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Ladies and gentlemen, thank you for standing by and welcome to the Shawcor's Q3 2019 Results Webcast Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker, Mr. Gaston Tano, Chief Financial Officer. Please go ahead, sir.
Thank you, operator. Good morning. Before we begin this morning's conference call , I'd like to take a moment to remind all listeners that today's conference call includes forward-looking statements that involve estimates, judgments, risks and uncertainties that may cause actual results to differ materially from those projected. The complete text of Shawcor statement on forward-looking statements is included in Section 4 of the third quarter 2019 earnings press release that is available on SEDAR and on the company's website at shawcor.com. I'll now turn it over to Shawcor's CEO, Stephen Orr.
Good morning, and thank you for joining us on this morning's conference call. Before I start, I'd like to take a moment and highlight a tremendous milestone for our company. This year, Shawcor is celebrating its 50th year on the TSX, a testament to our value-based culture and intense focus on technology and innovation.Mr. Les Shaw listed the company on the Toronto Stock Exchange in 1969, and the journey of Shawcor as a public company was started. In achieving 50 years, I'd like to thank our customers, shareholders, suppliers and especially current and past employees. Without the dedication of those that have chosen to work and contribute to this company, there would not be a Shawcor. My sincere gratitude to all for helping to drive Shawcor's success throughout the last 50 years.Now turning to the quarter. Q3 adjusted EBITDA was $42.4 million, an increase of 17% over the second quarter of 2019. Revenue for the quarter was $394 million, a 4% decrease over the previous quarter. This quarter's results were supported by composite sales from both pipe and tank products, pipe coating in Latin America and North America for offshore projects, specifically in our Veracruz, Mexico and Channelview, Texas facilities and increased demand for wire and cable products.In Q3, we experienced reduced activity in EMAR in pipe coating as Barzan volumes ramped down in our Adria Italian facility and from Leith vessel-based girth weld inspection as several projects near completion. Of note, in the quarter, we continue to experience a very depressed Western Canadian market, and we did incur costs associated with capturing and executing future pipe coating projects. Backlog in the quarter was relatively flat at $509 million, which reflects the flow of smaller projects that we're winning and has maintained the backlog level. Also in the quarter, we generated over $6 million of cash from divesture activities. Q3 results were in line with expectations and reinforced that the near-term future success of Shawcor will be determined by our ability to execute on 3 main priorities. The first is the dynamic management of our base, book and turn businesses. The second is the securing and executing of pipe coating projects. And the third is the reduction of our debt leverage.I'll speak in more detail in a moment. But in summary, we remain very confident that Shawcor will see an uplift in pipe coating activity and that the decisions we are making to maintain our core capabilities in the business will be rewarded. The timing of the uplift hinges on the continued momentum in offshore and international market but more specifically on several projects on which Shawcor has been selected as the pipe coater of choice and which are poised for sanctioning in Q4 2019 and Q1 2020.Volatility in quarterly performance should be expected as we move through Q4 and in to early 2020 until the pipe coating business's contribution to the overall company results strengthen. This is increasingly important to note as U.S. shale operatives' newly found capital spend discipline and pipe coating project execution dynamics have resulted in limited short-term visibility for Shawcor. While Shawcor's diversified portfolio has expanded, it has the potential to bring long-term stability. We have retained the ability to provide industry-leading pipe coating solutions on a global basis. We've confidence that the industry demand for pipe coating is increasing and that the increase will extend for many years. Shawcor is well-positioned to benefit, and we're looking forward to the future and delivering improved results. I'll now ask Gaston Tano, our CFO, to provide some details on the third quarter financial results.
