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Petrofac - Profits slip and dividend cut

Nicholas Hyett | 30 August 2017 | A A A
Petrofac - Profits slip and dividend cut

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Petrofac Ord USD0.02

Sell: 420.10 | Buy: 420.40 | Change 6.30 (1.52%)
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Petrofac saw revenue and underlying profits slip in the first half, respectively down 20% and 41% on a year earlier. The order backlog has fallen from $14.3bn at 31 December to $12.5bn.

The interim dividend has been cut in order to protect the balance sheet, and now stands at 12.7 cents per share (2016: 22 cents). The shares fell 1.2% in early trading.

Our View

The announcement of a wide ranging Serious Fraud Office (SFO) investigation in May continues to drown out improvements in operating performance. The shares have fallen more than 45% since details first emerged, and it has embroiled much of the company's senior management team.

The investigation centres on Petrofac's relationship with Unaoil, a Monaco based company which it hired to provide local consultancy services primarily in Kazakhstan between 2002 and 2009, and has already seen the COO suspended and CEO interviewed under caution.

However, Petrofac can at least say it has overcome many of the operating challenges it faced in 2016.

The Laggan-Tormore gas project, with its associated cost overruns, has been handed over. A stabilisation in the oil price means writedowns in the IES business, which handles the group's investments in oil and gas fields, are hopefully behind us. True, the giant JSD6000 rig-lifting barge remains in limbo, but a recovering oil price should at least increase the appetite of potential buyers.

The core engineering businesses, which account for the lion's share of profits, are looking healthier. But, while tendering activity is said to be high, the overall order book is far smaller now than it was a year ago.

SFO aside, that's Petrofac's biggest problem. Oil prices may be recovering, but companies were too badly scarred by the crash to start splashing large sums on new projects straight away.

With contracts few and far between, competition is intense and if new orders remain in the doldrums, Petrofac's huge order book will drain away. Even its impressive cost cutting, the group cut another 500 staff this half, can't offset a lack of projects to work on.

While Petrofac's business is weighted towards the Middle East and North Africa, where low production costs mean projects should be easier to commission, the ongoing SFO investigation may well scare potential customers away.

Petrofac shares currently trade on 6.1 times expected earnings, compared to a longer run average of 11.5 . Following the dividend cut, the stock looks like it is currently yielding something in the region of 7%.

Half Year Results

Lower first half revenues, at $3.1bn, reflect declines across all three divisions - Engineering & Construction (E&C), Engineering & Production Services (EPS) and Integrated Energy Services' (IES) - as project scheduling and lower levels of activity took their toll.

Group wide net profit of $158m were hit by lower revenues and a deterioration in group margin, down to 5.1% from 6.8% in 2016. This was largely due to lower margin in E&C, reflecting project mix and phasing, and a small increases in IES losses - partially offset by improved EPS margins.

The significantly reduced backlog comes despite $1.7bn of new order intake in the half, although excludes the US$1bn Duqm refinery project award in August 2017. Backlog fell by $0.9bn in E&C, $0.8bn in EPS and $0.1bn in IES.

Cash flow was negative in the first half, with a $43m outflow, thanks to lower operating profits, higher taxes, and a $296m working capital outflow. Capital expenditure fell 44% to $110m.

Net debt rose to $1bn (Dec 2016: $0.6bn), in line with expectations.

The Serious Fraud Office investigation continues.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

All yield figures are variable and not guaranteed. The information in this article is not intended to be advice or a recommendation to buy, sell or hold any investment mentioned, nor is it a research recommendation. No view is given as to the present or future value or price of any investment, and investors should form their own view in relation to any proposed investment.

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