After a decade of declining revenue and five years of net losses, ENGlobal (NASDAQ:ENG) is now reaping the benefits of a new strategy to strengthen its overall business and right the ship. These benefits include improved profit margins, revenue growth, a crossover to profitability, and a slow but steadily improving share price.
In business for 35 years from its headquarters in Houston, Texas -- with five locations in four cities -- ENGlobal is a provider of complete modular process and automation systems primarily to the energy sector throughout the U.S. and internationally. The company has a customer base including many of the world’s largest companies, including ExxonMobil, Total, Chevron, Phillips 66 and many more, not to mention the U.S. Military. Employing about 300 people, ENGlobal operates through two business segments: Automation and Engineering.
But let’s briefly recap the company’s transition. Up until 2018, ENGlobal was basically an engineering consulting firm that would typically work on hundreds, sometimes thousands of assignments each year – assignments worth anywhere from $10,000 to $200,000 in revenue. Manpower costs were high, and margins low.
Two years ago, however, CEO and founder Bill Coskey developed a new strategy – rather than pursuing the aforementioned low-revenue jobs, he built a turnkey solution that would allow the company to bid on and favorably compete for modular process and automation systems projects with revenue valued from $10 to $200 million.
And not wasting much time, this past November the company validated its new strategic shift by inking an agreement valued in excess of $20 million to supply process modules for use in the constructing of a complete hydrogen production plant – a plant whose hydrogen fuel is the essential feed of a major renewable diesel facility. Not only did this contract’s value nearly match the $25.8 million in revenue amassed by the company during the first half of 2019, it also has the potential to be expanded further in scope over its 18-month duration.
The contract also had another substantial implication insomuch as the hydrogen unit’s design is utilizing technology of Haldor Topsoe, a new collaboration partner of ENGlobal. This highly efficient synthesis gas process consumes approximately 20% less feed and fuel gas than conventional hydrogen plants, and produces no excess steam, leading to substantially lower operating costs and a far smaller carbon footprint. The installation will mark the first time Haldor’s technology is being used in the U.S. after more than 40 successful implementations worldwide.
As for ENGlobal, the turnkey solution employed in this project can likely be employed to capture additional contracts in such esoteric areas as natural gas and crude oil production systems, synthesis gas processing, control systems implementation, continuous emission monitoring systems, and pipeline pump functions.
Subsequently, ENGlobal’s subsidiary, ENGlobal Government Services, Inc. (EGS) – which for decades has serviced various branches of the U.S. Dept. of Defense - landed an $11.5 million contract for the maintenance, sustainment and upgrades of Automated Fuel Handling Equipment (AFHE) worldwide with the Defense Logistics Agency (DLA).
To appreciate what EGS really brings to the table, last June the business won one of only three prime contractor spots on a U.S. Military $124 million AFHE multiple-award contract. In December, two task orders from the DLA were awarded under that contract that would produce another $6+ million in revenue as part of a five-year contract.
The above contracts underpinned a fourth quarter of 2019 in which ENGlobal achieved a profit of $741,000, or $.03 per share. For all of 2019, revenue totaled $56.45 million, up from $54.0 million in 2018. Net loss was $1.47 million for all of 2019, a decrease of 74% from a loss of $5.67 million in 2018, lending another signal that ENGlobal is charting the right course for growth while trimming operating expenditures.
The company ended the year with $8.3 million in cash on hand and no significant debt. Management has noted that it is exploring conventional financing, which is encouraging for anyone worried about dilution, and that the company was recently awarded an SBA loan under the CARES Act for $4.9 million to aid in its liquidity during these unprecedented times.
Confident in its new strategy, management has said it is on pace for continued profitability in Q1 2020. Savvy investors will take note that this quarterly report is actually coming out tomorrow, Thursday, May 7, 2020 – and should have investors taking notice of a microcap (market cap of just $27 million) that has doubled in value in the last month, but still sits well below its 52-week high of $1.48 set in November.
Of course, any discussion of ENGlobal must include the impact that Coronavirus has had on an energy industry already struggling with oversupply and bulging inventories, taking oil prices that looked to be stabilizing in the $55/barrel range (give or take $10) throughout the summer to under $10/barrel in April. (A rebound of sorts has ensued, with oil making its way back over $20/barrel as market participants consider the possibility that the worst of COVID-19 is behind us and economies worldwide can re-open, which should bolster demand and prices.)
While many companies have met their demise with falling energy prices, ENGlobal appears to be better positioned to weather the storm than most other companies servicing the energy sector.
The reasons are threefold: First, the company’s turnkey solution will likely continue to gain traction in tandem with America’s accelerating dependence on renewable energy; second, the oil and gas sector is steadily moving toward the adoption of modular, automated systems; and third, most of ENGlobal’s services are marketed for downstream-related clients like refineries and chemical processing plants – the type of entities least affected by the price of oil.
So far, the company has not seen much, if any, letup in this area of activity. At present, ENGlobal has over $100 million in proposals outstanding, and its experience over the last year has been to win about 39 percent of their proposals on a dollar volume basis.
Bottom line is that this Company expects to keep delivering on growth and earnings, regardless of the economic backdrop, which is something few other companies can say.
