raised our targeted run rate savings to $475 million.

Additionally, as separately announced today, we expect to reduce our total debt by one-third with estimated proceeds of more than $1 billion that we expect to generate from the sale of non-core operations. And finally, we have strengthened the balance sheet with a $300 million injection of capital and we have separately received commitments for a $230 million increase in a letter of credit capacity in anticipation of strong order intake.

As we progress through this combination, and as I meet with customers, I continue to be encouraged by their enthusiasm for the combination. Likewise, as I travel to our locations around the globe to meet with employees, I'm impressed with the level of talent and dedication that I've seen. And on that note, we'll open the line for questions.

Questions and Answers:

Jamie Cook -- Credit Suisse -- Analyst

(Operator Instructions) Your first question will come from the line of Jamie Cook, Credit Suisse.

Hi good evening. A lot to cover here, I'll let someone else ask if the charges are done, but like just David, I'm trying to understand your thought process behind, selling the fab and tank business, because I guess the concern would be you're not selling from a position of strength. People could argue this asset is no less this interesting sort of thought process, sort of timing, your comfort level with the $1 billion price tag and why wouldn't we be concerned that the buyer is in no rush just given, the balance sheet issues that we're having right now. And then what degree would you consider selling the tech business.

The second question I have is on the customer side. I know you're saying that customers are supportive of the deal, but obviously, that was before tonight's announcement. So to what degree is the risk that awards are on hold or at risk of loss until you guys can show that the charges are under control or that the sell -- that you successfully sell the fabrication and tank business. And then similar to the Rio, do you see risks, other contractors are asked to bid on projects that you thought you are well positioned for. I mean with that I'll stop. Thanks.

David Dickson -- President and Chief Executive Officer

Okay. Two very good questions, Jamie. So, let me address the first one. So, yeah, I guess it would appear in the face of -- this seems to be a sale because of the timing of these announcements. What I would say is that, we have said from day one that we want to maintain what we referred to is our vertical integrated strategy. And we also said there is an executive team that we need to remain disciplined on that. Now as we were going to through the process of closing, there is always a question market, do these businesses actually fall into that vertically integrated strategy. And what became very clear early on is one, the tank story business is a fantastic business. But as we look at our vertically integrated strategy, we don't win EPC contracts because we have that capability nor if we win the EPC contract do we actually get the tank storage contract.

So as you look at it today, the view is it doesn't fit into that vertical plan that we have. And two, as we said in the call, we also believe this business has stronger and better opportunities without the burden of the overall McDermott Company.

So we really think that even with the timing is that there is going to be significant interest in this business. We also know the timing is not only driven by obviously the thought of we're doing it because of the announcement today. But as we look at our end markets in particular both LNG and petrochemical, there is a significant ramp up in activity with regards to prospects.

So for the tank business to be independent very soon that will give that business a better opportunity to participate in what we see in a number of prospects coming up. On the pipe fabrication, it's a different story. I think on the pipe fabrication as you know, this was really a result of the acquisition that CB&I had off shore a number of years ago. And CB&I have successfully taken this business from being a business that is sold externally to the market to be a business that only supports internal projects. And as a result, that business has lost a significant amount of value, this business really needs to be independent of McDermott. So a different strategic reason, it doesn't support the vertical integrated strategy that we want to adopt.

So that's the first question. On the second one on the customer side --

Jamie Cook -- Credit Suisse -- Analyst

But a wait a minute, David. Before just people are trying to understand the EBITDA associated with that business is it a high single digit margin business. Yeah and I guess you don't want to answer willing to exploit the technology business.

David Dickson -- President and Chief Executive Officer

Yeah. So firstly let me just address the question on the technology and I tried to highlight a very strong on my opening remarks. The technology business is very core, are very much core for our future. We've already seen a number of opportunities, I've came up with the pull through of the technology through to the E&C and EPC business. And through our combination of both McDermott and CB&I, we're seeing excellent opportunities with regards to the capabilities of both companies and are referred to things such as (inaudible) utilization. So technology is very much part of our strategy moving forward. And as you heard on the call of business which today in the current market where we see increasing activity in petrochemical less so in refine and that will remain very core to our future.

Stuart Spence -- Executive Vice President and Chief Financial Officer

And Jamie on the margin question, both of these businesses operate at double digit operating income margins.

Jamie Cook -- Credit Suisse -- Analyst

Okay. Thank you. And then sorry, on the customer front the question.