Thanks, Steve. As Steve mentioned earlier, third quarter results were positive and in line with our expectations. Consolidated revenue in the third quarter decreased by 4% over the second quarter of 2019. The pipeline segment revenues decreased by 5% primarily, due to lower revenues in the EMAR and Asia Pacific regions, due to lower pipe coating activity, partially offset by higher activity levels in the Latin America region primarily related to execution of Liza II project in our Veracruz, Mexico facility. The quarter also benefited from higher revenues in North America reflecting higher demand for flexible, composite pipe and tanks and small-diameter coating, partially offset by lower revenues for large-diameter coating and girth welding inspection services due to the capital discipline focus of E&P operators, approval delays of the U.S. land transmission line projects and continued market softness in Western Canada. In the Petrochemical and Industrial segment, revenues were lower by 1% primarily, due to lower activity in our automotive heat shrink products, partially offset by higher demand for our wire and cable products in North America. Consolidated revenues in the third quarter of 2019 were 12% higher than the third quarter a year ago. The Pipeline segment revenues increased by 13%, reflecting higher revenues in North America from the full quarter impact from the acquisition of ZCL Composites, partially offset by lower demand in North America for small-diameter and large-diameter pipe coating, flexible composite pipe and tubular management services due to the capital discipline focus of the E&P operators and the continued market softness in Western Canada. In addition, Latin America region achieved higher revenues due to the execution of Liza II project in our Veracruz, Mexico facility. Revenue for the Petrochemical and Industrial segment increased by 10% compared to the prior year third quarter, primarily due to higher demand for our wire and cable products in North America, partially offset by lower revenues for our automotive heat shrink products. Consolidated gross margins for the third quarter were 29.1%, higher than the 28.5% reported in the second quarter of 2019, but lower than the 29.5% in the third quarter a year ago. The Pipeline segment gross margin in the third quarter was 29.2%, higher than the 28.5% in the second quarter of 2019, primarily due to the increased revenues from flexible composite pipes and higher facility utilization in Latin America from the execution of Liza II project in our Veracruz facility. Compared to the 29.6% reported in the third quarter of 2018, the Pipeline segment's current quarter margin was a lower, primarily due to a negative impact from the inventory revaluation related to the ZCL acquisition in the current quarter. The Petrochemical and Industrial segment gross margin was 28.1%, in line with the 28.1% the same quarter of 2019 and below the 28.7% that was reported on third quarter a year ago, primarily due to unfavorable product mix in heat shrink products for the automotive market. The current quarter results were impacted by nonrecurring items outside the company's normal course of business. Positive items in the quarter include the gain of $5 million on the sale of land in Edmonton. This was partially offset by inventory evaluation related to ZCL acquisition of $4 million, a loss of $3 million from the hyperinflation accounting for Argentina and a $1 million expense related to the tax effect of these items. Excluding these items, adjusted EBITDA for the current quarter was $42 million, 17% higher than the $36 million reported in second quarter 2019. This increase reflects lower SG&A expenses and higher foreign exchange gains in the current quarter. Excluding the impact from ZCL acquisition costs and related items in the -- from the second quarter, SG&A expenses in the current quarter decreased by $2 million primarily due to lower compensation expense. Adjusted EBITDA for the current quarter was higher than the $38 million reported in third quarter 2018. This increase is primarily, due to higher revenues and gross margins discussed earlier, which includes the acquired ZCL business and the positive impact from the adoption of the IFRS 16 in the current quarter -- in the current year. This was partially offset by higher SG&A expenses reflecting the ongoing expenses for the ZCL business and higher compensation expense overall. Let's now discuss cash flows for the quarter. Before changes in noncash working capital, cash flow provided from operating activities for the third quarter is $27 million, an increase of -- increase compared to the $19 million from operating activities in the second quarter of '19. This increase reflects the change in noncash items related to lower gains on sale of land and investment in associates, a lower deferred tax income taxes, partially offset by lower net income. Compared to the $35 million that was provided from operating activities in the third quarter a year ago, the current quarter is primarily down to lower net income and the change in noncash items. The change in noncash working capital in the third quarter was a net cash outflow of $19 million compared with an outflow of $40 million in the second quarter of '19 and an outflow of $55 million in the prior year period. The $19 million cash outflow from working capital in the current quarter is primarily due to higher contract assets and prepays, offset by lower inventory and increased accounts payable. Cash used in investing activities in the third quarter was a $2 million, reflecting $10 million of purchases of property and plant equipment, partially offset by $7 million of proceeds generated from the sale of land during the quarter. During the third quarter, cash used in financing activities was $45 million, reflecting $29 million of debt repayments made in the quarter, the payment of lease obligations and our regular quarterly dividend. Net cash flow for the third quarter in 2019 was negative $40 million compared to a positive $25 million in the second quarter of '19 and negative $52 million a year ago. With respect to the balance sheet, our financial position at the end of the quarter remains strong. The company's cash and short-term investments decreased during the third quarter to $82 million. The decrease reflects the $29 million of debt repayments made in the quarter. Noncash working capital at the end of the third quarter was a $249 million, up from the $228 million at the end of the second quarter 2019, primarily related to investment in working capital to support business growth and the newly acquired ZCL business. With respect to debt, the company is in full compliance with the debt covenants and has long-term debt at $448 million and $40 million of standard letters of credit as of September 30, 2019. With the new facility in place, the company has available unutilized borrowing capacity of over $290 million at the end of the quarter. I'll now turn it back to Steve for additional commentary on the company's performance and outlook.
