Ladies and gentlemen, thank you for standing by and welcome to the Shawcor Q4 and Year End 2019 Results Webcast Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any additional assistance, you may press star zero to reach an operator. I would now like to hand the call over to Paul Pierroz. Please go ahead.
Thank you, and good morning. Before we begin this morning's conference call, I would like to take a moment to remind all listeners that today's conference call includes forward-looking statements that involve estimates, judgments, and uncertainties that may cause actual results to differ materially from those projected. The complete text of Shawcor's statement on forward-looking information is included in section four of the fourth quarter 2019 earnings press release that is available on SEDAR and on the company's website at shawcor.com. I'll now turn it over to Shawcor's CEO, Steve Orr.
Good morning, and thank you for joining us on this morning's conference call. As we start the call, I'd like to highlight the extreme challenge of triangulating the industry and the company with a backdrop of ever-changing macroeconomics and factors that influence the risk of the company. Our approach is to be conservative and anticipate the possible impacts to the company and its performance. Yesterday evening, we released our Q4 and full year 2019 results with new segment reporting. This new segment reporting will, without question, provide enhanced granularity into the company's performance, but it will also challenge the historical and, in many ways, outdated set of assumptions about the company's portfolio, markets, and competitors that result in the company's valuations.
Additionally, the change in segment reporting will bring enhanced clarity to the reasoning why the company has moved with great urgency to diversify beyond pipe coating and, furthermore, the future potential that pipe coating brings. Now, turning to Q4 2019, Adjusted EBITDA was CAD 30 million, a decrease of 30% over the third quarter of 2019, and an increase of 22% over the same quarter one year ago. Revenue for the quarter was CAD 334 million, a 15% decrease over the previous quarter, and a 6% less than Q4 2018. The current quarter's revenue was negatively impacted by the annual season slowdown, low demand for product and services related to North America drilling and completions, and a revenue push related to a service quality event, partially offset by the addition of the ZCL acquisition.
Although Q4 revenue was lower than expected, as the North American E&P operators' pullback in spending was even greater than we had anticipated, and we certainly did not forecast a service quality event, EBITDA was delivered as expected for the quarter. Without the direct service quality cost of CAD 7 million provision taken to recoat pipe and the indirect cost, a CAD 10 million+ revenue push out of the quarter, the results would have been much better than we expected. Looking at the segments for the quarter, the pipeline and pipe service segment saw the completion of coating work for the Barzan project in EMEA, the absence of demand for girth weld inspection in December in both gathering lines and large diameter, and the impact of pipe coating of the service quality event.
The composite system segment had a very good quarter for tank deliveries, but it did not fully offset the reduction in demand for pipe in the U.S. land market. Automotive and industrial segment was as expected with a typical year-end slowdown. Looking forward to Q1 and the full year, we are forecasting that there will be a return in demand for our products and services in North America in both the upstream and midstream, with strengthening through the first quarter, with January being very slow. We expect demand for our composite tank products and retail fuel market will remain strong with the historical profile of sales, where Q1 is the lowest point of the year. Demand drivers for products and services within automotive industrial segments should remain solid for the full year, although we are expecting there will be some volatility due to the coronavirus in Q1.
But at this time, and I emphasize at this time, we do not expect it to impact the full year results. Pipe coating in offshore international markets are where we are now forecasting there will be a step change in activity. Based on projects that are already booked and are expected to be booked, Q1 will be slow with a progressive build for each quarter through the year, with Q3 and Q4 where we will expect to see the visible step change in performance. I'll speak in much more detail in a moment, but in summary, based on a very conservative view, we expect that Q1 could be significantly lower than we had just delivered in Q4 2019.
However, on the assumption we'll see continued strengthening in North American upstream and midstream to near 2019 levels, our oil and gas non-related businesses will perform at levels similar to 2019, and pipe coating projects that we have secured or have high certainty of securing and executing in 2020 are not halted or suspended. The company will deliver results in 2020 that are an improvement over 2019. Additionally, with line of sight on projects, many bids outstanding, and the success we are having in securing work with EPCs pending FID, the step up that we are forecasting for the second half of 2020 we expect will continue in 2021. I will now ask Gaston Tano, our CFO, to provide some details on the fourth quarter financial results.
Thanks, Steve. As Steve mentioned earlier, the fourth quarter results were in line with our expectations despite some challenges in certain areas. Before I start, I'd like to remind all listeners that we have revised our segment reporting. We now have three segments: pipeline and pipe services, composite systems, and the renamed automotive and industrial, formerly petrochemical industrial. Starting off with revenue, consolidated revenue in the fourth quarter was CAD 334 million, 6% lower than the fourth quarter of 2018. The pipeline and pipe services segment revenues decreased by 14% compared to the prior year, primarily due to lower demand for pipe coating and girth weld inspection services in North America as a direct result of the capital discipline focus of E&P operators and delays in land transmission line projects, partially offset by higher pipe coating project activity in the EMEA region.
