Enerflex Ltd. Provides Update Related to Kurdistan Project

Rhea-AI Summary

Enerflex (TSX: EFX) (NYSE: EFXT) has provided an update on its modularized cryogenic natural gas processing facility project in Kurdistan (EH Cryo project). Following a drone attack near the project site on April 26, 2024, Enerflex suspended activities and demobilized personnel. Despite collaborative efforts with the customer, Enerflex received notice of the customer's intent to terminate the contract effective September 8, 2024. Enerflex views this as a wrongful attempt to circumvent its contractual rights and plans to dispute the termination.

As of June 30, 2024, the project was approximately 85% complete, with a net unbilled revenue asset of $160 million. The project represented about 6% of the Company's Engineered Systems backlog. Enerflex has provided a $31 million Letter of Credit in support of its obligations under the contract.

Positive

• Project was 85% complete as of June 30, 2024
• Net unbilled revenue asset of $160 million recognized for the project
• Project represented 6% of the Company's Engineered Systems backlog

Negative

• Customer intends to terminate the EH Cryo project contract
• Suspension of project activities due to security concerns
• Potential dispute over contract termination may lead to legal costs
• $31 million Letter of Credit at risk if drawn improperly by the customer

Insights

Legal Expert

This situation presents significant legal challenges for Enerflex. The company's invocation of Force Majeure due to security concerns appears justified, given the drone attack and expert security input. However, the customer's intent to terminate the contract could lead to a complex legal dispute.

Key legal considerations include:

• The validity of the Force Majeure claim and its duration
• The customer's right to terminate under the contract terms
• Potential breach of contract claims from both parties
• The status of the $31 million Letter of Credit

Enerflex's stance that any drawing on the Letter of Credit would be improper is noteworthy but may be challenged. The company should prepare for potential arbitration or litigation, focusing on demonstrating the legitimacy of its security concerns and the wrongful nature of the termination.

Financial Analyst

The potential termination of the EH Cryo project poses significant financial risks for Enerflex. With 85% completion and a $160 million unbilled revenue asset, the company faces substantial exposure. This project represents 6% of Enerflex's Engineered Systems backlog, indicating a material impact on future revenue streams.

Key financial implications include:

• Potential write-off of unbilled revenue
• Impact on cash flow if the $31 million Letter of Credit is drawn
• Reduction in backlog and future revenue projections
• Possible impairment charges on project-related assets

Investors should closely monitor the dispute resolution process and any potential impairment announcements in upcoming financial reports. The outcome could significantly affect Enerflex's financial position and near-term performance.

Risk Management Expert

This situation highlights the inherent risks of operating in geopolitically unstable regions. Enerflex's experience underscores the importance of robust risk management strategies for companies engaged in international projects, particularly in volatile areas.

Key risk management insights:

• Importance of comprehensive force majeure clauses in contracts
• Need for flexible project execution plans that account for potential disruptions
• Value of maintaining strong relationships with local partners and authorities
• Significance of ongoing security assessments and rapid response protocols

For investors, this case serves as a reminder to scrutinize companies' risk mitigation strategies in challenging operating environments. It also emphasizes the need for diversified project portfolios to minimize exposure to regional instabilities.

CALGARY, Alberta, Aug. 20, 2024 (GLOBE NEWSWIRE) -- Enerflex Ltd. (TSX: EFX) (NYSE: EFXT) (“Enerflex” or the “Company”) today provided an update of a modularized cryogenic natural gas processing facility in Kurdistan (the “EH Cryo project”). 

As previously announced, and in response to a drone attack on April 26, 2024, that resulted in fatalities at an operational facility proximate to the EH Cryo project, Enerflex provided its customer with notice of Force Majeure, suspended activity at the project site, and demobilized its personnel. Since that time, Enerflex has worked collaboratively with its customer to evaluate the situation and assess potential options to complete the project notwithstanding the prevailing security situation at the project site.

Despite these efforts, Enerflex has received a notice that its customer intends to terminate the EH Cryo project contract with effect as of September 8, 2024. Enerflex views the purported termination as a wrongful attempt by its customer to circumvent Enerflex’s contractual rights to suspend performance while the project site remains unsafe; a conclusion that is supported by expert security input. Enerflex intends to dispute such wrongful purported termination and to protect its position in respect of the EH Cryo project.