Thank you, Gaston. In the third quarter of 2019, adjusted EBITDA was in line with management's forecast, but it did have early signs of possible headwinds late in the quarter. The quarter had the benefit of strong demand for composite tank products in retail fuel and composite pipe, primarily due to strong U.S. land orders. Heat shrink sales remained stable despite reduced automotive sales with the demand for wire and cable products remaining strong similar to last quarter. Pipe coating overall was mixed with higher activity in offshore driving strong performance in our Channelview, Texas and Veracruz, Mexico facilities offset by lower activity in our Italian plant as Barzan comes to an end. Girth weld inspection had a very strong first 2 months, however, the last month of the quarter saw a negative impact from approval delays in North America land transmission lines and a decline in demand for our call-out services related to U.S. small gathering lines.Unfortunately, Western Canada saw little improvement in the quarter, and the demand for Shawcor products and services in this market continues to be very depressed. There's little likelihood this market will see any significant recovery in the near future. Continuing what we saw in late Q3 and a late Q4, early Q1 timing of pipe coating project awards, the factors that influence the next few quarters will be heavily weighted to our base, book and turn businesses. The factors that we are watching closely are related to the impact on the demand for Shawcor's product and services as North American E&P operators determine their Q4 spending and the company's usual seasonality. Driven by shareholders demanding that they live within operating cash flows, E&P operators are under extreme pressure to move off chasing growth in production volumes as their primary objective. The result of this change is an increasing likelihood that Shawcor will be negatively impacted in the fourth quarter of 2019 as the industry discipline will result in budget exhaustion of our customers and therefore, lower demand for our product and services in North America. The unknowns and limited visibility are really around the magnitude of the reduction in the fourth quarter and the restart profile of Q1 2020. The products and services that we are expecting volatility are small-diameter pipe coating, girth weld inspection, tubular inspection and repair and composite pipes. On the seasonality issue, in previous years, the fourth quarter's performance is generally negatively impacted by year-end slowdowns. This is seen across our Petrochemical and Industrial segment and is expected in composite tanks for retail fuel and several of our personnel intense businesses such as Lake Superior Consulting.In summary, we are forecasting that our base, book and turn business will be reduced in Q4, and even with expected improvement in pipe coating, the result will be a lower Q4 2019 than we have delivered this quarter. Additional clarity, Q4 results could be similar to what we delivered in Q4 2018, and we currently have limited visibility into Q1 2020. However, demand is expected to return for products and service impacted, and we do have high confidence that the contribution for pipe coating will improve moving forward. And based on this, we're very optimistic about next year and delivering improved results compared to this year. As I mentioned in my opening comments and previous calls, our success will be determined by our ability to execute on 3 priorities. The first priority is the real-time management of our book and turn businesses that make up the base, as I've just described fluctuations in activity levels are a constant challenge to manage and require a combination of tactical measures and long-term repositioning. Tactically, an example this quarter will be the continued momentum in leveraging advanced NDT technology and available conventional NDT crews to serve the large diameter North American land transmission market. An example of longer-term repositioning is the decision we made to continue to adjust our guardian footprint in Western Canada to better serve our customers with a more efficient and lower cost footprint. In Q3, we closed the sale of an underutilized facility in Edmonton use to repair and machine OCTG tubulars. Recent land stabilization and improved capacity in our North Nisku site provided the support to consolidate and exit the Edmonton machining shop. This sale and the sale that was closed last quarter are examples of repositioning for expected future activity and to bring further efficiencies. Certainly, part of this priority is the importance of delivering on the value extraction of the ZCL composite business. Here we are very pleased with the results to date as the cost synergies are on track to meet $8 million annualized run rate by the end of first year. Furthering our excitement in having ZCL Composites within the Shawcor family is the visibility we're gaining on potential revenue streams that will enable us to meet our synergy target of $35 million of annualized revenue per year by the end of the year 3. A particular excitement in this quarter was the progress we are making in leveraging Lake Superior Consulting and ZCL Composites to bring a tank install verification service to the retail fuel market. Before I leave this floor, I would like to give a brief update on our plan to place a composite pipe facility in the Middle East as it is also a good example of managing in real time. We remain committed to expanding market access and enhancing our competitive position in international markets. Positioning a composite pipe tank internationally has attractive returns, if it is positioned in the correct markets with a broad enough product offering to ensure plant utilization. Markets where we are qualified and have sold products such as the Middle East Gulf states, Indonesia, Australia and India, remain attractive markets and initially, we were comfortable to fully move forward with a spoolable product diameter up to 4 inch. Recently, we have reevaluated the advantages of having larger diameter in a new plant and have slowed down the final stage of moving manufacturing equipment to the Middle East until our 6-inch spoolable family is successful here in North America. Introduced in North America this quarter, success of the larger diameter spoolable will substantially reduce the risk of our investment in a new plant. We now anticipate final plant construction and customer qualification to be in late 2020. The second priority is the winning and the flawless execution of pipe coating projects. The industry is now into the third year of recovery for offshore and international markets, and it is being fueled by lower breakeven in the offshore development, and LNG as a transition or replacement energy source. All the indicators are positive from incoming subsea order growth for equipment manufacturers year-on-year through to the number of geography and geographical regions that are posed for increased activities that includes the North Sea, Gulf of Mexico, Brazil