The current quarter was also negatively impacted by delay of revenue related to the quality issue experienced in the quarter. The composite system segment revenues increased by 10% compared to the fourth quarter of 2018, primarily due to the ZCL acquisition, which was completed in the second quarter of 2019. This was partially offset by lower demand for composite pipe products related to the capital discipline focus of E&P operators and the continued market softness in Western Canada. In the automotive and industrial segment, revenues were higher by 1%, primarily due to higher demand for our wire and cable products in North America, partially offset by lower revenue for our automotive heat shrink products. On an annual basis, consolidated revenue for 2019 was CAD 1.49 billion, an increase of 6% over 2018.
The pipeline and pipe services segment revenues increased slightly over the prior year, primarily due to improved pipe coating activity in the EMEA region, partially offset by lower revenues in the Asia Pacific region. The composite system segment revenues increased by 20% compared to the prior year, reflecting the benefit from the ZCL acquisition in the current year, partially offset by lower demand for composite pipe and tubular management services related to the capital discipline focus of E&P operators and the continued market softness in Western Canada. The automotive and industrial segment revenues increased by 4% compared to the prior year, primarily due to higher demand for our wire and cable products in North America, partially offset by a slight decrease in revenues for our automotive heat shrink products.
Consolidated results for the fourth quarter in the year were negatively impacted by non-recurring items outside of the company's normal course of business. The current quarter includes a $104 million impairment charge on intangible assets and goodwill for our Shawcor's inspection services business and assets at two pipe coating facilities. Also, a loss of $1 million related to the hyperinflationary accounting for Argentina. This was partially offset by a $5 million gain on investment in associates and a $1 million gain on sale of land in the quarter. The annual results reflect a negative impact of a $104 million impairment charge, ZCL acquisition and related items of $17 million, a loss of $5 million related to the hyperinflationary accounting for Argentina, partially offset by gains of $39 million on the sale of lands in Western Canada, and a $5 million gain on investment in associates.
On an adjusted basis, consolidated adjusted operating income margin for the fourth quarter was 1% compared to 2% for the prior year fourth quarter. The current year's adjusted operating margins reflect positive adjusted margins for the composite and automotive segments, both at 14.1%. These positive margins were offset by a negative adjusted operating margin of 13% in the pipeline and pipe services segment, which reflects the negative impact of the $7 million cost for the quality issue in the quarter, lower demand for girth weld inspection services, and underutilization of our pipe coating facilities in the EMEA and Asia Pacific regions. On an annual basis, consolidated adjusted operating margin was 3%, with composite systems in automotive and industrial segments having positive adjusted margins of 14.3% and 15.7% respectively, partially offset by the pipeline and pipe segments being negative 5.2% due to the reasons mentioned earlier for the quarter.
Adjusted EBITDA for the quarter was CAD 30 million, 22% higher than the CAD 24 million reported in the fourth quarter of 2018. This increase is primarily due to the addition of the ZCL acquisition and lower adjusted SG&A expenses, partially due to lower incentive compensation expense, offset by CAD 7 million in warranty cost and lower foreign exchange gains in the current quarter. Adjusted EBITDA for the current year was CAD 136 million, slightly higher than the prior year. This increase is primarily due to higher revenues discussed earlier, which includes the acquired ZCL business, the positive impact from the adoption of the IFRS 16 in the current year, and lower SG&A expenses, also reflecting lower incentive compensation expense, offset by higher warranty cost and lower foreign exchange gains. Let's now discuss cash flows for the quarter.
Cash provided from operating activities for the fourth quarter of 2019 was $49 million, slightly lower compared to the $51 million in the fourth quarter of 2018. This decrease reflects lower net income and higher changes in non-cash items in the current quarter. The change in non-cash working capital in the fourth quarter was a net cash inflow of $33 million compared with an inflow of $27 million in the prior year period. The $33 million cash inflow from working capital in the current quarter is primarily due to lower accounts receivable and contract assets, partially offset by lower accounts payable. On an annual basis, cash provided from operating activities in 2019 was $54 million compared to $31 million in 2018. This increase reflects lower investment in working capital, partially offset by lower adjusted net earnings.
Cash used in investment activities in the fourth quarter was $7 million, reflecting $10 million of purchases of property, plant, and equipment, partially offset by $3 million of proceeds generated from the sale of land during the quarter. On an annual basis, cash used in investment activities in 2019 was $252 million, reflecting $291 million related to ZCL acquisition and $45 million of capital expenditures, partially offset by $79 million of proceeds from sale of lands and investment in associates. During the fourth quarter, cash used in financing activities was $26 million, reflecting a debt repayment of $10 million made in the quarter, the payment of lease obligations, and our regular quarterly dividend.
