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McDermott International (NYSE:MDR)
Q2 2019 Earnings Call
Jul 29, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by and welcome to McDermott International's second-quarter 2019 financial results conference call. [Operator instructions] I will now turn the call over to Scott Lamb, McDermott's vice president of investor relations. Please go ahead.

Scott Lamb -- Vice President of Investor Relations

Thank you, and good afternoon, everyone. Joining us on the call today are McDermott's President and Chief Executive Officer David Dickson, and Executive VP and Chief Financial Officer Stuart Spence. I'd like to remind you that we are recording this call and the replay will be available on our website where you can also find a copy of our press release and our Form 10-Q. 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, July 29, 2019. Please refer to our filings with the SEC, which include and are available on our website, including our Form 10-K for the year ended December 31, 2018, and subsequent Form 10-Q filings, which provide 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. Good afternoon, and thanks for joining us today. I'm sure you've all seen the quarterly results by now, and Stuart will offer detailed commentary on the numbers in just a few minutes. But before that, let me provide an operations update.

As our release has indicated, the news this quarter is mixed. Before we address the reasons behind our operating loss and the impact on the quarter, let me start with the positives, which we believe will position us to demonstrate sharply improved performance in 2020. First, the company reported a record-setting level of backlog and new awards, which clearly reinforces the benefits of our combination with CB&I and the opportunities available in a strong market environment. Second, the company has about more than 19 billion of new awards since the May 2018 combination, all of it under McDermott's stringent risk management protocols, which we believe paves the way for us to deliver consistent margin performance through the application of the one McDermott way in the execution of this backlog.

Third, our revenue opportunity pipeline remains at a near record level of 90 billion. This a metric we use to look at all the coming five quarters. And during this forward-looking period, we are positioned for a continued, robust flow of new awards for offshore work in the Middle East and a number of other noteworthy headline projects such as a large subsea contract, featuring an integrated surf, an SPS EPCI solution for a client in the APAC region, a potential mega contract for EPCI work on the Scarborough gas field development project in Australia, a medium-sized LNG project in North America, a subcontract for our QMW facility for a significant amount of module work on the Arctic 2 LNG project, and potential new petrochemical facilities on the Gulf Coast where our technology has already been selected. We also see a potential, longer-term, FEL3 opportunity in South Korea where our technology business was selected as the master licenser by S Oil, an affiliate of Saudi Aramco, in support of its ethylene cracker and downstream petrochemicals complex being developed as a major expansion of S Oil's existing refinery.

Fourth on the list of positives is that the company continues to remain on schedule in executing the Cameron and Freeport LNG projects. The Cameron settlement agreement that we signed earlier this month is a testament to the mutually productive relationship we have built with this customer since the combination, and the associated incentive provided a meaningful contribution to our second-quarter results. And in Freeport, we announced the introduction of feed gas last week. Both projects are more than 90% complete with no scheduled changes as of Q2.

And what we refer to as the cone of uncertainty related to project risk is steadily shrinking with each passing quarter. And as this relates to Cameron in particular, the uncertainty in 2020 is further diminished by meaningful incentives as we hit the associated milestones that we have negotiated with the client. Finally, I would say that the fundamental long-term outlook for our key markets is exceptionally robust. In the strategic area of feeds, for example, our awards for the first half of 2019 are already more than double what we won in all of 2018 in terms of both man hours and dollar value, and that's especially important as feed work positions us for EPC opportunities.

This year, for example, we have about 1.5 billion of EPC work as a result of feed work that's been done since the combination. Further, in our technology business, we are forecasting the number of license sales to increase by 25% this year versus 2018. Beyond that, as a result of recent or pending technology license sales, we continue to see roughly 40 billion of potential EPC FEL3 opportunities in refining and petrochemical. And we believe the petrochemical market in particular is poised for another wave of investment in the next 12 to 24 months with an expected increase of more than 40% between 2019 and 2028 in world ethylene capacity in a market where we are one of the world leaders.

However, as shown by our second-quarter operating results, the bottom-line benefits of the combination are not yet fully evident. Some of what we saw in our operating margin during the second quarter of 2019 was a reflection of our shift to a younger project portfolio, if I can describe that in that way. What I mean in particular is that compared to last year, our portfolio is, on average, at an earlier stage of execution when the margin-enhancing opportunities have not yet been realized. Apart from this, yes, there have been a few operating disappointments and surprises since last year's combination.