Pre-salt, Mozambique, Australia and Guyana.Lower breakevens are being achieved in part from a change in contracting model where EPCs are given larger scopes. There is a link between pre-FID work award and the construction contract, and the construction contract is conditional on FID or sanctioning of the project. This change in contracting model is enhancing the importance of Shawcor's EPCs and advancing the timing that commitments are made as the EPC's success is dependent on the performance of suppliers they select.What this means for Shawcor is that we're able to secure work that is conditional only on project sanctioning. By the end of Q3, work that we have secured through EPCs that is pending project sanctioning is now over $240 million, up from the $150 million we called out in Q2. Additionally, the majority of projects in the $240 million, including one that is over $100 million, are set for investment decisions in late Q4, early Q1.With respect to book orders, the backlog at the end of Q3 2019 was $509 million. The stability of the backlog represents the success we are having in securing smaller projects, which were the first to be sanctioned as the cycle started its slow recovery. Bid and budgetary remained very high with more than $2.7 billion of visible opportunities globally. This is exceptionally strong, especially when you consider we have removed well over $360 million from the bid related to a land-based East Africa project suspension. And the $240 million award secured pending FID, I just mentioned, is included in the bid number. Shawcor continues to be positioned for future pipe coating work with investments being made to see that Shawcor is selected as the pipe coater of choice. In the upcoming quarters, our investments will continue with a focus on those projects that are very near decision point. With anticipation that projects will be approved, we will have increased visibility on execution plans and the associated fixed and mobile plant configurations needed to serve our customers over the next several years. As a result of the gained visibility, we will take steps to reduce the fixed cost base of our global plant footprint, including the exiting of some sites. The third and final priority pertains to the actions we are taking to strengthen the balance sheet after the acquisition of ZCL Composites. We continue to be very focused on the management of working capital and capital expenditures in all areas. Additionally, we will continue to take steps on assets that have been determined to be noncore or long-term dilutive where we have divestment opportunities.Before I open it up for questions, I'd like to take a moment and highlight several points. The energy sector continues to be challenged to predict due to uncertainty from trade, geopolitics and variables on both the supply and demand side of the equation. With this as a backdrop, investors should consider owning Shawcor for the following reasons: Shawcor's diverse portfolio is underpinned by supportive long-term fundamentals and is positioned to deliver sustainable returns throughout the cycle; Shawcor's legacy core business of pipe coating is poised to strengthen with multiple project set to be approved in the upcoming quarters and there is a growing list of future projects; management is executing on clear priorities, and they are focused on delivering shareholder value in the long term. I'll now turn the call over to the operator to open it up for any questions you may have for Gaston and I.
[Operator Instructions] Our first question will come from Aaron MacNeil with TD Securities.
Thanks for the additional detail on some of the factors impacting the fourth quarter in your prepared remarks, but I guess then reduced demand for the businesses and products that you outlined, are you also experiencing pricing pressure in those businesses? And if so, can you maybe quantify the impact?
So maybe we can walk through the businesses. So Aaron, first and foremost, probably the largest impact that we're stating relate to U.S. land drilling completion-related services. So I think it's pretty well known now in market that has been telegraph from both suppliers and operators that the budgets will be exhausted, and there's going to be a digital pullback in the fourth quarter. In Q3, we saw it for, what we refer to as, call-out services on girth weld inspection. So these are trucks and technicians that are assigned to basis across the U.S. shale play, and they really don't know the project they'll go to, often with less than 48 hours notice. And so this was -- we had 2 good months in Q3, and then the third month basically slam shut. And this was the, what I call the, field services work. And it's unlikely that it's going to come back because we have a late Thanksgiving this year. I think operators will just call it a day, and we'll see a return of all this activity in Q1. So it's very difficult for me to make a comment on pricing because even if you drop pricing, it's unlikely you're going to put these crews back to work. In Q4, what you're going to see is that we are going to maintain the crew count because we do expect that the budgets will be exhausted, and we have talked to operators directly, and they're managing by their fiscal year, and so they're going to turn everything back on in Q1. So for us to go through a substantial reduction of headcount and laid down crews makes little sense when we can manage the cost as tightly as we can and be ready to go. So not only you're going to have a reduction in revenue, we're going to have some costs associated with carrying these crews with lower utilization per crew. The second -- and so that's the field services-type business. The other one that we're just starting to see now in the month of November, and some of it is self inflicted, is in the composite pipe, in particular, the products including heat shrink sleeves, where we have very good visibility on customer's inventory. And although, we have committed orders, and we could push them into Q4, and we could make them happen because we have POs, in fact, overdoing as loading inventory for next year, so we're going to see the decline in next year. So what we're doing is try to proactive the absorption rate in manufacturing, and we're working with the customer, and they'll take the orders in Q1.So again, at and that particular point, the orders are under PO, so there's not pricing. And our composite pipe has a unique offering, so I don't expect the pricing pressure to come, right? So that's the big nuances. So it's not only a drop in revenue that we expect in Q4 because -- but we are going to have lower absorption rate in the manufacturing for pipe and absorption rates for fuel services. So it's kind of a double whammy where it doesn't make any sense to do anything catastrophic in a restructuring of the business for a couple of months' expected decline. And so we've been very clear on the singling on how bad it could get. I think it's -- we have yet to see it fully play out. So I hope that helps a little bit on the color.
