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Petrofac - Oil price boosts profit, but order book still sliding

Nicholas Hyett | 29 August 2018 | A A A
Petrofac - Oil price boosts profit, but order book still sliding

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Petrofac Ord USD0.02

Sell: 118.90 | Buy: 119.10 | Change 0.00 (0.00%)
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Petrofac saw underlying profits rise 20% year-on-year to $190m, despite a 10.9% decline in revenues. That was largely thanks to a return to profit in Petrofac's own oil and gas production assets, as production increased in a higher price environment.

The board announced an interim dividend of 12.7 cents per share, in line with last year.

The shares rose 2.2% in early trading.

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Our view

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

Energy companies are indeed starting to loosen the purse strings when it comes to commissioning new projects, but they more cautious than in the past. Having been badly burnt in the oil crash of 2014, that's perhaps no surprise - especially given the lurking worries about peak oil demand.

That's not great news for companies like Petrofac, which provides the skills and expertise to develop new fields. Still, it can at least point to some meaningful improvements.

Petrofac's 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 competition for business is intense, new contracts aren't turning up fast enough to replenish the order book. The slide is slowing, but Petrofac looks set to stabilise as a considerably smaller company than in years gone by. 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. The group denies any wrongdoing, but could face significant fines if found guilty.

With the scent of recovery on the wind, Petrofac shares now trade 11 times expected earnings, compared to a longer run average of 10.7. Analysts are forecasting a prospective yield of 4.3%.

But in our opinion, the SFO investigation will determine performance one way or the other in the near term, and it's almost impossible to call the outcome. Add some longer-term headwinds and we remain cautious on Petrofac despite the improved share price performance.

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Half Year Results

Despite the improvement in underlying profits, at the reported level, Petrofac actually made a loss of $17m in the first six months of the year. That reflects losses of $173m on disposal of the JSD6000 installation vessel and interests in its Mexican and North Sea oil fields, and $34m in additional exceptional items.

The core Engineering & Construction (E&C) business, which accounts for 78% of group profit, saw revenues slide 18.6% to $1.9bn in the first half. However, margin improvements meant profits only fell 7.5%, with staff numbers falling by 250. The divisional order book, or backlog fell from $7.5bn at the year end to $6.9bn.

Engineering & Production Services (E&P) saw revenues rise 9% to $712m, thanks to new contracts in Oman. With margins broadly stable despite staff numbers rising by 500, profits rose 5.9% to $54m. The new contracts supported a slight improvement in the backlog to $2.8bn (Dec 2017: $2.7bn)

The Integrated Energy Services (IES) business, which includes Petrofac's own oil & gas assets, saw revenues rise 40.2% to $136m as higher production and prices boosted results.

Increases in working capital, tax and dividend payments saw net debt rise 44.1% to $882m.

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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.