We're not happy with the magnitude of the loss for the quarter which, to a certain degree, is extending the overall timing of our transition period, but we fully expect benefits of the combination to become more evident next year. For now, however, we are reducing our full-year guidance to reflect the second -- the weak second quarter, as well as profit recognition slippage from Q4 into 2020 and lowered expectations for the performance of legacy CB&I projects in our NCSA segment. Stuart will provide additional commentary on guidance in just a few minutes. Our Q2 results are also a reminder of the inherent volatility in quarterly results in the E&C space.

Despite that, we manage our business for the long term. That's certainly the perspective we adopted when we engineered the turnaround of the legacy McDermott business in the 2013 to 2015-time frame. It was a long and challenging journey, and our financial results did not begin to show the benefit of our hard work until the 18 months or so after my arrival in late 2013. We are maintaining this long-term view of value creation as we work through 2019.

Clearly, the signs are positive. At the end of the second quarter of 2019, our backlog already included approximately 7.4 billion of our expected 2020 revenues, which is much higher than the 4.2 billion of 2019 roll-off that we had in backlog this time last Year. Beyond 2020, we have good visibility into 2021 where we already have more than 4 billion of revenues in backlog. Moreover, when we look at our near record level revenue pipeline, we have a very good idea where the additional awards and revenues will come from.

And another encouraging sign is the steady roll-off of legacy CB&I backlog, which stood at 2.9 billion as of the end of the second quarter. Of this amount, 2 billion was associated with our NCSA segment and that is projected to be below $1 billion by the end of this year and below 200 million by the end of 2020. What we see as of today is -- 2020 that we expect to demonstrate significantly improved performance with higher revenues and solid operating margins. I want to emphasize that we are using the McDermott playbook to ensure that the company reaches its full potential.

Specifically, we have identified the loss-makers and balanced the risks and opportunities across the CB&I portfolio. We have introduced a more robust bidding process and oversight. We have introduced better cash management. We have built and repaired relationships with customers and other business counterparties as evidenced by the Cameron settlement and new record bookings.

We have built a strong backlog. We introduced a new risk management system and recently established a new risk committee within our board of directors. And we enhanced what we believe is an already best-in-class ethics and compliance program that enables us to avoid the kinds of problems that you've seen affecting some of our competitors. And the final element of the playbook I want to mention is that we have built and established a new leadership team.

In this regard, I am particularly excited about the change we made in the technology business earlier this year. Today, we are looking at reenergizing this business with a specific emphasis on new approaches to optimizing pull-through opportunities. Moving forward, the McDermott playbook will help us continue to deliver on the legacy portfolio, complete the loss-making projects, execute on a new portfolio, reduce the volatility in our quarterly results and continue to strengthen our customer relationships. When I look at what we are doing as a company, when I travel to our various offices around the world, I see countless examples of operational progress, innovative thinking and employee engagement at McDermott.

I am firmly convinced that the company is strategically and tactically focused on doing exactly the right things in exactly the right way. And I have absolutely no doubt that these efforts will create long-term value for our investors, customers and employees. And as far as the near to intermediate term, we expect to see a sharp improvement in the company's operating income by the fourth quarter this year as we build momentum heading into 2020. And with that, I will turn it over to Stuart.

Stuart Spence -- Executive VP and Chief Financial Officer

Thanks, David, and good afternoon, everyone. Let's now take a closer look at the numbers. The company reported revenues of 2.1 billion, net loss of 146 million or $0.80 per diluted share and an operating loss of 61 million. Excluding a 101 million noncash loss on the sale of alloy piping products, or the APP, business, as well as restructuring, integration and transaction costs, the adjusted net loss was 14 million or $0.07 per diluted share.

Our adjusted EBITDA was 112 million and the adjusted operating income was 71 million. The 71 million of adjusted operating income included the benefit of the Cameron settlement under which 110 million of progress incentives were recognized during the quarter. The adjusted operating income also reflected increased cost estimates on projects in the company's NCSA segment, including 38 million on the Freeport LNG project as a result of increased construction and subcontractor costs on trains one and two as we near completion on each of those trains, and 33 million on the company's companies offshore project for Pemex in the Gulf of Mexico related to disagreements with the customer that have coincided with changes in that company's leadership team and changes in the country's political landscape. Turning to the performance of the operating units.