Yes. That helps a lot. I just wanted to understand the -- some of the competitive dynamics that are occurring. I guess switching gears a bit to the $240 million of conditional awards. Historically, when you've talked about larger projects, there's been call it a 6- to 9-month lag between projects award and revenue recognition. And I guess can you speak to if that rule of thumb applies for these projects or if revenue recognition could be faster, given that the project scopes have been determined and all vendors like Shawcor have been engaged earlier in the process?
So if I was to look at the $240 million, so across the $240 million and meanwhile, I'll provide even more granularity than I did in prepared remarks, so there's $240 million. There's one project that's over $100 million. The $100 million and another project that's around $40 million. We have been awarded the contract and sanctioning of the project is a what we require for the full green light. However, we're working with the EPC on an execution plan, and both those projects would quickly be important to what we're messaging on the upside in 2020. So if they go, and there's some Board meetings that are planned here shortly with the operators to make the decision, it will impact the magnitude of what we're communicating will be the uplift of 2020. So what I'm saying is the majority of the $240 million that we're stating will be seen in an impact 2020. Although some of them, especially the $100 million one, will grow into 2021.
Okay. That's helpful. And then is it fair to assume that there's 3 projects that comprise that $240 million or would it be more than that?
The 2 that I mentioned and then probably, 9 other ones.
Okay.
I think we've done this on purpose, we press release twice now. A consolidated grouping of projects with EPCs, and that consolidated grouping is the same model that this other projects that I mentioned are there.
That's helpful. And what kind of margin performance is implied by these conditional awards. I mean obviously, there'd be some leverage over your fixed costs or absorption of fixed cost, but I guess I'm just trying to understand how that might impact your EBITDA earnings?
So I think -- we've always been very careful because there's such a huge influence of a plant that is idle to one that ramps up in utilization. But if you want to try to peg a margin on backlog, I think it's fair that you can go somewhere between 35% to 40%.
Is that on a gross margin basis or on an EBITDA basis?
No, gross margin basis, yes.
Okay, understood. And then final question from me. You had mentioned in your prepared remarks that you are exiting some sites. Can you quantify, open number of sites and/or the percentage of capacity and the potential run rate cost savings that might arise from that?
So first, I am going to be very obtuse or nondirectional on the sites because the sites that we close, as I mentioned, the determination of closing the sites are based on the increased visibility we expect to get on the project awards because we will know the execution strategy for them. So as you're very much aware, we bid on a particular project multiple sites, depending on the EPC and the possible scenarios where the pipe mills comes from. So until we ask you lock it in, I'm very reluctant to say, we're going to shut down a particular plant because it kind of shows our cards to the competitors or potentially the pipe mill that may not be at an advantage if we shut down a particular plant. So I'm not going to say -- but I will give you some information on capacity takeaway and cost. So if you think about running a facility, and if it's stationary, I think on the last quarter, we said that, a, plant, say, of a scale of Leith in Scotland, runs you just in a calendar-year in terms of lease, keeping it warm stack in excess of $2.5 million. So that, when we stage $15 million of costs associated to pursue, we talk about a plant like Leith on a run rate in the year could be $2.5 million, right? Capacity for the company, we have an almost unlimited capacity because if you recall, 2 mobile facilities went into Sur De Texas into Mexico into $360 million worth of work and they are mobile. So we don't look at it that way because of the proven ability for us to mobilize where the work is going, I don't believe we going to take any additional capacity out of the market place, and certainly we're going to remove facilities where we have redundancy in a region, right? So we have quite a few plants in North America. We have quite a few plants in the Europe landscape, and we have a quite a few plants associated with Asia Pacific and the Middle East. So those are kind of the areas where we're looking for consolidation opportunities.
And I guess maybe not to get into specific spend, but are you targeting like a certain number of facilities? Or how should we think about the magnitude?