On an annual basis, cash provided by financing activities was $82 million, reflecting a net increase of debt of $148 million related to ZCL acquisition, partially offset by $42 million of dividends paid and $25 million of lease payments. Net cash flow for the fourth quarter in financing was a positive $16 million compared to a positive $27 million in the fourth quarter of 2018. 2019 annual cash flow was negative $119 million, primarily related to ZCL acquisition, compared to negative $72 million for 2018. In terms of the balance sheet, the company's cash and short-term investments increased to $98 million compared to $82 million at the end of the third quarter. Non-cash working capital at the end of the fourth quarter was $204 million, down from the $249 million at the end of the third quarter, primarily related to the typical seasonal inflow from working capital in the business.
Property, plant, equipment, goodwill, and intangible assets are down compared to the third quarter of 2019, primarily due to impairment charges booked in the current quarter. With respect to debt, the company is in full compliance with its debt covenants and has long-term debt of $438 million and $37 million of standard letters of credit as of December 31st, 2019. As announced in our press release, subsequent to year-end, the company negotiated an amendment on its credit facility with its syndicate of lenders. This amendment amends the maximum net debt leverage covenant in 2020 to 4.24x for March 31st and June 30th, and to 4x for September 30th. The net debt leverage covenant returns to 3.5x for December 31st.
The company obtained this amendment to address the potential risk that it might experience volatility in its short-term results due to the dynamic nature of the demand in North America land market, the potential delay of pipe coating projects, and the general overall global uncertainty at this time. The company believes this level of relief provided in the amendment is conservative and will not be fully utilized. This debt amendment will allow the company to focus its resources in 2020 on delivering on its long-term growth strategy. I'll now turn it back to Steve for some additional commentary on the company's performance and outlook.
Thank you, Gaston. I'll first start with providing some additional color on Q4. We had expected and in the Q3 conference call communicated that the impact of North America E&P operators' capital discipline would result in a reduction in spending in the fourth quarter. This reduction was forecasted to impact the demand for our products and services that are tied to drilling completions in both our pipeline and pipe services and composite system segments. In the first two months of the fourth quarter, we experienced a slowdown that was in line with what was planned. However, in December, many field operations were fully halted, our crew utilization fell below break-even, and product installations stalled, resulting in North America negative impact on Q4 being greater than we expected.
Furthering the pressure on the fourth quarter operational results was the service quality event that occurred at one of our sites in our pipeline and pipe services segment. The event was limited to one site, a specific product and application, and one customer. Shawcor's decision to rework the product was driven primarily to ensure that the long-term credibility of our commitment to stand behind our products and services remained intact. In other words, a key customer was not satisfied with what we had delivered, and we had to ensure our reputation for technology and execution continues to command a premium in the future. The impact on the quarter was seen directly in the $7 million provision we had taken and indirectly on revenue as other booked work at the facility was also pushed out of the quarter.
It is estimated that revenue impact was in excess of $10 million and that it will take several quarters to reschedule the pushed work. The root cause of incident has been addressed, the facility is back to production, and the customer is now satisfied with what is being delivered and has awarded us work since. Within the composite system segment, tank sales from retail fuel remained strong, and actual results were better than expected due to favorable weather that increased the number of installs in the quarter. Other positives for the tank business were the record full year for sales and margins in water and wastewater, and we completed the last actions that will result in us achieving $8 million of annualized cost synergies as of the 12-month anniversary of the ZCL acquisition. Automotive and industrial results were as expected in the quarter.
There was the usual end-of-the-year slowdown in demand for heat and cold-shrink products that was partially offset by solid demand of especially wire and cable solutions. Although at quarter end, the backlog remained relatively flat at $513 million compared to $509 million reported at the end of Q3, I am very happy with the success we are having and winning work to maintain this level. Additionally, with over $1 billion of outstanding bids, of which $240 million is awarded conditional FID, it was a good quarter for project positioning to ensure Shawcor is the pipe coater of choice. Of note, the recent press release on Payara and Sangomar are examples of projects secured pending FID, and the Baltic Pipe press release is one that followed the normal award process. In Q1, we are forecasting a slow return in North America E&P spending.
We also expect project restarts in North America midstream after the seasonal break and several regulatory suspensions will push into late February or early March. Project startups in our Channelview, Texas, Kabil, Indonesia, and/or Orkanger, Norway facilities are ramping up but are end-of-the-quarter loaded, and we will be taking costs to prepare our Scotland and Brazil plants for booked work production that will start in Q2. In our normal seasonal cycle, Q1 is the lowest for composite tank sales due to low installs because of weather constraints, and the automotive and industrial segment should see an improvement in Q1 over Q4. However, there may be some impact in Q1 from the coronavirus, but we've been actively managing it, and although there is uncertainty, at this time we're not forecasting a negative impact on the full year.