David Dickson -- President and Chief Executive Officer

And then on a customer question. So Jamie obviously a number of customers were aware of it, the -- well aware of the situation on with regards to Cameron. So what was happening on Freeport. So we've had already a number of discussions with customers. I would say that I haven't had any negative feedback, more the encouragement to get these projects fixed and get them behind us.

As we look at the market moving forward, it is clear with the level of activity that's picking up is that there are -- there's not a huge amount of capacity in the ENC space to deliver these projects. So more has been an encouragement from the customer side to get the business stabilized and and then obviously move into this what we call our optimized phase, so that we can participate in future prospects.

Jamie Cook -- Credit Suisse -- Analyst

Okay. Thank you. I'll let someone else ask a question.

Operator

Our next question will come from the line of Tahira Afzal, KeyBanc Capital Markets.

Tahira Afzal -- KeyBanc Capital Markets -- Analyst

Hi David and team.

David Dickson -- President and Chief Executive Officer

Hi, Tahira.

Tahira Afzal -- KeyBanc Capital Markets -- Analyst

So David, you know when we had talked earlier, you had mulled about pipe fabrication in it, you know how core it was. But you also talked about the tank business being one that is exceptional and one you'd like to keep. What has really changed and the concern here being is this more to Jamie's point, something you're doing because you need the cash or is it really for some reason, it's become less core than you thought.

David Dickson -- President and Chief Executive Officer

I think to answer your question I think that you're correct and that we always said the tank business was a good business, is a very historic business and the business which has made a lot of money for the company. I think we also described it like a business which creates an annuity. I don't think we ever said though during the closing that this was a must keep business. And what's happened since we've closed is we have evaluated the tank storage businesses as I said, we don't win contracts because we have the tank storage capability, and at the same time if we win the E&C we don't necessarily get awarded the tank storage contract. And if you look at it, I believe my view is that the tank storage business does get held back by the fact that it's either had CB&I as it's parent or today McDermott name above that prevents it from expanding its business with -- in particular with some of our competitors. So as we have looked again come back to being disciplined on our strategy, we see this is a business that has a large value and now with the timing of the increase in activity in the offshore -- on the onshore market and now is the better time to sell on the basis that it will take a number of quarters to complete the transaction.

Tahira Afzal -- KeyBanc Capital Markets -- Analyst

Got it, OK. And David, my sense was that Freeport could have some headwinds with a profitable project. How does that change, is this now going to be a zero margin project going forward based on the slides and your update. And I think the percentage of completion you've provided for the rest of the portfolio on some of your core projects is very helpful. But it seems like it's largely intact, but can you talk about, if there are projects where the profitability margins have deteriorated, was it what you initially thought on some of the legacy CB&I jobs?

David Dickson -- President and Chief Executive Officer

Yeah, as I think just on Freeport, Tahira, obviously we've taken a writedown on there which would be a surprise today. This is a project where today is in construction mode and being managed by our partner Zachary (inaudible). They are doing an excellent job. They writedown really has resulted from a couple of things. Stuart mentioned in his opening remarks, one is, taken into consideration some liquidated damages pre-Harvey, which hadn't been taken into the numbers today. But also is for us, also the writedown is as a result of working -- us working with our partners looking at the lessons learned from Cameron seeing some of the challenges on certain trades. And as a result, we're written that project down. Now, looking at the balance of the portfolio, what we said again in opening remarks is, we haven't identified any projects that carry any significant risk. The overall portfolio is performing well. There are some puts and takes that generally over the portfolio we're very happy with the execution is ongoing.

Tahira Afzal -- KeyBanc Capital Markets -- Analyst

Thank you, David. Obviously, have more questions but I'll wait for a follow up.

David Dickson -- President and Chief Executive Officer

Okay.

Operator

Our next question will come from the line of Chad Dillard, Deutsche Bank.

Chad Dillard -- Deutsche Bank AG -- Analyst

Hi, good evening, everyone.

David Dickson -- President and Chief Executive Officer

Hi, Chad.

Chad Dillard -- Deutsche Bank AG -- Analyst

So can you walk through the timing of the sale of the tank and fab business. Maybe you could touch on the structure of the sale. And just what key milestones should investors be aware of as you go through this process?

Stuart Spence -- Executive Vice President and Chief Financial Officer

Hi, Chad, it's Stuart. So we've both -- we have both processes under way. We have advisors hired on both. On the pipe sale, it's our U.S. business. So it's relatively simplistic for us to do the carve out. And so we were expecting a rather kind of simplistic process about a typical, so you'd expect it to close within kind of six to eight months.