So the way we look at this is, first of all, the securing of the next 5 years worth of work what plants do we need to service that work, right? So as we go forward, we look at the 5 years. We want to keep an ability to serve those markets, for example, the offshore markets, we want to make sure we maintain the presence in those for upgoing work. But I think in some cases, the offshore markets are becoming soft, and we have over capacity or we can service them through mobile technology closer to the pipe mills. So it's not a simple equation but certainly, you could expect the company to take 3 or 4 plants out over the next calendar year.
And am I right to assume that, that's $7 million to $10 million of run rate impact?
Yes, depending where the plant sits, I think, that's fair.
Our next question comes from Greg Colman with National Bank.
I want to start by looking at sort of the near-term outlook just to layer on a couple of the things that Aaron was talking about. You mentioned in your comments the next few quarters will be heavily influenced by the base book -- sorry, book and turn business. Should we be interpreting this that for at least the first half of 2020, we should expect aggregate financial results to resemble something of that like we saw in Q3 presumably as things, sort of, restart after budget exhaustion in Q4? Or am I interpreting those incorrectly?
No, I think that's a good way to look at it. Yes, it just -- I think that's a good baseline and then, Greg, the kind of magnitude of the difference would be, number one, what operators do in Q1, right? We could expect 1 of 2 approaches, I think either unfortunately, what we often see in oil and gas is a very, very quick return to work, all hands on deck, so a very steep profile in Q1. Or we could see a much gradual return to work through Q1 into Q2. And the second, which is quite important is, where the projects that we have ordered today actually slot into the quarter. As historic performance in the company when you look back, it is not unusual for the company to be plus or minus on revenue and profitability on a quarter by a project slipping from one quarter to the other because we're not in control of the delivery of pipe into the facilities. But I think that's a very nice way to look at as we sit right now, the base book and turn business, we should expect kind of a Q3 run rate for Q1, Q2 next year. And the excitement in the company right now is that we have line of sight of pipe coating work where we know that we're in the driver seat to win it. If these projects are sanctioned on time, it turns the whole view of the company quite different for 2020 because we're now in execution mode of some substantial volume of work in a business today, pipe coating, which in Q4, is the first time we'll see it actually contribute, right?
Got it. Okay. I appreciate that color. Just factually, I guess to make sure that I am attributing a couple numbers that you put out in the results correctly. Backlog is $509 million, conditional awards $240 million, I believe. In October, you announced the Johan Sverdrup and offshore Australian projects, $30 million to $50 million in aggregate. That -- is that included in the $240 million? I'm assuming it is and not additive.
No, the projects that we announced, they're in backlog.
Oh, got it.
So we have not announced any projects that are under conditional awards. So all the announced -- that we made are booked work that will be -- that we're about to execute, that's in backlog. So Johan Sverdrup is an example.
And to add, Greg, is there's also a bit of backlog outside of the 12-month period at similar levels that we talked about in Q2.
Got it.
So maybe, I'll be very clear so that there's no confusion. So $509 million includes work that is secured. There is pricing contracts, execution schedule of when the pipe will arrive. There is -- so it's contractual obligation that we'll do the work. The $240 million is carried in the -- in bid number, okay? So when you actually think of what the company has secured work, maybe we've introduced a fourth bucket. So we have backlog of $509 million. We have this kind of gray area between bid and backlog of $240 million that we put into bid. And then we have the budgetary, which is kind of on the horizon. The other clarity I'd make is we pulled out well over $360 million for an East Africa project, and I think anybody that's done any research probably knows the project and it's not represented in bid, backlog, and certainly we have not put it in budgetary because we don't even know the configuration of the future pipeline as the operator has now gone into suspension mode. So I hope that clarifies that.
Got it. It really does. And just -- and for -- and just to hone in on that one part there, the October announcements, the $30 million to $50 million, that is in the $509 million and not additive?
So all the announcements we made to-date, the 2 groupings of EPC are either in the $509 million, and there may be a very small outhanging that's beyond the 12 months, right? The $509 million is what we'll -- is scheduled work for the forward-looking 12 months.
Got it. And sorry for the pedantic on that. I just wanted to make sure that I was clear. This is the last one for me. Bigger picture, in a lot of the remarks you've been talking about, sort of see 2 competing dynamics. On the up swing, obviously, we have the offshore, which is looking very good as we trend into the latter part of 2020 and beyond. In the risk part, or in the short term, we have the onshore markets in North America, obviously, causing pause in Q4. And we'll see them probably causing volatility in early 2020. You reiterated your confidence that we're going to see a lift, or we should see or are expecting to see a lift in activity in aggregate in Shawcor in 2020 over 2019. What has to happen to the negative part of that outlook, what has to happen to North America for your confidence in aggregate results lifting in 2020 to be at risk?
