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Petrofac - Still burning through the order book

Nicholas Hyett | 14 December 2017 | A A A
Petrofac - Still burning through the order book

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Petrofac Ord USD0.02

Sell: 118.40 | Buy: 118.70 | Change -1.40 (-1.17%)
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A brief trading update confirmed that Petrofac is trading in line with expectations, with $5.2bn of new orders in the year. The company also announced that Chairman Rijnhard van Tets will step down from the board in May.

The shares fell 1.5% in early trading.

Our view

The announcement of a wide ranging Serious Fraud Office (SFO) investigation in May continues to drown out operating performance. The shares have fallen 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 remains in limbo, 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 activity is said to be high and there have been some significant wins of late, the overall order book is still draining away.

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.

With contracts few and far between, competition is intense and if new orders remain in the doldrums, Petrofac's still sizeable 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 8 times expected earnings, compared to a longer run average of 11.2. Analysts are forecasting a prospective yield of 6% for the next financial year.

Pre-Close Trading Update

The large Engineering & Construction business has won $4.1bn of new orders in the year, and continues to see a higher level of tendering activity. The group has completed projects in Oman and Algeria, with additional projects in Oman, Saudi Arabia and Kuwait approaching completion.

Engineering and Production Services has won $1.1bn of contracts or extensions this year. A long-term framework agreement with PDO Oman is expected to add to backlog as projects are sanctioned.

Earnings before interest, tax, depreciation and amortisation (EBITDA) in the smaller Integrated Energy Services (IES) business are now expected to be at the bottom end of $80-$100m guidance.

The group's order backlog, excluding IES, stood at $10.3bn at the end of November. This is down 12% from the start of the year, as progress on our existing portfolio of projects offset new order intake.

Net debt at the year-end is expected to be $850m, with $175m of capital expenditure for the year as whole.

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.