I will start with NCSA, which reported revenues of 1.3 billion and operating income and margin of 15 million and 1.2%, respectively. Excluding the loss on the APP sale, adjusted operating income for NCSA was 117 million. Segment results for the quarter included the net impact of the Cameron settlement agreement and the project charges I just mentioned. Let me offer just a bit more color on the Cameron settlement.

The 110 million that we recognized in our statement of operations for the second quarter was an incentive related to the projected achievement of construction progress milestones. That incentive has two cash components: 75 million expected to be received in the second half of this year, including 38 million of which we received in July of 2019. The remaining 35 million of the 110 million, we expect to receive in 2020. Now to be clear, the settlement agreement gives us additional incentive opportunity beyond what we have currently included in our revenue estimate for completion-related milestones.

That additional opportunity is modestly lower than the 110 million we recognized in Q2. And the benefit for the income statement and for cash flow would be in 2020, as David referenced, when we become confident in our ability to achieve the milestones. NCSA recently achieved significant operational milestones. First cargo shipped from Cameron's train one during the quarter was a substantial completion of Phase I expected within this quarter.

Trains two and three continued to progress on schedule, with the overall project reaching 93% completion during the quarter. Freeport continues to progress well, reaching 95% completion for all three trains combined. Commissioning of freeport train one continues with the introduction of feed gas early in the third quarter. The first cargo shipment is expected in the third quarter.

Our EARC segment reported revenues of 192 million and operating income and margin of 4 million and 2.1%, respectively. Key contributors to revenues and operating income were the Total Tyra, Lukoll refinery and Afipsky refining projects. As the LNG cycle continues to show momentum, our EARC segment booked McDermott's share of the Mozambique LNG EPC contract during the quarter. And as a reminder, until June of 2020, McDermott has a unilateral right to step up its participation in the project to 45%, which would represent another 1.6 billion of approximate booking value.

In our MENA segment, we reported revenues of 399 million and operating income and margin of 29 million and 7.3%, respectively. Key contributors were the Saudi Aramco Safaniya Phase 5 and 6, QP Bul Hanine, ADNOC crude flexibility, SASREF and Liwa projects. Operating income was impacted by transitioning from mature backlog to newer contracts secured at lower prices due to increased competitive pressure. MENA demonstrated McDermott's continued strength in the region by booking record level order intake during the second quarter, resulting in the highest level of backlog ever attained in the region.

Among the new awards during the quarter were two megaprojects for Saudi Aramco located in the Marjan field. APAC reported revenues of 133 million and operating income and margin of 2 million and 1.5%, respectively. Operating income was driven by various active projects and closeout-related savings in Australia and India. APAC is expected to book the Scarborough gas field development project in early 2020, a megaproject for which we have done feed and related work.

Moving on to our technology segment. We reported revenues of 154 million and operating income and margin of 35 million and 22.7%, respectively, primarily driven by catalyst shipments, execution progress, earned fees and process performance. And to round out the discussion, let me quickly recap the corporate segment, which reported 146 million of expense items mainly attributable to selling, general, administrative and other expenses of 52 million, 59 million of unallocated operating costs, 31 million of restructuring, integration and transaction-related costs down significantly as compared to Q1. Cash used by operating activities in the second quarter of 2019 was 205 million.

This primarily reflected the company's net loss and the usage cash on the Cameron LNG project. Total cash availability was 1 billion at June 30th, 2019, consisting of 455 million of unrestricted cash and 568 million of availability under McDermott revolving credit facility. As of June 30, 2019, McDermott had approximately 1.4 billion of combined availability under its principal letter of credit facilities, uncommitted bilateral credit facilities and surety arrangements. McDermott was in compliance with all financial covenants under its financing arrangements as of June 30, 2019.

And now for a quick update on the status of the asset sales. During the second quarter of 2019, McDermott completed the sale of the APP business, the distribution and manufacturing arm of our pipe fabrication business. Net proceeds were 83 million. We continue to pursue the sale of the remaining portion of the pipe fabrication business.