So there's 2 factors. I think you've already hit the first one, is we have to see the U.S. land work to at least have a sustainable revenue level around the Q4 -- sorry, Q3, what we just delivered. That's -- so we need to get back. We can see that if the decline that we are expecting and have visibility in Q4 continues for the first half of next year, that would be a negative on our outlook for 2020. Then the second part is, okay, we already have work secured, which is the $509 million plus overhang beyond the $509 million because we still have the fourth quarter next year, but the magnitude of what we land in the next 3 to 4 months is -- has a big impact on what's going to happen on Q3, Q4. So we feel right now, done the different scenario planning that we will see an uplift on, what I think it is, at best, standard results on 2019 with now that we see a softer Q4. And 2020 will be an uplift. The magnitude of the uplift will be the strength in the U.S. land business. So how does it return, and then, what's going to happen over the next 3 to 4 months, which will influence Q3, Q4 of next year. And that's pipe coating.
Our next question comes from Elias Foscolos with Industrial Alliance.
I have a question, most of my questions have been answered, on the bid book. You did lose as you mentioned, the project worth I think it was $360 million, but bid book only declined by, I'm guessing, about $100 million. Can you provide some color on what ballpark $300 million additions came in, was it one project, were they multiple small projects? Because it's quite a substantial makeup.
Yes. Correct. So first just to clarify, the large projects or the East Africa project we referred to is not lost. We pulled it out of the bid, but it hasn't been awarded to anybody. So it's out there somewhere beyond bid and budgetary. So it's out there in the marketplace, some place. Does it go ahead or not? I think people can read the politics that are happening in the presses as much as I can. The replacement, right -- the replacement of the volume of bid, of course, was in the budgetary before, right? So we moved projects from budgetary into bid. And so I'll talk about that first. Several of those projects are associated with gas in the Middle East, right? And those projects are in the above the press release scale, so the $30 million of Canadian that we -- kind of the threshold of when we press release, right? The other area that I would highlight is there is now increased, intensified bidding in both the Gulf of Mexico from IOCs, now that we've moved beyond the tie-ins and Brazil. That's where they're coming from, and I would say, on average, it's probably a healthy mix of smaller projects but several of the projects are certainly above this $30 million threshold. Budgetary, kind of, had some resilience to it because now we're starting to provide, what we call, project estimates for some large projects that are associated with Australian gas that made up the movement of -- and there's one in particular that's quite large.
Okay. Thanks very much for that color. If I could summarize your outlook, you seem to be a little cautious over the next few quarters, quite a bit more optimistic because I'll playback on one of your comments, which you said, I think I've got this right, you mentioned something that maintaining your core capability will be rewarded. Is that a fair outlook, and of course, we're probably that rewarding comment probably applies to Q3, Q4 next year.
Yes. I think maybe I'll break down what I said. So the confidence comes from the difference between Q2 and Q3 work that we have secured with EPCs pending FID. So in our risk profile, there's 2 elements. One is, do we win? Are we the chosen pipe coater? And does the project go ahead? So this EPC model, which is probably the biggest change in the offshore development is really providing the opportunity for us to work with EPCs to derisk what they're taking on, which is much larger projects. So that's the first part. Is that -- and I think you're going to see as we move forward, that this is going to be a common approach. And we are going to land more projects pre-FID. So the operators are seeing the advantage of this. The additional component of we will be rewarded is if we would have shut down and buttoned everything up, we would not be in the position to offer the complexity of the execution to the EPC. So we wouldn't -- to be quite fair, we wouldn't be in the running for -- we've won Liza I, we've won Liza II, there's Liza III and IV out there to get. If we had not put in the resources pre the sanctioning of the Liza projects, we would not even be in a preferred position with Saipan and I think this is going to continue.So our outlook, and I'll regurgitate what I said earlier, it's coming down to the next 3 or 4 months. right? We're going to see what's going to happen in the next 3 or 4 months because the one thing we don't control is the confidence that operators have in LNG in the offshore in the long-term and do these projects actually get sanctioned or not. Everything else is positive. Our tail, we tail the subsea manufacturer equipment manufacturers. So the Camerons and Schlumberger, the FMC or the TechnipFMCs. And their order intake year-on-year is very, very strong. And they're about 1 year ahead of us. So it's now in terms of tenured project awards, even those that are not EPC 100% or EPCI-led, where we're being awarded work as a function of sanction of the FIDs, all those other projects that we're not talking about are about to happen. So we spend a lot of time speaking about EPC, but there's another volume of work out there that is going the conventional way and tree manufacturing -- subsea tree manufacturing and sales is a leading indicator of what's coming our way. And so yes, confidence is quite high. And I do see the 2020, it's not the question that will we be stronger. It's what is the magnitude of improvement that's going to happen for us, right?