The net result of a very conservative view that has a slow return of activity in North America, late in the quarter pipe coating project starts and costs, and seasonally low quarter demand is that Q1 2020 could be significantly lower than we had just delivered in Q4 2019. For the full year of 2020, we are expecting volatility quarter to quarter in North America upstream and midstream and customer spending on par with 2019. Q1 will be the lowest point for pipe coating activity with strong build in the second half of the year due to planned execution of projects that are already booked. The non-oil and gas businesses in our composite systems and automotive industrial segments will follow their usual annual profile and are expected to remain solid at similar levels to 2019.
Overall, we are forecasting we will have earnings improvements over 2019 and that the improvement will be very visible as we exit the second quarter as our international and offshore-type pipe coating business starts to execute. Since 2014, we've been building a portfolio that is diversified both in offering and markets that leverages the core strengths of the company that can deliver both sustainability and torque benefits of large capital projects. I believe with our new segment reporting, it will make clear why a diversification strategy was pursued and the potential that is available in the very near term.
Our automotive and industrial and composite system segments are performing well as a result of the decisions we've made to add capacity: 25% increase in capacity over the last three years for automotive industrial segment and new offerings, tanks in the case of composite system segment during a very rough long-duration downturn for our oil and gas, CapEx spending-dependent pipeline and pipe services segment. Supported by the demand for global LNG as a transition energy source, the reduction in offshore development costs, subsea tree orders, and projects that Shawcor has booked or is positioned to win, there is confidence that the pipeline and pipe service segment is on the verge of returning to contributing meaningful for Shawcor. We expect an inflection point that is quarters, not years away, and that the benefit will extend beyond 2020.
The success of the company will be termed by our near-term success in managing three elements. The first is the dynamic management of our base book and term businesses. The second is securing and executing pipe coating projects, and the third is the reduction of our debt leverage. Before I open up for questions, I'd like to highlight several points. The energy sector continues to be challenged to predict due to uncertainties in trade, geopolitics, and variables on both the supply and demand side of the equations. With this as a backdrop, investors should consider owning Shawcor for the following reasons. Shawcor's diversified portfolio is underpinned by supportive long-term fundamentals that is positioned to deliver sustainable returns throughout the cycle.
Shawcor's legacy core business of pipe coating is poised to strengthen with multiple projects set to be executed and secured in the upcoming quarters, and there is a growing list of future projects. Management is executing on clear priorities, and they are focused on delivering shareholder value in the long term. I'll now turn the call over to the operator and open up for any questions that you may have for Gaston and I.
As a reminder to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Aaron MacNeil of TD Securities. Your line is open.
Hey, morning all. Thanks for taking my questions. Steve, when you say that Q1 results could be significantly lower than Q4, can you help us understand the magnitude by maybe diving into some of the variables that might contribute to this performance? I guess I'm wondering specifically, will U.S. land be any different Q1 versus Q4? What will be the Q1 impact of the Channelview facility, and how much do you expect to incur in additional costs to prepare for contracted work?
Okay. So I think it's a very fair question, but I'd like to highlight management's commentary on Q1 is with the understanding of all, and I want to make sure I phrase it correctly, all the headwinds and uncertainties as we go into Q1. The comment of significance is based on a factor in U.S. land that we may not see an improvement from Q4. So we now have one month, and it has not recovered to the first two months' run rate in North America upstream that we saw in the fourth quarter. So that's my first comment. We have, and we monitor incoming tickets because it really is a book-and-turn type business for virtual inspection gathering lines and pipe sales. So assume if it's flat and shows no improvement, so it becomes a two-month quarter, then you could expect similar performance to Q4. So no uplift.
The other comment I would make in non-oil and gas, and you can look at the historical performance of ZCL. Q1 will be low for ZCL. It is the profile of the business. So if you compare Q4 to Q1, you will see an absence of contribution or a much lower contribution of ZCL into Q1. The comments then on pipe coating, the facility, and you've identified it as Channelview, there will be some impact. We took the cost to strip and recoat, but of course, we had to push work out of the schedule. So there's going to be work that we would have assumed we would have done in Q1 that is still going to be pushed into further quarters in the year. So there'll be some pressure from the service quality event on the top line to continue into Q1.
The other comment that I'll make, and we really don't know, is the automotive industrial segment is a very solid segment for us. We should see an improvement from Q4 to Q1, and I use the word should. However, and you're probably familiar, our Chinese facilities and our automotive customer supply chain is ingrained and touches many points that are being impacted by the current pullback, extended shutdowns in automotive. And so the messaging on the significant pullback is kind of at our arm's length of the projects for pipe coating, and that's the one thing I think we're most comfortable with because we have the work that we have secured, and we're forecasting will be the step up is work that is already secured. So that one is probably the most confidence that we have.
The next confidence that we would have, of course, is we know ZCL will be low, and then the rest relies on really what is the uptick that will happen in North America reference to Q4 and what will happen on the automotive as we see things play out over the remainder of the quarter for demand of automotive products and our facilities that's in China. So I hope that puts it in proportion. Look at Q4. I think you can pull out the ZCL. I think that's fair. You can expect if things don't improve from the Q4 run rate in North America upstream, it could be a pretty rough quarter for us.
