The company is part of a group will build power plants in the Middle Kingdom. But analysts are keeping a wary eye on cost overruns
Shaw Group's (SGR) stock price soared in U.S. trading on Dec. 18, after the Baton Rouge, La.-based engineering and construction firm and its partner Westinghouse Electric Company snared a multibillion contract. The companies plan to build four 1,000-MW nuclear plants for China as part of a program that starts in early 2007.
China's exploding economy requires a lot of power. Already the world's third-largest net importer of oil behind the U.S. and Japan, China's oil consumption will increase by almost half a million barrels per day in 2006, or 38% of the total growth in world oil demand, according to the Energy Information Administration. China also has 20 of the world's 30 most polluted cities, largely due to high coal use and motorization, according to the World Bank.
So far China uses hardly any nuclear power to offset such problems. But the country expects to spend $50 billion on more than 30 new reactors by 2020, adding to nine 1970s-era ones operating now and quadrupling its nuclear power generation (see BusinessWeek.com, 12/18/06, "Toshiba-Westinghouse Takes China Nuclear").
Shaw's CEO J.M. Bernhard, Jr. is expecting a lot of work with his new contract. "This project also represents the beginning of a major construction program for China to add at least 20,000 megawatts of nuclear power over the next 15 years. We look forward to a long and mutually beneficial relationship with our Chinese clients for these and future nuclear units," Bernhard said in a press release Dec. 16. Precise deal terms weren't disclosed.
As part of the agreement, Shaw will provide engineering, procurement, commissioning, and management services for the four Chinese nuclear generation units.
Investors bid up Shaw 7.9% to $32.99 per share near closing time on the New York Stock Exchange.
The deal is expected to add 5,000 U.S. engineering jobs. Standard & Poor's Equity Research raised its target price on Shaw by $9 to $38 per share after the news. "Still, we continue to be concerned about Shaw's internal controls and possible further cost overruns," Standard & Poor's analyst Stewart Scharf said in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.)
Just this October Shaw Group said it planned to buy a 20% stake in Westinghouse Electric Company for $1.08 billion. Japan's Toshiba Corp. bought a 77% stake in Westinghouse, of Pittsburgh, for $5.4 billion this year.
Shaw Group, which has grown through acquisitions from a small industrial pipe-fabrication company, should benefit from a resurgence in power plant construction, Morningstar said in a general comment about Shaw on Oct. 3. "However, more contract work in the energy sector will introduce additional risk, as power plant projects are typically structured as fixed-price deals--meaning Shaw would bear the brunt of any cost overruns," Morningstar analyst John Kearney, CFA said in a research note.