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Petrofac - Slimming down to boost profits

Nicholas Hyett | 22 February 2017 | A A A
Petrofac - Slimming down to boost profits

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Petrofac Ord USD0.02

Sell: 164.10 | Buy: 164.65 | Change -10.35 (-5.93%)
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Petrofac reported an underlying net profit of $320m for the full year. This represents a significant improvement on the year before, although excluding the impact of losses on the Laggan-Tormore project across both years, net profits actually fell 4.3% to $421m.

The shares rose 1.8% following the announcement.

Our View

A lot of the major challenges faced in 2016 are now in the past.

The Laggan-Tormore gas project, with its associated cost overruns, has been handed over. A recovering oil price means write downs 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 looks set to remain in limbo for now, 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, with profits running slightly ahead of expectations for the full year. However, with new projects awards slowing to a trickle, this is coming at the expense of the backlog.

That's Petrofac's current problem. Oil prices may be recovering, but E&P companies were too badly scarred by the crash to start splashing large sums on new projects straight away. If new orders remain in the doldrums, Petrofac's huge order book will start to drain away. Even the group's impressive cost cutting can't offset a lack of projects to work on.

Fortunately, Petrofac's business is weighted towards the Middle East and North Africa. Given those regions often have low production costs, reflecting onshore locations, that's a big advantage. If projects are going to be commissioned anywhere, it's here.

Despite industry wide challenges, Petrofac looks well placed compared to many of its competitors. It currently trades on a forward PE ratio of 9.9 times forward earning, versus a long run average of 12 times. The improving conditions mean that for the first time in two years the dividend is comfortably covered by earnings, with the stock offering a prospective yield of 6%.

Full year results

Improved free cash flow and rephrasing of capital expenditure helped the group reduce net debt by 10% this year. Overall net debt now stands at $617m, a figure which compares favourably to earnings before interest, tax, depreciation and amortisation (EBITDA) of $704m.

The group received new orders of $1.9bn. However, this failed to offset completed orders, leaving the total order backlog at $14.3bn (2015: $20.7bn). Overall headcount across the business has fallen 29%, delivering annualised savings of $120m.

Petrofac's flagship Engineering & Construction division saw revenues hit a record high, with costs also falling. The division saw profits of $311m this year (versus a $1m loss last year) with net margins also improving. Backlog in the division decreased significantly from $13.3bn to $8.2bn, while headcount fell from 12,000 in 2015 to 7,500.

Engineering & Production services saw revenue decline 1% year on year, but a significant improvement in margins helped the division deliver profits of $111m, up 91% on 2015. The margin improvement reflects changes in business mix.

The group's in oil well operating business (Integrated Energy Services) saw headcount more than half in the year (from 1,900 to 800) as the group disposed of several major operations. The division record a loss of $42m this year.

The full year dividend remains unchanged at $0.658 a share.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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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 disclosure for more information.