As of June 30, 2024, construction of the EH Cryo project was approximately 85% complete. Revenues associated with the EH Cryo project are recognized within Enerflex’s Engineered Systems product line and any amounts not yet invoiced are presented as an unbilled revenue asset on Enerflex’s consolidated statements of financial position. The net unbilled revenue asset recognized for the EH Cryo project was approximately $160 million at the end of the second quarter of 2024. As at June 30, 2024, the EH Cryo project represented approximately 6% of the Company’s Engineered Systems backlog. The Company has provided a $31 million Letter of Credit in support of its obligations under the EH Cryo project contract, which financial security is funded with the Company’s Revolving Credit Facility and LC Facility. As Enerflex views the customer’s termination as improper, Enerflex would similarly view any drawing of such financial security in the prevailing circumstances as similarly improper.

Enerflex is focused on resolving this matter while protecting the best interests of the Company and its stakeholders. Enerflex will continue to update stakeholders as and when appropriate.

ADVISORY REGARDING FORWARD-LOOKING INFORMATION
This news release contains “forward-looking information” within the meaning of applicable Canadian securities laws and “forward-looking statements” (and together with “forward-looking information”, “forward-looking information and statements”) within the meaning of the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking information and statements. The use of any of the words "future", "continue", "estimate", "expect", "may", "will", "could", "believe", "predict", "potential", "objective", and similar expressions, are intended to identify forward-looking information and statements. In particular, this news release includes (without limitation) forward-looking information and statements pertaining to the intended termination of the EH Cryo project contract, the Company’s intended response thereto, and the timing associated therewith.

All forward-looking information and statements in this news release are subject to important risks, uncertainties, and assumptions, which may affect Enerflex's operations, including, without limitation: the impact of economic conditions; the markets in which Enerflex's products and services are used; general industry conditions; changes to, and introduction of new, governmental regulations, laws, and income taxes; increased competition; political unrest and geopolitical conditions; and other factors, many of which are beyond the control of Enerflex. As a result of the foregoing, actual results, performance, or achievements of Enerflex could differ and such differences could be material from those expressed in, or implied by, these statements, including but not limited to those factors referred to under the heading "Risk Factors" in: (i) Enerflex's Annual Information Form for the year ended December 31, 2023, (ii) Enerflex's management’s discussion and analysis for the year ended December 31, 2023, and (iii) Enerflex's Management Information Circular dated March 15, 2024, each of the foregoing documents being accessible under the electronic profile of the Company on SEDAR+ and EDGAR at www.sedarplus.ca and www.sec.gov/edgar, respectively.

Readers are cautioned that the foregoing list of assumptions and risk factors should not be construed as exhaustive. The forward-looking information and statements included in this news release are made as of the date of this news release and are based on the information available to the Company at such time and, other than as required by law, Enerflex disclaims any intention or obligation to update or revise any forward-looking information and statements, whether as a result of new information, future events, or otherwise. This news release and its contents should not be construed, under any circumstances, as investment, tax, or legal advice.

ABOUT ENERFLEX
Enerflex is a premier integrated global provider of energy infrastructure and energy transition solutions, deploying natural gas, low-carbon, and treated water solutions – from individual, modularized products and services to integrated custom solutions. With over 4,500 engineers, manufacturers, technicians, and innovators, Enerflex is bound together by a shared vision: Transforming Energy for a Sustainable Future. The Company remains committed to the future of natural gas and the critical role it plays, while focused on sustainability offerings to support the energy transition and growing decarbonization efforts.

Enerflex's common shares trade on the Toronto Stock Exchange under the symbol "EFX" and on the New York Stock Exchange under the symbol "EFXT". For more information about Enerflex, visit www.enerflex.com.

For investor and media enquiries, contact:

Marc Rossiter
President and Chief Executive Officer
E-mail: MRossiter@enerflex.com 

Preet S. Dhindsa
Senior Vice President and Chief Financial Officer
E-mail: PDhindsa@enerflex.com

Jeff Fetterly
Vice President, Corporate Development and Investor Relations
E-mail: JFetterly@enerflex.com

FAQ

What caused Enerflex (EFXT) to suspend work on the Kurdistan project?

Enerflex suspended work on the Kurdistan project following a drone attack on April 26, 2024, that resulted in fatalities at a nearby operational facility, citing Force Majeure due to security concerns.

How much of the EH Cryo project was completed before the suspension?

As of June 30, 2024, construction of the EH Cryo project was approximately 85% complete.

What is the value of the unbilled revenue asset for Enerflex's (EFXT) Kurdistan project?

The net unbilled revenue asset recognized for the EH Cryo project was approximately $160 million at the end of the second quarter of 2024.

When does the customer intend to terminate Enerflex's (EFXT) contract for the Kurdistan project?

The customer intends to terminate the EH Cryo project contract with effect as of September 8, 2024.