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Petrofac - On course for a steady full year

Nicholas Hyett | 18 December 2018 | A A A
Petrofac - On course for a steady full year

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Petrofac Ord USD0.02

Sell: 111.70 | Buy: 112.20 | Change 3.10 (2.85%)
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Petrofac is on course to meet expectations for the full year, with $5bn of new orders so far this year. The total order back log stands at $10.2bn, in line with this time last year.

The group has also made significant progress in reducing net debt, from $900m at the half year to $250m by year end. That includes $500m from divestments.

The shares rose 2.2% in early trading.

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Our view

Energy companies are starting to loosen the purse strings when it comes to commissioning new projects. That's good news for a company like Petrofac, which provides the skills and expertise to develop new fields.

The recent downturn in oil prices could yet see the breaks slammed back on, but for now Petrofac can point to some meaningful improvements.

The 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 get off the ground.

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 intense, new contracts are barely enough to replenish the order book. The slide has slowed, 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.

The shares currently trade on a pretty undemanding 6.3 times expected earnings, compared to a longer run average of 10.7 and analysts are forecasting a prospective yield of 6.9%.

Although the SFO investigation will determine near term performance, there might be an opportunity for longer term investors. Oil & gas look set be key contributors to our overall energy mix for years to come, and that means developing new fields. With debt back under control Petrofac should be around to capitalise on that spending when it comes.

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Trading Update

The Engineering & Construction business has seen progress at projects in Kuwait, Abu Dhabi, and the North Sea. The division has been awarded $3.8bn of new contracts this year, including projects in Thailand, India and The Netherlands, and is bidding on $15bn of new business.

Although the market for brownfield sites in the North Sea remains challenging, progress in Asia and Engineering, Procurement & Construction Management mean the broader Engineering & Production Services remains resilient. The division has secured $1.2bn of contracts and extensions in the UK. Oman, Turkey and Iraq.

Net production is set to be around 6.1 mmboe in 2018, in line with guidance. The average realised oil price for the year is expected to be approximately US$61 per barrel of oil equivalent (2017: US$51).

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.