On the tank side, it's a global business. It's in all of our legal entities and so it's going to be a little bit more of a complicated carve out for us. So a slightly longer time frame and currently we'd estimate around 9 months to complete the sale.

Chad Dillard -- Deutsche Bank AG -- Analyst

Got you, that's helpful. And then you called out the $475 million in synergies, I just wanted to make sure we all understood, is that inclusive of that tank and pipe business and without that what would that number look like. And then also could you comment on how you think the business should be run on a pro forma basis from a leverage perspective, and how much minimum cash would you want to have on the balance sheet?

Stuart Spence -- Executive Vice President and Chief Financial Officer

Yeah. sure. So a number of questions in there. On the CPI, there's a small number included in the $319 million that we have achieved to date on an annualized basis. That would refer to the tank or pipe business, but it's a small number. So really we view the 475 as CPI that we would achieve on the business that would remain after we sell both pipe and tanks. In terms of the overall liquidity position of the company in terms of cash. Like I said, we closed the 1.4 billion of cash available at the end of the third quarter. Once we close on the preferred stock, that would add approximately $300 million to that number, so 1.7. As we look at the minimum cash that we used to run the company on a kind of monthly, quarterly basis, we're currently looking around about $500 million.

Chad Dillard -- Deutsche Bank AG -- Analyst

Great. Thank you very much.

Operator

Our next question will come from the line of Steven Fischer, UBS.

Steven Fisher -- UBS Securities LLC -- Analyst

Good afternoon. Just continuing along the balance sheet discussion here, just wondering how you think about what is a manageable level of leverage for the remaining business as you move along because I mean clearly you're still going to have, as you build this backlog over time you're going to have a lot of fixed price mix in there? And you will have some upfront payments, but I was just curious kind of on just a pure leverage basis, what would you feel most comfortable is appropriate for that kind of business?

Stuart Spence -- Executive Vice President and Chief Financial Officer

Yeah, Steve, in terms of kind of leverage multiples, we've always said that we in the short term want to get our leverage done to two times EBITDA. That goal we feel is still intact, given the divestiture announcement for the tanks and the pipe business.

In fact, we see that kind of coming into the more near term than taking longer from general operations. Once we kind of dispose of the tanks and the pipe businesses, our kind of medium term, longer term target is to get the leverage level down in our business to about one times EBITDA, and that's on a gross basis. We probably want to hold about the same level of cash as we do of debt. So on a net basis, we'd be zero.

Steven Fisher -- UBS Securities LLC -- Analyst

Got it. That's helpful. And then how should we think about when you might be able to achieve a positive free cash flow on an ongoing basis just from profit conversion as opposed to upfront payment. It was helpful to get the schedule of when the legacy projects are going to burn cash. But just sort of the go-forward business, when will it generate positive cash flow from profits. And then, I guess related to this, how close would you say you are to reporting clean quarters.

Stuart Spence -- Executive Vice President and Chief Financial Officer

So on the first question about free cash flow, we've always said that it would take us about 12 months to stabilize the combined entity. Our view really has not changed. So we're probably looking at breakeven free cash flows in the first half of 2019. But then we expect as we've always done that the second half of 2019, we would start to generate positive free cash flows. In terms of reporting, as you would say, clean quarters, this is really our first quarter under the combined entity. We've done significant work to review and control the legacy projects that have driven some of the changes to cost estimates and this is our best view at this point in time.

Steven Fisher -- UBS Securities LLC -- Analyst

I'm sorry, just one clarification on the second half 2019 generating free cash flow, is that exclusive of all the legacy project cash outflows?

Stuart Spence -- Executive Vice President and Chief Financial Officer

That would be inclusive, Steve. All right, thank you.

Operator

And we have time for one more question that will come from the line of Andrew Kaplowitz with Citi.

Andrew Kaplowitz -- Citi -- Analyst

Good afternoon, guys.

Stuart Spence -- Executive Vice President and Chief Financial Officer

Hi Andy

Andrew Kaplowitz -- Citi -- Analyst

David when you came to McDermott from Technip, you were able to get your arms around I think nine projects that McDermott had reasonably quickly. Why do you think that you haven't been able to get on top of Cameron and Freeport in particular? And why should the market -- I mean, it's tough to ask this question, but why should the market believe you now that you have your arms around the project because in E&C we've tended to learn that once projects are bad, they tend to be bad until after first fire, so. And I know you've said all this stuff that you've done differently, but maybe help us understand why this really is it?

