First Pacific Advisors (Trades, Portfolio) on Aug. 31 gave up on Babcock & Wilcox Enterprises Inc. (BW, Financial) as the company faces lawsuits and costly problems in its renewables segment.
FPA bought the stock when it spun off from Babcock & Wilcox Company in second quarter 2015 and added to the position as negative events pummeled its share price over two years. Since their debut on the New York Stock Exchange, Babcock & Wilcox Enterprises shares dropped 85%. FPA closed the losing position for around $2 per share as investors lost patience with the company’s efforts to resolve a renewable energy project in Europe.
Babcock & Wilcox Enterprises revealed an issue with the piping design of one of its renewable waste-to-energy projects on June 28, 2016. At the time, B&W said it was an “isolated issue” that it would work with its client to minimize delays on the project.
In the same release, the company announced further difficulties: a faster-than-expected drop in coal U.S. coal use that would prompt a 15-20% decline in demand for its parts and services, as well as a business restructure to separate its coal and renewable segments.
Issues with the European project continued to dog the company for months, weighing on margins and revenues. By mid-2016, overall quarterly revenues at the company declined 12% year over year, primarily due to a revised estimated cost to complete the contract.
By March 2017, two plaintiffs filed complaints against the company alleging fraud, misrepresentation and misconduct related to the renewable segment. In the second quarter of 2017, the stockholder litigation was condensed to one complaint covering investors who purchased shares from June 17, 2015, to Feb. 28, 2017.
The litigation alleges fraud, misrepresentation and misconduct related to the renewable segment that inflated its stock price. It also alleges that disclosing the company would post losses on projects within the segment harmed shareholders.
B&W said in a second-quarter filing that the allegations “without merit” and would not have a material negative effect on its consolidated financial condition, results of operations or cash flows.
The company struggled with European renewable contract well into 2017, announcing a second-quarter revenue decline of 8.7% with a loss per share of $3.09 compared to $1.25 in second quarter 2016. An unexpected $115.2 million charge and schedule issues in the renewable segment dragged on results. In addition to the first European renewable energy contract, B&W reported further losses on five other renewable projects that in the fourth quarter had become loss contracts.
The company said it expected its other renewable energy projects that had not become loss contracts to be profitable at completion.