Okay. And then I just wanted to clarify on your 2020 comment. In order for 2020 to be higher than 2019, do you need to see activity levels flat to 2019? And I guess I'm wondering because based on capital budgets announced in the U.S. so far, U.S. land upstream spending would broadly be expected to be lower year-over-year.
Yeah. In my prepared comment, and I'll address it by segments. So what do we need to have an improvement over 2020? The first thing that we need to do is we need to ensure that the revenue that we generate in North America upstream is equal to what we did in 2019. That doesn't necessarily mean that we need the same level of activity because we have more products that are now going into the market. And I think a critical one I would identify is the success that we're having in pushing our 5-inch and larger diameter spoolable into the marketplace. So it was commercialized at the end of last year, and we are expecting and we have a line of sight of an increased demand in international for that will help our composite type business.
So we don't need the same level of spending, but we need to be able to successfully actually hedge us to a decline in spending. Right? So I think that's my comment there. We need the same that I mentioned for our automotive and industrial business. We need on par of 2019. So the biggest impact on year-on-year performance is really the execution of work that's already secured. And I think you only have to go back to the press releases that we've made throughout 2019 and recently in 2020 and look at the timeline of when they're going to be executed. They all start, and you'll see them in the project plants that I mentioned, which is the plants that are in Kabil, Indonesia is going to see a substantial, and we mentioned that in a press release. Norway is going to pick up.
We're going to see Channelview once we can clear up the service quality issue start to generate bottom-line performance. In the later part of the year, you're going to see Norway, and one that is probably the biggest one is now Leith which was a site we had targeted to consider. It has a footprint. How did it address the market? It has been awarded the Baltic Pipe. All this has been secured in the second half. You will see an uplift, and that's probably the most confidence we have.
Okay. And you had mentioned on the last call that you wouldn't look to a substantial reduction in headcount in Q4 for the girth weld business, given an expectation that activity would rebound in Q1. And I guess, has the continued weakness in U.S. activity changed your view at all, or are you still committed to running?
If you allow me to correct you, we said it the other way. We actually reduced facilities in the fourth quarter and reduced headcount in girth weld inspection. So we have moved out of three different geographies in girth weld inspection in the fourth quarter.
Okay. That's helpful.
Yeah. So I just want to be clear. We've actually done that. So the revenue on girth weld, the profitability as a percentage for girth weld inspection for gathering lines, so this callout type work, we've pulled out of several basins or will service basins from adjacent locations. So we're down 4 in the 1 quarter.
Okay. And obviously, I assume you think that that's a good fixed cost structure going forward.
The biggest headcount in that business is the variable headcount, which are the technicians that run the trucks. The technicians' compensations are tied directly to activity, so it's kind of self-regulated.
Okay. That's all for me. I'll turn it over.
Our next question comes from Anthony Linton of National Bank. Your line is open.
Hey, good morning, guys.
Good morning.
Just a question to clarify on the backlog. So conditional awards at the end of Q4 2019 were CAD 240 million, which was flat to Q3. Is that because the letter of intent on the Liza project was backfilled, or is it still considered to be a part of the conditional awards?
Payara or Liza 3 remains in this bucket of 240. So it's still there. And so is another large project, by the way. But the 240 had, I'm just off the top of my head, probably 4 projects that moved into backlog and that were backfilled by other projects. So we did have a movement of projects from this 240 bid number that moved into backlog that was replaced by other ones. It was over the quarter.
Okay. Then I guess on a similar note, just trying to understand the timing for Baltic Pipe and then Sangomar, were those reflected in that CAD 500 in the backlog number and the conditional award, or should we be thinking about those over and above the release number?
The Sangomar is in the CAD 240 at the end of the quarter. We had pipe delivery confirmation for Baltic Pipe, so some of Baltic Pipe is in the backlog, and some of the Baltic Pipe is beyond the 12 months.
Okay. Got it. And then just thinking about the Channelview facility, I think you said CAD 10 million. Is that how we should be thinking about what's getting pushed into Q1, or is that some of that going to carry over into Q2?
It will take the whole. Some of the work is already pushed into Q3, Q4. So it won't be fixed. The backup work won't all come in Q2.
Okay. And then if we just on the margin side, if we add back that $7 million rework charge, it implies in just an EBITDA of CAD 36 million with an 11% EBITDA margin. Is that kind of the profile of the backlog we should be thinking about in the first half of 2020?
There should be some improvement to that as we get further utilization in our coating facilities in the pipe coating side as we execute the secured work that we have and the work that we expect to secure. There is improvement. That's what we've talked about in our earlier remarks that we do expect an improvement of results in 2020 over 2019.
Okay. That's it for me. I'll turn it back. Thanks.