As for the storage tank business, we have identified potential buyers, and sales efforts with respect to that business remain ongoing. In connection with that contemplated sale, we may retain a continuing minority ownership or other economic interests in the business. Our anticipated aggregate net cash proceeds from the pipe fabrication and storage tank transactions are now expected to be lower than the approximately 1 billion we previously estimated. Our ongoing competitive sales process is now expected to result in a closing of the sale in the fourth quarter of 2019.

I'll now comment on our updated guidance for 2019, which is driven by four main factors. First would be the weaker-than-expected operating results for the second quarter of 2019. Second is the impact of reduced revenues and higher unallocated operating expenses due to slippage in certain new awards and customer changes to schedule on several projects. Third is changes in our assumptions about the expected performance of legacy CB&I projects in our NCSA operating segment; and fourth is the shift from the fourth quarter of 2019 into 2020 in the assumed timing of remaining incentives on the Cameron project.

As a result, we have reduced our revenue guidance for the year from about 10 billion to about 9.5 billion. We've also reduced our guidance for adjusted operating income to 470 million, down from previous guidance of about 800 million on an adjusted basis. This reduction, as you would expect, flow through to corresponding reductions in EBITDA, net income and earnings per share. And we now expect our full-year adjusted loss per share of about $0.32 in 2019.

We have also adjusted our guidance for cash flow from operating activities and free cash flow for this year. We now expect negative cash flow from operating activities to be approximately 495 million as compared to previous guidance of negative 310 million. The good news here is that most of this negative cash flow has already occurred during the first half of the year, which suggests that cash flows from operating activities would be only modestly negative in the second half. As for negative free cash flow, we have reduced our full-year guidance to about 640 million on the forecast of a capital investment budget of about 145 million.

As a reminder, you can find the full slate of GAAP and adjusted numbers in the guidance table of our earnings release. Even with the reduction in overall guidance, we expect to see a sharp improvement in operating income in the fourth quarter of this year. And wrapping up my remarks, I'd also like to note that we continue to believe that the company's liquidity profile is adequate. And I will remind you that the guidance we are providing today is based on our current portfolio.

And with that, I will turn it back over to David.

David Dickson -- President and Chief Executive Officer

Thanks, Stuart. In conclusion, let me emphasize once again that the long-term outlook for McDermott is exceptionally positive. We are optimizing the benefits with CB&I and steadily advancing toward completion of the Cameron and Freeport LNG projects. We remain confident in the earnings power of the company, and the adjustment in our current year guidance is largely a reflection of Q2 actuals and subsequent timing-related issues.

We are confident that the challenges we have confronted since the combination with CB&I will be largely behind us by the end of the year, and we look forward to a significantly improved 2020. Although we are not prepared to give specific earnings guidance for next year, let me cite the specific factors that support our optimistic view of 2020. First, we should capture not only the revenues and earnings that we previously expected to see in Q4 of this year, but we should see a much higher revenue run rate based on the growth in backlog and the corresponding reduction in unallocated operating expense. Second, we would expect to see a sharp reduction and eventual elimination on zero margin revenues from our existing project portfolio as we complete the Cameron and Freeport LNG projects.

Third, we believe our backlog is sound and profitable, and we would not expect to incur material changes in project estimates across our portfolio. Fourth, we expect to see continued market strength, particularly in petrochemical, where there are six or seven very large EPC opportunities that we are tracking, as well as additional bookings for LNG EPC work and a continued rich opportunity set for offshore work, especially in the Middle East. Fifth, a reduction in and eventual elimination of integration and restructuring and transaction expenses in conjunction with a reduced interest expense due to reduced borrowings under the revolver. And lastly, we will see full-year benefit of the cost reduction efforts we have made.

Before we go to Q&A, I want to leave you with one key takeaway. You've heard me say this before, but it bears repeating. I firmly believe the strategic rationale for the combination with CB&I is as strong as it ever was. The turnaround of legacy McDermott was a challenge that took more than 18 months to complete, but we never lost sight of our objective.

Today, we are just over 12 months into the turnaround of CB&I. And in comparison, to the previous McDermott turnaround, we have a much stronger revenue pipeline with approximately 7.4 billion of 2020 revenue in the backlog and more than 4 billion of 2021 revenue in the backlog. It's clear that we have an excellent future and are working steadfastly to realize the full potential of the new McDermott. That concludes our prepared remarks, and we'd be happy to take your questions.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Tahira Afzal from KeyBanc Capital.

