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Petrofac - Underlying performance improving

Nicholas Hyett | 1 March 2018 | A A A
Petrofac - Underlying performance improving

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Petrofac Ord USD0.02

Sell: 123.00 | Buy: 123.80 | Change 0.50 (0.41%)
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Despite an 18.8% fall in revenues to $6.4bn, Petrofac saw underlying profits improve 7.2% in 2017 to $343m. However, exceptional items and write-downs saw reported profits fall into the red, with a loss of $29m.

The group has announced a final divined of 25.3 cents per share (2016: 43.8), taking the full year total to 38 cents, down 42% on the previous year and in line with the new dividend policy of paying out 33-50% of profits.

The shares rose 3.3% in early trading.

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Our View

The announcement of a wide ranging Serious Fraud Office (SFO) investigation last May continues to drown out operating performance. The shares have fallen45% 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 and subsequently released without charge.

However, Petrofac can at least point to an improving operating performance.

The group is returning to its roots as a Middle East focused oil & gas services business. Its own book of oil & gas producing assets is shrinking, but a recovering oil price should at least increase the appetite of potential buyers of the for sale giant JSD6000 rig-lifting barge.

The core engineering businesses, which account for the lion's share of profits, are looking healthier and cash profits are moving in the right direction. Recent project wins have been weighted towards the Middle East and North Africa. Low production costs in those regions mean projects should be easier to commission.

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 an SFO investigation hanging over the group is not likely to be doing it any favours. Even impressive cost cutting can't offset a lack of projects to work on.

The share price reflects those headwinds. 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 5.9%.

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Full Year Results

Revenue fell across all three divisions; down 19% to $4.8bn in Engineering & Construction (E&C), 19% to $1.4bn in Engineering & Production Services (EPS) and 16% to $228m in Integrated Energy Services (IES).

Margins in the E&C business improved to 7.1% thanks to change in project mix, as a result profits delivered a 10% improvement to $342m. However, in EPS improved profitability was largely offset by lower cost recovery and deferred tax charges, with the effect that margins remain unchanged and profits fell 19% to $90m. Margin improved slightly in IES thanks to reduced costs, with losses halving to $21m.

The group recognised $372m of write-downs and other exceptional charges in 2017. This includes a $176m charge relating to the JSD6000 rig lifting vessel, which is now earmarked for sale. The IES division, which manages Petrofac's own portfolio of oil & gas assets, recognised a write-down of $179m after changes to production profile assessments for the Greater Stella Area development.

The group order book fell 13% to $10.2bn, as completed work more than offset $5.2bn in new orders. Bidding activity is said to remain high.

Capital expenditure fell by 44% in the year to $170m, with better than expected working capital flows at the year-end delivering free cash flow of $281m. Capital expenditure is expected to fall again to $150m in 2018.

Net debt was unchanged over the course of the year, at $0.6bn.

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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.