Our next question comes from Elias Foscolos of Industrial Alliance Securities. Your line is open.
Good morning.
Good morning.
Good morning, Elias.
I want to hit on some sort of general overall items. Given the current share price, have you considered and the board an issuer bid, or is that something that's maybe off the table for a while given the amendments to the credit facility?
Yeah. I think we should temper the priorities. So I think the near-term priority is to manage the dynamics. And certainly, as we have line of sight of the debt leverage coming down, a share buyback program certainly is more and more attractive as the share price goes down. But as we mentioned, there's kind of three priorities, and the third one is we really have to get the confidence in the balance sheet back that I would say is lacking. And then as we generate more cash, and we expect to generate the cash from the pipe coating in the second half, and then I think the board and management is aligned that there is opportunity to use excess cash, including returning to shareholders in the form of a share buyback. But we have to get there, right?
We have to get this second half running, and we really need to see what's going to happen in the other pending markets. And I think at this time, with the uncertainty from many different headwinds that I never thought I would see in my career in oil and gas, we need to see these headwinds to find out what really is going to happen. The concern now is on, and Elias you're probably reading as much as I am, on the long-term impact on demand. And does this switch the whole supply chain? So I think the uncertainty right now is high, and the focus needs to be securing the balance sheet.
Got it. Yeah. I appreciate that color, and it's not surprising, but I did want to sort of ask it. Are there any asset sales that you might have that you're working on? No specifics, but I kind of think there must be a few things that are possible.
The board and management is spending considerable amounts of time evaluating the value of assets that sit in the portfolio and the long-term strategy of the company. So it's important that I don't get granular on particular businesses, but certainly that is a topic of focus right now.
Okay. That high-level color is appreciated. Finally, focusing on Sangomar, given that the work is supposed to start in 2021, that is not in backlog, and we can start to see that come in over the next few quarters, correct?
Yeah. Correct. So we actually will generate a little bit of revenue in the tail end of 2020, and the way we generate revenue with pipe coating is a small percentage of the overall revenue that we'll generate will come from loading in the pipe. The lion's share is done by joint of pipe that you coat and as they accept it, and then there's a small percentage as you load it out. Included in the load-in will be some cash that we receive, revenue we receive to run trials of the pipe in our facility. We're going to see some of that in Q4, and then as production starts in Q1. So as we release the end of Q1 results, you'll start seeing Sangomar in the backlog. That's how it will work.
Then as we do Q2, you'll start to see now two quarters of the total production come in. You're right. It's not captured in today's backlog, but you'll start seeing it coming in next quarter.
Okay. Great. Maybe one last question, and I don't want to beat this to death, but I just want to understand it. You had rework in Q4 that pushed revenue out. You said it's pushing revenue out from Q1 into Q2, but you presumably had revenue in Q4 that would have been pushed into Q1 unless you were planning to do some retooling. Is that correct? In other words, when you're doing the rework, everything slides back, but there seems to be a bit of a gap. Is that because some retooling of a facility?
No. So the service quality event is in pipe coating, one of the biggest barriers to entry in pipe coating is to apply the technology in this particular case, and I think everybody's assuming it's Channelview, so it's insulation with anti-corrosion combined. So one of the issues is when you run a production volume through the facility and it's discovered upon or on the customer's site, you now need to retrench all that pipe back into your facility, and the capacity of the facility then goes into lockdown, and all efforts go into removing the coating that you already applied on the pipe. So in Q4, what we would have done is we would have stalled all revenue-generating work, and we would have put the money into stripping the pipe. And so that's what indeed happened.
And then as we got to the end of Q4, then you start reapplying the coating on the pipe. The challenge that you have is that your schedule is backed up, so now you need to reschedule. So the revenue in Q4 that is now being pushed, there's two components. One is from the facility itself, which will be rescheduled throughout the year. So you slide in this rework. A big chunk of it happened in Q4 and Q1, but there's more rework. And what I mean rework is more coating to be applied on pipe at later sections. So you need to push all these other projects to make room because Channelview had work booked for Q1 already, so there won't be an uplift from the work because we need to put it in someplace else.
The second revenue that's missed right away is we provide services in the spool yard of applying coating on the field joints as it goes onto the vessel. Well, if the pipe's not available, then they don't spool the pipe. We don't generate that revenue. And that revenue also is pushed until we finish that in later quarters. So it's not as easy. Channelview already had work. So we can't put more work into the facility because it was booked out. So now you need to slot it into another facility, which means you need to move the pipe, or you wait for it later in the year to slot in. So there's a finite number of capacity that we can push through Channelview. So there's no room to push it into Q1.
Okay. I understand that. Thank you very much for that clarification, and I'll turn the call back.
Our next question comes from Tim Monachello of AltaCorp Capital. Your line is open.
