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Petrofac - On course to meet full year expectations

Nicholas Hyett | 30 August 2016 | A A A
Petrofac - On course to meet full year expectations

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Petrofac Ord USD0.02

Sell: 110.80 | Buy: 111.60 | Change 2.30 (2.12%)
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Petrofac shares are up marginally after the company announced that it was on course to meet full year profit expectations.

Revenue for the half was $3.9bn, up 22% on H115, with net profit of $236m - before accounting for $101m of losses associated with the now complete Laggan-Tormore project. The group saw further largely non-cash write downs of $123m, primarily in in its Integrated Energy Business (IES) portfolio.

The group remains on-track to meet consensus expectations of $440m net profit for the full year, excluding exceptional items associated with IES and the final charge on Laggan-Tormore.

Results continue to demonstrate the importance of Petrofac's large order backlog, in what remains a challenging environment for the sector. Despite few contracts being awarded this year, the group maintains 'excellent revenue visibility' for both the second half of 2016 and FY 2017, based on a backlog of $17.4bn. Although order intake for the period was just $1bn, the group describes its bidding pipeline as strong - retaining its geographic focus and disciplined approach to bidding.

The interim dividend remains flat at 22 cents per share, with net debt rising to $877m (FY15: $686m) - below guidance from earlier in the year.

Alastair Cochran, formerly Transition Head at BG Global Strategy & Business Development, will be joining the company as CFO in October, taking over from Tim Weller who is becoming CFO at G4S.

Our view:

Petrofac will be glad to finally 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.

Write-downs in the IES business, which handles the group's investments in oil and gas fields, are unsurprising given recent movements in the oil price, but there could be more to come. The group continues to spend money on the JSD6000 lifting barge, despite having cancelled the construction contract with 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.

Elsewhere things are looking more positive. The core Engineering & Construction business, which accounts for the lion's share of profits, is looking healthier, with revenues and net profits both up strongly on six months previously. Although, with few new projects being awarded, this is coming at the expense of the backlog, which was $10.7bn in June 2016, versus $13.3bn at December 2015.

Overall, 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 low production costs, reflecting onshore locations, that is a big advantage for the group. If projects are going to be commissioned anywhere, it's there.

Both the barge fiasco and the losses at Laggan-Tormore should remind investors 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, the company does look well placed compared to many of its competitors. It currently trades on a forward PE ratio of 9.6x, versus a long run average of 13x while the dividend should be comfortably covered by earnings if it meets market expectations going forwards (unlike the last two years). On current forecasts the stock offers a prospective 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.