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Petrofac - Challenges remain

Steve Clayton | 25 August 2015 | A A A
Petrofac - Challenges remain

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Petrofac Ord USD0.02

Sell: 118.90 | Buy: 119.10 | Change 0.00 (0.00%)
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Petrofac has announced results that show a decline in underlying profit of just 4%, despite the challenging environment for the oil and gas sector. Success in winning new business has led to the group's backlog rising to $20.9bn (2014: $18.9bn). Profits for the year will be weighted toward the second half, reflecting timing of project deliveries. Debts rose from $700m to $1.0bn as the group invested in major projects. Dividends are maintained at 22.0c per share.

The shares reacted positively, rising 2% in early trade.

Our View:

Petrofac's exposure to the Middle East and Central Asia, where fields often have relatively low costs to build and operate, is helping to insulate it somewhat from the ravages of the falling oil price. $6bn of new business wins bode well and the group's backlog is equivalent to almost three years of future sales.

The profit warnings that have dogged the group now look to be consigned to history. The troubled Laggan Tormore project in the Shetlands is now commissioning and further cost over-runs were limited to around £30m.

Challenges remain for Petrofac; the offshore installation barge it is building, at a cost approaching a billion dollars, will float out into a very different world than the one envisaged when it was first conceived. But with the core Engineering division's order book bulging, this issue is not as serious as it could have been.

Earnings are depressed this year, due to those previous cost over-runs, but on the current market consensus, the stock is trading on less than 8x 2016 earnings per share. Historically, a rating of 13x has been more typical for the stock. That could be a deceptive comparison though, because Petrofac used to have net cash balances, not a billion dollars of debt. On a maintained full year dividend, the stock would yield over 5.5%, but please remember this is variable and not guaranteed.

Group Performance:

Onshore, apart from the Laggan Tormore development, Petrofac is performing to plan, with a major $4bn new business win in Kuwait especially noteworthy.

Offshore, Petrofac continues to win new business and is claiming substantial progress on existing projects. That matters, because profit recognition is dependent on achieving milestones on each project, at the costs first anticipated.

The Engineering and Consulting business has a record backlog and revenue visibility, after winning a $900m contract in Oman and work on the Ichthys LNG project offshore Australia.

Efforts to reduce the capital committed to the Integrated Energy Services division continue, and with Petrofac talking about a desire to "deliver value" from the portfolio, perhaps investors should expect to see some disposals of assets here in coming years. The Malaysian Cendor field project has finally finished drilling, after five years, and the wells will now be commissioned.

Outlook:

Group priorities are to convert the backlog into profitable work, and close-out Laggan-Tormore to the client's expectations. After a long period of development, Petrofac hope to deliver the floating production facility to the Greater Stella Area in mid-2016. The group is seeking operational efficiencies, knowing that competitors are similarly retrenching. The group say that the success in growing the order book has left them with excellent revenue visibility for H2 and beyond.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.