Sangita Jain -- KeyBanc Capital Markets -- Analyst

Hi. This is Sangita for Tahira. Thanks for taking my question. So the first thing I would ask is you guys guided obviously a different number for 2019, and you gave us some color, but can you highlight a little bit more on what projects you think will get pushed out to 2020?

Stuart Spence -- Executive VP and Chief Financial Officer

Sangita, this is Stuart. Yeah, so just to recap the impact on our guidance for EBITDA or adjusted operating income for 2019, first, it was really a revenue slippage from this year to next year, as you see, for about 500 million. This was kind of across the portfolio related to the timing of some of the awards that we've seen in the second quarter, just also some project schedules we see in the second half of the year. That not only impacts the profit on the project, but it's also increasing our unallocated expense of our operating assets.

Second, we're taking into account our lower-than-expected Q2 results. Third, on our Cameron incentive, we moved that into 2020 where we see the milestones come on that incentive. And then lastly, given some recent performance indicators in our NCSA portfolio, schedules haven't changed, but we've taken down our margin expectations of that old portfolio. And that's what drives our change in guidance.

Sangita Jain -- KeyBanc Capital Markets -- Analyst

That's helpful. And if I can ask another one on the asset sales, I understand what you said in your prepared remarks, but would you be willing to give us a new range for what you expect from the sales and how realistic your 4Q outlook looks at this point?

Stuart Spence -- Executive VP and Chief Financial Officer

Sangita, it's Stuart again. As you hear, we're in the middle of our competitive process. So obviously, anything we say is commercially sensitive. And as a result of that, we'd like to stick to our prepared remarks.

Sangita Jain -- KeyBanc Capital Markets -- Analyst

OK great. Thanks so much.

Operator

And our next question is from the line of Jamie Cook from Credit Suisse.

Jamie Cook -- Credit Suisse -- Analyst

Hi, good evening. I guess, just to follow up, Stuart, on the guidance reduction for 2019, I understand you gave the buckets of why we're lowering each one. But besides like the 500 million in revenue you talked about, can you just put a dollar amount in -- associated with each of the four buckets so we can see what the -- so we're able to quantify how big each bucket is? And then I guess my second question, just how do we think about the ramp Q3 versus Q4 because obviously that has implications for the earnings trajectory into 2020? And is there any way you can help us think about a more normalized margin for the company in 2020, assuming you can execute against the existing portfolio?

Stuart Spence -- Executive VP and Chief Financial Officer

Thanks, Jamie. So I'll take the first question around the drop in guidance. So when we look at the impact of, I would say, the revenue fall impact on margin and the change in our expectations for NCSA portfolio, those are roughly the same number. And you saw that our Q2 earnings was impacted by two project charges, and our Cameron incentive is a similar amount to that charge.

On the cadence of timing in the back half of the year, I think we see Q3 as having slightly higher revenues but also kind of a challenged profit environment, but we see a significant uptick in revenues in Q4 with a real step-up in operating income performance. Hopefully, that's helpful to you.

Jamie Cook -- Credit Suisse -- Analyst

And any way you can help us think about sort of a normalized margin for what's on backlog as we think about 2020. And I know you don't want to answer 2020, but I'm assuming it's more back-end loaded versus front-end loaded just in terms of how the projects ramp and with us finishing Freeport -- we'll still have Freeport and Cameron in our numbers in the first part of the year at least.

Stuart Spence -- Executive VP and Chief Financial Officer

Sure. When we look at 2020, we would always say it's early, but you see we do have 7.4 billion of revenue already secured for next year. We are expecting some additional awards in the back half of this year that will also add to that number. And as we've commented, we have an option on the Anadarko LNG project and also the feed to EPC conversion on Scarborough.

So we see a very, very healthy backlog environment going into 2020, and that should drive significant revenue growth from 2019. In terms of a margin profile or a cadence to the business, first, the cadence we see is steady growth throughout the year, building from Q4. And from a profit recognition perspective, we would see a growing portfolio almost in line with the revenue but also getting higher in the back half of next year.

Jamie Cook -- Credit Suisse -- Analyst

OK that's helpful. I'll get back in queue. Thank you.