Thank you very much. Most of my questions were touched on, but maybe just a little bit of additional detail. Just following on the quality issues in Q1, I mean, there's a $7 million or so impact to cost as the pipe was stripped. Sounds like the rework and the recoating is ongoing today. Are you expecting any cost impact in the first quarter as well on top of the revenue push?
In Q1, the only negative input will be the lower utilization in the facility as we're recoating the work. We've taken certainly the lion's share of the cost upfront to strip and recoat the pipe, but there is a cost inefficiency as the plant is working on non-revenue-producing projects, right? So there will be some inefficiencies. Yeah. But it's not we've taken the majority of the cost. It's now just because you have no capacity, you can't push any more through that quarter through that facility.
Right. So the out-of-pocket costs to recoat the pipe, we're taking it in the fourth quarter?
Absolutely. Yes.
Okay. Got it. And I mean, I imagine that the majority of the work going through Channelview has to do with Liza 2. Correct me if I'm wrong, but would that have any impact to the timing of the Payara project?
So I can give you the project or projects. It's a product issue, and it was one customer that has since awarded us work, so you can assume it's an EPC. It was not Liza. Okay?
It was not. Okay.
It has nothing to do with the Liza project, which was coated, by the way, not just in Channelview, but also Veracruz. So if it was a Liza issue, it would have been it could have been substantially higher because it would have been two facilities we would have had to troubleshoot and get the root cause from. So it wasn't. And as I mentioned in the last probably the last three quarterly calls, Channelview is a very busy facility, both because of work that we plugged in at the Liza project, but a lot of the smaller tie-ins in the Gulf of Mexico were all being done in Channelview.
Okay. I was hoping maybe you could give a little bit more clarity on your commentary around coronavirus. Sounds like you're expecting some near-term impacts, but that should be mitigated through the rest of the year, and largely that has to do with the automotive sector. What would be the 2020 impact if that had any contagion into the oil and gas sector? And is that what it looks like?
I think that's a great question. Maybe can I break here and respond it into near, well, say immediate, short term, medium term, and long term?
Sure.
So the short-term impact, what we're seeing right now is there will be volatility in our automotive industrial segment, primarily to do with a longer so they've extended, and we're back to work today at a lower production volume, the Lunar New Year in China. They extended it, so the facility worked less in China. That impact is extended beyond our facility because our customers did the same thing. So the whole back up of supply chain compressed in the first quarter. So you're going to see a short-term volatility. Our thinking is right now, what we're seeing is that, okay, this is a slug, and it's going to pick up. And unless there's a fundamental change in demand for automotive and a stalling of electrification of cars, this is going to work itself out. So I think that one is probably not the biggest impact to the company.
If I then go to the medium term, and if the supply disruption happens substantially in China, then we may see an impact on the link to the supply chain into oil and gas. In some of our businesses, and certainly in our composite business, we have a large several supplier base in China for our core components, so glass and resin. A lot of this is sourced multiple locations in China, but this could be an issue on the supply chain. I would further extend in the medium term, if the shock of uncertainty in demand continues to drive the price of oil at a level below where we are today and sustainable, you're going to see a pullback in U.S. land. That's what we're signaling that could happen. You may not see the U.S. land market come back.
In the long term, and I think this is yet to be seen, if the long-term readjustment in the supply chain and overall GDP pulls back, and there's no other efforts to address the supply, and so demand's going down and supply is not addressed, you may see a substantial pullback in capital spending, even to the point that it impacts the offshore projects that we are expecting to contribute substantially into 2021 and 2022. So that's kind of the short-term, medium, long term for the company as it pertains to, okay, how long does this go, and does it actually readjust the supply chain and GDP from China?
Okay. Then just as 2 follow-ups on that, for the near-term guidance that you gave there, what could the revenue impact be from Chinese outages over the first quarter in your view on a revenue set?
I can't say yes, right? I think we're just starting, as I mentioned, the automotive and announcements of automotive, and certainly now it's gone to South Korea. If the automotive was to go to a screaming halt, the business of DSG-Canusa, which is the heat shrink and cold shrink that is in our automotive and industrial segment, could see a substantial pullback. We haven't seen it, but I guess in theory, it could be bad as what it was in 2008, right?
Right. Okay.
I don't know. Then that's why I use this term all the time at this time because we're not considering how bad it could get for automotive.
Okay. And then last one on coronavirus. Are there any international pipe coating facilities that are in affected regions or scheduled to start up that are in affected regions or near affected regions that could delay?
No. Of course, we have facilities in Italy, but the large projects that we are counting on are not going to be done from Adria or Pozzallo. But there is, of course, the virus. It's in Italy, and it's not far from the region where our facility is there, but there's no impact from it because we don't have a lot of workbook to go through it in the second half of the year.
Okay. And then just last question, is there an update around your expectations for the timing of Scarborough?
