You'd be hard pressed to find any stocks trading in the black today but it's the energy sector that is taking the worst beating.
The broad-based sell-off on the market is triggered by rising fears that Greece is going to be booted from the European Union as the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) dived 1.7% this morning.
But that seems mild when compared with the 2.6% belting oil & gas companies in the ASX 200 are taking with Origin Energy Ltd (ASX: ORG) leading the falls with a 3.8% plunge to $11.31 and Santos Ltd (ASX: STO) shedding 2.4% to $7.82.
A more than 2% drop in crude oil prices is not the only reason for the fall. There are concerns that oil & gas majors will be locked in multi-billion dollar disputes over the construction of liquefied natural gas (LNG) projects with their contractors, according to the Australian Financial Review.
Just about all ASX-listed energy majors have invested heavily in LNG with Origin Energy involved in Australia Pacific LNG, Santos in GLNG in Queensland, and Woodside Petroleum Limited (ASX: WPL) has a few projects under its belt like Pluto and Wheatstone LNG.
Falling energy prices are putting pressure on project owners to push back on cost claims by their contractors that are linked to project delays and variations.
Both parties are quick to move to arbitration instead of trying to privately negotiate settlements because financial pressure and consolidation in the engineering contractor industry is overshadowing the need to maintain friendly relationships to win future work.
Government figures show there are seven large-scale LNG projects worth $193 billion that are due to be completed in the next two years and legal sources say there are at least three claims with $1 billion in dispute each that have been filed so far.
There are a number of other claims that run into hundreds of millions of dollars as well and I fear it is the listed contractors that will be at the losing end of these disputes.
While both the energy and engineering sectors are under intense pressure, engineers have found the going tougher as they lack the resources and are facing a bigger cash crunch. Many don't have a luxury of waiting for months to get their claims paid even if the courts find in their favour.
Contractors are already under stress as the pipeline of work dries up from project cancellations and deferments on the back of falling commodity prices, while infrastructure construction projects have yet to pick up.
This is why I am staying away from the sector and not even the heavily discounted prices of leading firms like Worleyparsons Limited (ASX: WOR) and Monadelphous Group Limited (ASX: MND) can tempt me despite both stocks crashing over 40% in the past year.
There's plenty of time to buy them yet.
Other contractors that are already caught up in LNG disputes include UGL Limited (ASX: UGL) for the Ichthys power plant project and Cimic Group Ltd (ASX: CIM), which has been chasing $1.46 billion in claims for a jetty construction for the massive Gorgon LNG project.
While I would not be using the ongoing sell-off to buy the sector, there are other stocks investors should be looking at right now. Sign up below to get your free report from our experts to see what some of these investment ideas are.