Operator

And our next question is from the line of Andy Kaplowitz from Citi.

Andy Kaplowitz -- Citi -- Analyst

Hey, good evening, guys. David or Stuart, you've mentioned the changes in assumptions in the legacy CB&I projects within NCSA and that the CB&I legacy projects are now only 14% of your backlog. I mean as you guys know, it's been over a year since CB&I closed. So in general, when do you think that investors can get comfortable that the vast majority of your backlog at risk will get better? And I know you mentioned CB&I backlog would be under a billion by the end of this year and 200 million by the end of '20, but what's the risk that we have to wait until the end of 2020 for you to reduce the noise in the backlog?

David Dickson -- President and Chief Executive Officer

Yeah, Andy, if you look at -- it's David. If you look at -- obviously, the majority of this backlog still relates to Cameron and Freeport. And as you can see in the supplemental deck, the completion dates for both those projects haven't changed since Q1. So while we have those two, obviously, those two projects are ongoing, and we'll obviously continue to -- these are zero margin revenue projects.

But the balance of the portfolio I would say today that -- and I said at the prepared remarks is obviously our confidence level is growing as we've gone through each and every one of them. And as you're seeing, once we get through to the back end of 2020, we're essentially through that, we only have $200 million of the backlog left. So I think that after 12 months -- and obviously, a lot of our focus, as you know, has been on Cameron and Freeport because of the quantum of the charges we're about to take on both of those projects. And what we'd say today is obviously we've made a lot of good progress.

The incentive discussion with the customer, I think the customer has been very fair with us. But unfortunately, a large part of those incentives won't be realized until 2020. But generally, over the portfolio, I think we're -- as times progress, we're getting our arms around it more and more, but I think the two big remaining issues will always be Cameron and Freeport until we've got them completely done.

Andy Kaplowitz -- Citi -- Analyst

David, what were the -- were there other changes in other projects? I mean it sounded like there were other changes in other projects. Were there? Or was it really just -- and we noticed, you obviously talked about Freeport, but what else was there in the CB&I backlog that you changed?

Stuart Spence -- Executive VP and Chief Financial Officer

Yeah, Andy, it's Stuart. So if you think about what was in the segment NCSA, it's really around the petrochemical and the power projects. I think it's there where we're kind of resetting the expectation level based on the overall performance that we've been seeing. So not all of those contracts are lost contracts, but they're relatively low margin.

We and the NCSA management team have been working extremely hard to try and increase the profitability. But as we're finding, they are too late in their life cycle to really make any significant impact. And that's what's driving this kind of change in our expectation and then feeding into the change in the second half guidance.

Andy Kaplowitz -- Citi -- Analyst

Got you. And then, Stuart, you've got $1 billion of liquidity that you talked about. You talked about less burn in the second half, 150 million I think is the number. We know, obviously, you have your asset sales that would go a long way to help your liquidity.

But what if your asset sales continue to push out or projects tend to bleed a little bit more for cash? We know you have 800 million on liquidity versus your covenants. But there -- is there a certain level that you would get to where you might have to think about other solutions? And what is it that's slipping in the asset sales themselves?

Stuart Spence -- Executive VP and Chief Financial Officer

So just as a reminder, Andy, our guidance for the full year does not include the divestiture of our tank storage business or the remaining pipe fabrication assets. So our guidance includes the benefit of those businesses all the way to the end of the year. We are comfortable with the liquidity at the end of Q2, which is $1 billion. We are guiding -- giving guidance for the back half of the year.

And given our credit facilities and bilateral facilities, we are comfortable with the overall liquidity profile of the company. If we look at the asset sales just in general, our tank business is a global business. It has a high level of interest. It was the foundation entity of CB&I.

So it has taken us a little bit longer to prepare for sale. It's taken a little bit longer for our buyers to understand the global scale and growth opportunities of that business, but we would hope to drive that process to conclusion relatively soon.

Andy Kaplowitz -- Citi -- Analyst

Thanks, guys.

Operator

And our next question is from the line of Steven Fisher from UBS.

Steven Fisher -- UBS -- Analyst

Thanks. Good afternoon, guys. So I guess just to follow up on some of the previous questions, what continues to surprise you on the project execution? Is this all just labor productivity? Is there something else going on there? And I know you basically just talked about that it was Freeport and some power and chemicals. But are you -- as it relates to Cameron, I mean you mentioned doing a good job on keeping the project on schedule? Are you just spending more now to make sure they stay on schedule?

