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Petrofac - Profits 'weighted to the second half'

Nicholas Hyett | 27 June 2017 | A A A
Petrofac - Profits 'weighted to the second half'

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Petrofac Ord USD0.02

Sell: 119.30 | Buy: 119.60 | Change 2.90 (2.51%)
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Petrofac has issued a brief trading update ahead of half year results on the 30 August. The group expects underlying net profits in the first half of 2017 to be $135m-$145m, with full year profits weighted towards the second half of the year.

The shares were flat in early trading.

Our View

The announcement of a wide ranging Serious Fraud Office (SFO) investigation in May continues to drown out improvements in operating performance. The shares have fallen more than 45% since details first emerged, and it has embroiled much of the company's senior management team.

The investigation centres on Petrofac's relationship with Unaoil, a Monaco based company which it hired to provide local consultancy services primarily in Kazakhstan between 2002 and 2009, and has already seen the COO suspended and CEO interviewed under caution.

However, Petrofac can at least say it has overcome many of the operating challenges it faced in 2016.

The Laggan-Tormore gas project, with its associated cost overruns, has been handed over. A stabilisation in the 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. But, while tendering is said to be picking up, the overall order book is far smaller now than it was a year ago.

SFO aside, that's Petrofac's biggest problem. Oil prices may be recovering, but 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 drain away. Even its impressive cost cutting can't offset a lack of projects to work on.

While Petrofac's business is weighted towards the Middle East and North Africa, where low production costs mean projects should be easier to commission, the ongoing SFO investigation may well scare potential customers away.

Petrofac shares currently trade on 5.3 times expected earnings, compared to a longer run average of 10.

Trading update

The group's order book (backlog) stood at $13bn at 31 May 2017 (2016: $18 .9bn) with $1.7bn of new orders so far this year.

The group has secured new contracts in its Engineering & Construction and Engineering & Production Services divisions. CEO, Ayman Asfari, attributed the high level of tendering activity to "greater confidence in our core markets" and noted that the group "continue to have a very good pipeline of bidding opportunities".

Performance in the group's own oil fields, held within Integrated Energy Services, remained poor as a result of low oil prices. The division is now expected to deliver EBITDA of between $80m and $100m for the full year.

Net debt at the end of June is expected to be $1.1bn.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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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