Okay. Thanks very much for adding that color. I think almost all my other questions have been asked. So while I turn -- or maybe one other question. One final one. Any more -- and I think you alluded to this, any more possible asset pipe land sales that you'd be looking at in the near-term that would have a material impact?
Yes. Material. So...
Similar scope to the last few quarters.
We got so much as this...
We had a really good quarter in Q2 but I think you'll -- we have a long list and all of them, of course, we have to make sure that there is an audience or an appetite or a third party that's available but you will see continued sales of assets as we rationalize our footprint, including land and equipment. And we will even divest some businesses that are -- that as we finished or are finishing up our plant, are dilutive. So, yes, you'll continue to see this.
Our next question comes from Keith MacKey with RBC.
Just a question for you. Of the gray area of the -- containing the projects of $100 million, $40 million and then the additional groupings, can you maybe give us a ordering of the probabilities in your scenario analysis that those projects go ahead or get FID-ed in the next few months. Just kind of, are you thinking it's -- the $100 million, that's likely going to go ahead first? Or is it the other ones that you would say are more likely?
Well, great, great question, right? So I think the ones that are most important is the $140 million, right? So...
Yes.
The market is waiting for $140 million. So we are expecting the $140 million to go in over the next couple of months, maybe even sooner. One, we're watching quite closely on how the operator manage in country versus actual projects sanctioned so that the project is ready to go. So I think similar to what you saw in Liza II, where the contracts will be given and license or authority to spend and to start doing all the early work, which is the PQT of the plant, the pipe assessings. It could be done in a 2-stage approach, meaning that you don't get full sanctioning of the project but they give authorization for the full supply chain to go ahead, with the sanctioning of the project to be confirmed at a later date before they start putting in the water. And that's -- if you recall, that's what happened to Liza II. We made a press release that we were awarded the work pending FID, and then before we knew it, even though the FID hadn't happened, the pipe was showing up and we were doing the work. So there is project there that may go that way. And the second one is pretty much digital. There's a Board meeting planned. It makes logical sense that the gas is needed. There is partners involved in it. So I'm not privy to what happens in the boardroom, but I would give it an 85% chance that it should go. And then the smaller ones all have their nuances. And do they go in the short term or do they push a couple of quarters? It's hard to say one by one.
Got you. Okay. No. That's appreciated color. I guess on my next question, of the facilities that you'd potentially be looking to sell or monetize, are you -- do you think these would likely go to a competitor? Or would they be repurposed for some other use? Just trying to get a sense of, is there going to be a less capacity in the market post a sale of your facilities? Or is it just going to be a different competitive dynamic then?
So. As I mentioned, there's 2 -- you're talking primarily, around pipe coating I suspect, right?
Yes.
Okay. Because I first want to tell you that what we did this quarter was to sell land to a developer that will repurpose the land. The land value had gone up, and we moved the capacity or consolidated the capacity in a site. So in that case, capacity has come out of the market. So that's a very -- and it's Western Canada. So there should be no surprise. You need less machining capacities, and so we put it all on one site. For pipe coating, there's 2 elements, right? So one is the equipment itself and the second is the land, right? So the equipment in some cases, there is a market for it in pipe mills, particularly to do anticorrosion. So in some cases, we're not really participating in the marketplace because low-end anticorrosion coating primarily in North America is a low market share for us. So would it put additional pipe coating capacity into the market? I think in a lot of cases, all it's doing is repositioning it. So it's moving it from what we see is a challenging location, and we can do it someplace else. So we're reducing our capacity and we'll push it into a pipe mill. So that's the equipment. Land, most definitely, you can relate land sales against repurposes to the capacity of pipe storage into the market. So as you've seen, we've sold land and will continue to sell land. Each time you sell land, you remove the amount of stockpiling for pipe into the marketplace. So as we sell land, especially pipe coating land, whether it be offshore-related facilities or land-related facilities, the capacity to store and stage pipe is reduced, but the barrier to entry to store pipe is -- it doesn't cost very much to -- it's in the millions of dollars if you want to restabilize land. So it's not capacity that couldn't come back into the market relatively quickly. Maybe an extension just so everyone is clear is it's not a pressure pumping or an offshore rig story. If you take capacity of anticorrosion out of the market, you can buy that equipment and then sell it and the cost of developing land is quite cheap. So it's not -- you shouldn't see a pricing increase because we take capacity out of the market.
I am showing no further questions at this time. I would now like to turn the call back over to Mr. Steve Orr, Chief Executive Officer for any further remarks.
Well, I'd like to thank everybody for taking the time for the call, and then joining us this morning. And I look forward to touching base with everybody again after the end of the fourth quarter. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.