David Dickson -- President and Chief Executive Officer

So Steven, it's David. I mean in Cameron and Freeport, as we say, we're sticking to the schedule. We've taken a charge obviously on Freeport which -- for this quarter. With regards to Cameron, I mean we continue to see the project progress.

You've seen all of the good announcements over the last few weeks. We've now delivered a number of cargoes from train one. Obviously, we take those lessons learned to trains two and three. And as we said, we're still on track.

But until these projects are finished, then we'll never say we're done. I think going back to what Stuart was highlighting is that when we look generally across the portfolio, although a number of these projects are not moving into loss-making, they just don't carry the levels of whether it be contingency and whatever that allows us to enhance or maximize the profits. So there's just not that depth across. And it's mainly the NCSA portfolio, and that's what we highlighted in the prepared remarks.

And then when we're having these charges, unfortunately, we do have a very young portfolio moving forward. Again, we highlighted about the 19 billion of new contracts that have been awarded since the completion. So again, it's going to take a period of time for these projects to start to materialize and really deliver on the upside that we would expect to see. But there aren't any other buckets in the NCSA portfolio that we can go into.

Now have we seen any further deterioration with regards to productivity at that point? We haven't really seen any further changes. I think we got to the bottom of that when we really analyzed more Cameron than Freeport. So I think generally, just the quality of the portfolio is just not there. And that's what we're doing, when the future beckons us, to really enhance the overall quality of the portfolio.

Steven Fisher -- UBS -- Analyst

OK. And then, Stuart, you mentioned that the 110 million of incentives is based on projected achievement of milestones, and it sounds like maybe you achieved some of them in July. But what happens if you don't achieve those projected milestones?

Stuart Spence -- Executive VP and Chief Financial Officer

So the initial recognition, as a reminder there, Steve, was around what we call the construction milestone-related incentives. So those are set on various construction activities for train two and train three. As we look at the projected schedule of the project, we see an attainment of those milestones with a degree of error or safety in the attainment. And that's what gives us the confidence to recognize them before they're actually attained.

Obviously, if we don't attain those construction milestones, then there'll be an adjustment to the incentive that we recognize.

Steven Fisher -- UBS -- Analyst

OK. Thanks a lot.

Operator

And our next question is from the line of Chad Dillard from Deutsche Bank.

Chad Dillard -- Deutsche Bank -- Analyst

Good evening, everyone. So I was hoping to get a little bit more color on the Freeport charge, just which trains were they related to, your comfort that this is the right amount to take a charge. And then also on the Pemex project, just like what's the percent completion? And give us a little more detail on kind of the discrepancy in the time frame for potential resolution. And just lastly, just how much 0 margin revenues in 2019.

Stuart Spence -- Executive VP and Chief Financial Officer

Chad, it's Stuart. I'll just take the first part of that question on Freeport. So as you'll see from the Q when you get time to go through it, we made an adjustment on T1 and T2 for about 27 million. That's really related to just refining our cost estimates as we get closer to the completion of those two trains.

As you've seen, we've introduced feed gas into train one, which is a critical part of the commissioning, and we're looking forward to seeing the first cargo from T1 this quarter as well.  And then we also made a small adjustment to T3 of about 11 million. Again, that's us just looking at the overall performance of T1 and T2 and then rolling that assumption or basis of assumption into T3. With that, I'll hand it to David for Abkatun.

David Dickson -- President and Chief Executive Officer

And then on -- Chad, on the Pemex side, disappointingly, we did have some more charges during Q2, and now both those projects are literally days away from completion. So we are now comfortable on the cost. The big part of the charge however is applied for LDs. Now the disappointing thing for us as a company is we've been working with Pemex for a long time, and this is the first time we're seeing this type of behavior where obviously we are in disagreement with the customer with the application of the LDs.

Well, we felt that it was prudent this time to take that charge until we can resolve this situation with Pemex which, working with Pemex, can take a number of months or a number of quarters to finalize or reach a resolution. So we felt this time it was prudent to take the charges associated with LDs until we get an agreement with the customer.