I can only say on Scarborough, I think it's highly, highly unlikely that Scarborough will not go. If anyone's been following Scarborough, Scarborough lands gas into Pluto. Pluto agreement has been signed because Pluto is owned by a different group of operators, and they've given license now to Scarborough to go there, and they need the gas. So the second comment I would make is reserves, even at the current gas price, have increased substantially for Scarborough, and Woodside continues to be very, very confident that they will FID the project. I've heard different, both from our employees that are on the ground and from the customer press releases, that it's a 2020 FID announcement.
I wouldn't be surprised that it's a June time frame, but I also wouldn't be surprised if we get a green light or the services that are involved in the project get a green light to go ahead and start in advance of the FID as early as March or April. But I think formal FID will probably be mid-year, but I wouldn't be surprised that the EPCs, the pipe mills, those that are competing for the coating work will get a green light earlier.
Okay. Do you think that that's potential still in the first quarter, or do you think that's more likely in the second, third quarter?
Scarborough will be resolved in the year. I think in terms of the FID, and we should count on it by mid-year. I think yeah, I think there's a possibility that no later than the third quarter, you'll see it. The pipe coating that wins it will be in their backlog. I think that's a fair way to look at it.
Great. I really appreciate the color. I'll turn it back.
Thank you.
Again, to ask a question, please press star, then one. Our next question comes from Keith Mackey of RBC. Your line is open.
Thank you. Good morning, everyone. I just wanted to start by clarifying what I've heard on the outlook just to make sure I've got it correct. So your forecast for 2020 improving over 2019 is based on, 1, improved pipe coating contribution from projects you've already won and expect to begin work on starting in Q2, Q3 time frame. Number 2, market share gains in composites like the 5-inch spoolables and so forth, and strong demand from fuel tanks offsetting expected or potential expected weakness in actual U.S. completion activity. And number 3 is stable work in the automotive and industrial segment. Have I got that right?
Yes. Yeah. I have no further comments. Yeah. You have it.
Okay. Thank you. And so just under that scenario, what would be your outlook for free cash flow for 2020?
Listen, I think it will be stronger than what we did in 2018, of course. Part of it is being driven by advanced payments that we will get on pipe coating projects, but work will be executed. So free cash flow-wise, I think it's more important to look at operating margins that we expect to be higher as pipe coating contributes, and that will in turn lead into free cash flow in the second half of 2020 and lead into 2021.
Okay. Thanks. And just not to belabor it, but is there a magnitude on the pipe coating operating margins that you would target given what you know you expect to happen?
It's still, there's lots of things that depend on it, Keith, that for me, it's very difficult for me to give you that right now, and it's not something that we feel comfortable sharing at this point in time. There's lots of volatility here that we need to manage, but it is going to be a positive contributor versus a negative OI that we had in 2019.
Okay. Thanks. That's helpful. Just on the automotive and industrial segment, the last few questions, maybe just a play off of that is just what do you kind of see as the breakdown of revenue between automotive things that may be more affected by this potential long-term negative scenario of coronavirus versus the industrial, which may not be as exposed?
First of all, I'll point to the name change. So the company has moved. Historically, petrochemical was a good way to capture the segment because it participated a lot in a lot around Western Canada on the heavy oil extraction and processing or value-add components. The segment is now called automotive and industrial, and the DSG-Canusa business, heat shrink and cold shrink, is heavily weighted to automotive. And so ShawFlex, which is the cable business, I think will be quite positive this year because of not only does it participate in the high-run cable business, it is nicely positioned for the rebuild and nuclear work, which is right in its niche of high-specialized cable.
So I think a good way to look at the business is just have a look at 2008 of petrochemical and industrial and see the magnitude of what a global slowdown can do to a GDP-focused business, right? But to answer your question, a large percentage of automotive industrial is based on direct supplying wire harnessing and wire components and protection of wire and components into automotive, high percentage, greater than 50%.
Okay. Perfect. Well, that's very helpful. That's it for me. So thanks very much for your time.
There are no further questions. I'd like to turn the call back over to Paul Pierroz for any closing remarks.
All right. So I want to before I pass it over to Paul to close the call, I just want to put some additional color on comments that we made both in the prepared remarks and during the questions. So first of all, the times of uncertainty, both because of the macroeconomics, the industry, and I think sentiment overall for a publicly traded company is a challenge to give you a correct outlook. Management's approach has been quite conservative in our messaging, and I think that links into our approach that we've done with the debt amendment. So I would suggest people consider that in what we've done. The 2020 outlook, we do expect that the strategy of the different cycles within oil and gas will protect the company in many ways from others because pipe coating is scheduled to improve in the second half of the year.
That generally, the conversion of gas as a greener alternative, the higher demand in LNG, lower cost in offshore will continue beyond 2020. With that, I'll turn it over to Paul to close out.
Okay. Thanks, Steve. I'd like to thank everyone for their participation and interest today, and we look forward to talking to you again next quarter.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Everyone, have a great day.