David Dickson -- President and Chief Executive Officer

So, Andy, let me go back to the McDermott story. The nine loss-making projects I think I first disclosed it to the Street about four months after I joined, here obviously we're getting close to six months. But obviously the scale and the size of these projects are considerably larger than what we've seen. I think in particular in Cameron the challenge we've had is, having to unwind what was a pure execution and strategy by CB&I and so that's taken a bit more time. And then obviously mobilize and the stronger teams and the stronger executive oversight has just taken a little bit longer.

The additional item here which you can't blame the past is the situation around the availability and quality of construction labor, specifically to the Lake Charles area, and that's resulted in this significant increase in cost. Now come back to answer your question, what would give confidence in these projects? So if we look at the work that we have done. On the estimate, and I'm going to specifically talk about Cameron, because that's the bigger one.

So on Cameron, we've done the cost estimate based on a number of methodologies from top down, bottom up, having the teams, let's say, invest--really spending time and building up the cost and schedule. We also today -- and I won't disclose where they are, but are using productivity factors in certain trades, which are numbers which sometimes are difficult to understand because they're so low. So we've taken a very, what I'd call, prudent position with regards to productivity.

Now we've been spending a lot of time on building up the cost estimate to go. And what I was trying to make clear on my opening remarks is now we've shifted away from containing the cost to say, hey, how do we reduce these losses, so in Cameron, we had $1.5 billion of loss, that loss does not include any productivity improvement that we're looking to see, where we can make changes, does not include any cost improvements that we could make and a significant part of what's happening in Cameron today is subcontract. And we also haven't included any cost recovery from our customer, and we're starting to engage discussions with our customer. And in particular, Cameron to get to the $1.5 billion loss, we actually unwound some incentives that had been included in the estimate.

So while we talk about the cost, the losses today in Cameron, we haven't included for any upside, resulting from those three initiatives. Secondly, I tried to indicate in my remarks is that, as we look to Cameron, we also benchmarked it against Freeport, and as we look at those two projects today with the estimated cost at completion, these are benchmarking very closely together, so that gives us even further confidence is that, we're getting to the end of where these projects would go. But today, our more focus is on to recover the cost, reduce the cost rather than contain the cost.

Andrew Kaplowitz -- Citi -- Analyst

Yeah. That's helpful. And then, either David or Stuart, like I just want to follow-up on Steve's question. You said free cash flow would be positive, you already thought it could be positive in the second half of next year. You gave us numbers around the cash outflow in the second half of this year, $580 million to $600 million. I think I added up the cash, I believe next year on the projects is $420 million. So if you've got sort of $1.4 billion of liquidity at this point, why would you need to raise equity at the bottom of the cycle, and relatively expensive equity as you know. Are the banks kind of telling you, you need do this, you've mentioned sort of being prudent but sort of why now?

Stuart Spence -- Executive Vice President and Chief Financial Officer

Yeah, Andy, so we're wanting to provide certainty to our company, our employees and our customers, as we work through the period between now and when we achieve the exit of the tank and the pipe business. And additionally we need the additional capital to support our growing business. So as David mentioned we've got an $80 billion opportunity pipeline, all of our end markets are in growth, and we are looking at an increased order intake pace. So it's all about kind of providing some working capital, providing support for our growing business and just ensuring that we've got a very kind of prudent balance sheet to manage through 2019.

Andrew Kaplowitz -- Citi -- Analyst

Thanks. Good luck guys.

Stuart Spence -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. That will conclude the Q&A portion of today's call. I'll turn it over to Scott Lamb.

Scott Lamb -- Vice President of Investor Relations

Thanks everyone for taking the time today to listen to our call. As a reminder, a recording of the call will be available for replay for seven days on our website mcdermott.com. And that concludes today's call. Thank you

Operator

Thank you for joining. That does conclude today's conference call. You may now disconnect.

Duration: 61 minutes

Call participants:

Scott Lamb -- Vice President of Investor Relations

David Dickson -- President and Chief Executive Officer

Stuart Spence -- Executive Vice President and Chief Financial Officer

Jamie Cook -- Credit Suisse -- Analyst

Tahira Afzal -- KeyBanc Capital Markets -- Analyst

Chad Dillard -- Deutsche Bank AG -- Analyst

Steven Fisher -- UBS Securities LLC -- Analyst

Andrew Kaplowitz -- Citi -- Analyst

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