Stuart Spence -- Executive VP and Chief Financial Officer

And Chad, could you repeat the last part of your question?

Chad Dillard -- Deutsche Bank -- Analyst

Yeah. So just how much zero margin revenues is baked into 2019?

Stuart Spence -- Executive VP and Chief Financial Officer

So we haven't given that number out completely, but I think part of our reason to show you the legacy CB&I portfolio was really to kind of highlight the amount of very low margin or zero margin work that we have going through our backlog.

Chad Dillard -- Deutsche Bank -- Analyst

Got it. So just one more question on your cash flow cadence, just trying to understand, I guess, like what sort of visibility do you have in your cash flow to turning positive. And secondly, what's embedded in terms of cash advancements for the back end of the year?

Stuart Spence -- Executive VP and Chief Financial Officer

When we look at the cadence of cash for Q3 and Q4, we are seeing the operating activity level, we're seeing consumption in Q3 but almost a breakeven level in Q4. Obviously, you take the capex from that to get the free cash flow. You'll note from our capex plan that we have deferred or pushed an amount of our capex from the first half of the year into the second half, and we continue to look to optimize that number. That said, free cash flow will still be negative, assuming we spend the capex budget in Q4.

But as we look into 2020, we see the dynamics. Given the younger portfolio and its progress along with some additional bookings, the dynamics are getting set up for positive free cash flow in 2020. In terms of advances in the second half, Chad, so we have some certain order intakes. But we don't see our second half free cash flow guidance as being the line on one single advance from one single customer or one project, it's kind of spread evenly in risk over the portfolio.

Chad Dillard -- Deutsche Bank -- Analyst

Thanks, guys.

Operator

We have time for one more question. It comes from the line of Michael Dudas from Vertical Research.

Michael Dudas -- Vertical Research -- Analyst

Thanks for squeezing me. I just wanted to touch on -- you'd mentioned in your prepared remarks about the technology business as you made some changes there from a management or maybe a structure standpoint. Could you just go elaborate on what you did there, why and what you anticipate the outlook is for that business going forward given the visibility on some -- on new business that you guys booked in the last quarter?

David Dickson -- President and Chief Executive Officer

Yeah, Michael. I mean the changes was we had retirement of the head of technology. Dan has agreed to stay on for approximately 12 months as he knew that we will be busy, the management team is busy fixing some other things, and also, we've got a lot of confidence in the technology business. What we have done since the beginning of this year is we have put a new person in charge of that business.

Dan has retired. And we have also challenged the new team to really reenergize the technology business. And the reason we say that is that Lummus has a strong position already in the marketplace. But with feedback from our customers, we feel that Lummus has an even stronger position in the marketplace.

So we are doing a review of the whole business, looking at the whole portfolio of the technologies. And the big thing that we really are driving now is really taking that opportunity to buy, sell and license, hopefully takes us into feed, the sale of critical equipment and then ultimately the EPC. So what we've noticed is just in the last three or six months is those number of opportunities have significantly increased. In addition, what we've done is although we operate the technology business as a separate segment, we've also integrated it more with regards to our business development efforts.

And so, when we are sitting across from a customer, we're not just talking about selling a license but we're actually talking about how we can support a customer through the various stages of developing the project. So we're starting to see some positives on that. The S Oil award in South Korea was a major award, although it's only a master license at this stage. But it's an example of a project which could lead to the award of the various next stages and including some high-margin activity.

Michael Dudas -- Vertical Research -- Analyst

Thank you. Appreciate it.

Scott Lamb -- Vice President of Investor Relations

All right. Well, thank you, everyone, for taking the time to participate in our call today. As a reminder, a recording of the call will be available on the McDermott website for seven days. Operator, that concludes our call.

Operator

[Operator signoff]

Duration: 53 minutes

Call participants:

Scott Lamb -- Vice President of Investor Relations

David Dickson -- President and Chief Executive Officer

Stuart Spence -- Executive VP and Chief Financial Officer

Sangita Jain -- KeyBanc Capital Markets -- Analyst

Jamie Cook -- Credit Suisse -- Analyst

Andy Kaplowitz -- Citi -- Analyst

Steven Fisher -- UBS -- Analyst

Chad Dillard -- Deutsche Bank -- Analyst

Michael Dudas -- Vertical Research -- Analyst

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