We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us

Petrofac - Performing in line with expectations

Nicholas Hyett | 26 June 2018 | A A A
Petrofac - Performing in line with expectations

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Petrofac Ord USD0.02

Sell: 123.30 | Buy: 123.90 | Change 4.80 (4.04%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

Petrofac's first half results are in line with management expectations. The group has secured $1.8bn worth of new contracts so far this year - mostly in the core Engineering & Construction (E&C) business.

The shares rose 1.2% in early trading.

View the latest share price and how to deal

Our view

With the oil price looking healthy, and futures markets suggesting they will remain so for some time, these should be good times for oil services.

Unfortunately there's a lurking doubt that improved energy efficiency and increasingly viable renewable energy sources could mean we see demand for oil slides in the coming years. The combination of getting badly burnt when oil prices fell in 2014 and the threat of 'peak oil demand' means energy companies remain cautious when it comes to loosening the purse strings.

That's not great news for companies like Petrofac, which provides the skills and expertise to develop new fields. Still, Petrofac can at least point to an improving operating performance.

The core engineering businesses, which account for the lion's share of profits, are looking healthier, while an aggressive cost cutting programme means cash profits are moving in the right direction. Recent project wins have been weighted towards the Middle East and North Africa, where low production costs mean projects should be easier to commission.

It's even managed to sell the giant JSD6000 rig-lifting barge - which has been a white elephant for years.

Still, with contracts few and far between, competition for business is intense and Petrofac's order book is shrinking. Even impressive cost cutting can't offset a lack of projects to work on.

The situation isn't helped by a wide ranging Serious Fraud Office (SFO) investigation launched in May 2017.

The probe centres on Petrofac's relationship with Unaoil, a company it hired to provide local consultancy services, primarily in Kazakhstan, between 2002 and 2009. Should Petrofac be found guilty of misconduct it could face significant fines.

That has drowned out operating improvements, and the shares are still well below where they were before the probe was announced.

Petrofac shares currently trade on 9 times expected earnings, compared to a longer run average of 12.3. Analysts are forecasting a prospective yield of 5.4%.

We remain cautious on Petrofac at the moment. The SFO investigation makes the company a bit of a black and white bet, and there are longer term headwinds to bear in mind as well.

Register for updates on Petrofac

Half Year Trading Update

$1.2bn of new contract wins in E&C, and a further $0.6bn in Engineering & Production Services, mean Petrofac finished the first half the year with an order book of $9.7bn. That's slightly behind the $10.2bn the group reported in December - with the E&C book shrinking by $0.5bn.

Contract wins have been spread across Petrofac's core Middle Eastern markets - with promising signs in the North Sea and India as well. Around $20bn of bid opportunities will be awarded in the second half of the year.

Integrated Energy Services, which includes Petrofac's own production assets, is operating in line with expectations, with an average realised oil price of approximately $58 a barrel.

Petrofac also completed the sale of the JSD6000 oil rig lifting barge during the period - for $190m.

Net debt stood at $0.9bn at the end of the half, from $0.6bn in December. This is part due to the end of short-term working capital movements and the timing of tax and dividend payments. Net debt is expected to decrease over the year.

Commenting on the group's position CEO Ayman Asfari said "we are well positioned for the second half with good revenue visibility, a strong competitive position and healthy liquidity."

Find out more about Petrofac shares including how to invest

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.