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Petrofac - Strong new business wins

Steve Clayton | 24 February 2016 | A A A
Petrofac - Strong new business wins

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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: 123.30 | Buy: 123.90 | Change 4.80 (4.04%)
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Full year results from Petrofac are heavily distorted by the losses incurred on the Laggan-Tormore gas project in the Shetlands, where costs overran by hundreds of millions of dollars. Stripping these out, EBITDA fell from $935m to $792m whilst net profits after tax were in line with market expectations at $440m, before the Laggan-Tormore losses, which took reported net profits to just $9m (2014: $581m). A maintained full year dividend of US$ 65.8 cents is declared.

The shares rose sharply in early trading, up 7% to almost 800p.

The group had a good year for new business wins, with backlog rising 10% to $20.7bn (2014: $18.9bn), after over $6bn of new orders were received. Good cash collection saw debts fall toward year end, to $686m. The backlog gives the group "excellent visibility" for 2016 and beyond, with embedded margins in line with previous guidance.

Cost savings of $80m were delivered in 2015 and $90m is targeted for the coming year. Laggan-Tormore is now operational and there will be no more charges relating to it. The group will continue to work on reducing capital intensity and maximising value from their Integrated Energy Services portfolio.


Petrofac expect to generate a net profit of around $450m in the current year, plus or minus an adjustment of around $2.5m for each dollar that the average oil price for the year is above or below $45, reflecting the direct linkage between oil prices and some of their production revenues within the IES division.

Our view:

"Shipyard performance issues" was an interesting term to explain backing out of a billion dollar commitment to build something for which there may no longer be much demand for. How much the group ends up having to write off against the ill-fated JSD 6000 barge project remains to be seen, but right now, we doubt the market for half-built super-size oil rig lifting barges is that strong.

But that may be academic, for it was clear that the JSD 6000 was a product conceived in a different era, which would struggle to earn its keep in a world where new deep water oil fields may not be economic.

More importantly, Petrofac's core ECOM business has won some major new orders, despite the weak price of oil and looks to be in a strong position. The position at IES is less encouraging, but far from desperate.

All in all, Petrofac appears to be rebasing back toward the shape of company that it presented when it first floated in London, in other words an engineering, procurement and construction business with a strong focus on the Middle East and North Africa regions. Given that those regions often have highly competitive production costs, reflecting onshore locations, that is a big advantage for the group.

Not all has gone to plan, with both the barge fiasco and the further provisions to come against Laggan-Tormore both serving to remind that what Petrofac does is inherently risky, given its willingness to take on lump-sum contracts, where cost overruns fall onto Petrofac's shoulders, not the clients.

Nonetheless, Petrofac looks to be well placed compared to many of its peers. If it meets current consensus forecasts for 2016 and beyond then the group is trading on single digit PE multiples, well below the longer term average for the group.

Again, if forecasts can be met, then the group should, after paying an uncovered dividend for 2015, revert to having cover approaching 2x and on current market forecasts, the stock is on a yield approaching 6%.

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.