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Petrofac - Trading update

Steve Clayton | 21 June 2016 | A A A
Petrofac - Trading update

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Petrofac Ord USD0.02

Sell: 115.00 | Buy: 118.00 | Change 0.00 (0.00%)
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Petrofac shares rose modestly after the company reiterated their guidance for full year trading, in an update that shows the continuing benefit of their substantial order backlog, in a period of ongoing industry-wide uncertainty. Their geographic exposure to the Middle East and North Africa is serving them well, because the low cost of producing oil and gas in these regions can make Petrofac's clients in the region less sensitive to the vagaries of the oil price.

Net profit is expected to be roughly evenly split between the two halves, ignoring the final, circa $100m charge against the now completed Laggan-Tormore project, which will be set against the interims. Petrofac say that the consensus profit expectation is for full year net profits of circa $445m, before allowing for the Laggan-Tormore charge and a loss of $30m-$40m in the IES division.

The order backlog across the group remains high at $18.9bn (2015: $20.7bn) giving good revenue visibility in the Engineering businesses, where despite a lower level of contract awards in H1, the bidding pipeline for the next few quarters looks strong.

Integrated Energy Services is making progress in reducing its capital intensity and expects production to start in the Greater Stella Area project later in the summer. IES will exit the Ticleni Production Enhancement Contract imminently, and the terms of the Mexican PEC's are being restructured.

Net debt is expected to rise by $400m in H1, compared to the year-end position, to stand at $1.1bn reflecting the payment of the final dividend. The group continues to spend money on the JSD6000 lifting barge, despite having cancelled the construction contract with the shipyard.

Our view:

Petrofac will be glad to see the back of the Laggan-Tormore gas plant, where cost overruns have seriously blotted the company's previously excellent track record for on-time, on-budget deliveries. But we have yet to see the full cost of their involvement in the JSD6000 barge project.

Petrofac backed out of a billion dollar commitment to build JSD6000, leaving the hull in the shipyard. How much the group ends up having to write off against the ill-fated ship remains to be seen, but right now, we doubt the market for half-built super-size oil rig lifting barges is that strong.

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 losses at 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.

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