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Petrofac - coronavirus troubles continue to weigh on performance

Nicholas Hyett, Equity Analyst | 24 June 2020 | A A A
Petrofac - coronavirus troubles continue to weigh on performance

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Petrofac Ord USD0.02

Sell: 124.80 | Buy: 125.20 | Change 6.20 (5.22%)
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Both trading and new business have been negatively affected by the coronavirus outbreak, and accompanying fall in oil & gas prices, in the first half. Petrofac is on course to deliver $125m of cost savings in 2020 and up to $200m in 2021.

New order intake during the first half came in at $1bn. That wasn't enough to offset work completed with the result that the total order book shrank by 13.5% to $6.4bn.

Full year guidance remains suspended given current uncertainty.

Petrofac shares fell 4.7% in early trading.

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Our view

Petrofac reported a relatively positive first quarter, with the order book delivering meaningful growth. The cancellations of $1.5bn contracts in Abu Dhabi undid that good work, taking a huge chunk out of the order book, and marking the start of tough times. At the half year stage things are set to look very different.

The dramatic decline in the oil price is set to reduce capital spending across the oil & gas industry this year. That's likely to mean less contracts, perhaps cancellations and lower revenues from Petrofac's own stakes in oil producing assets.

Petrofac's servicing activities are the kind of essential work that, by and large, needs to continue throughout any lockdown. A bias towards lower cost Middle Eastern and North African oil markets should provide some shelter too. But project delays and travel restrictions are starting to have an effect on the day-to-day business nonetheless.

It doesn't help that the group's not going into the current crisis in the best of shape. It's been under investigation by the Serious Fraud Office (SFO) for some time, and we suspect that has contributed to an extended decline in the size of the order book - down 22.9% last year. Management comments suggested that's particularly true in the key Saudi Arabian and Iraqi markets.

With revenue likely to struggle, attention has turned to costs and cash preservation. The groups' already proven adept at trimming costs when times are tough, but the most recent round of cost savings are far more brutal. Most staff have seen their pay cut, and 1 in 5 jobs have gone altogether. Even then the group's looking to cut capital expenditure and slash the dividend to keep cash in the business.

The good news is, for now at least, the group has access to significant funding. Net debt is modest and existing loan facilities means it can weather a short period of inactivity. However, if the SFO should find Petrofac at fault then it could face a significant cash fine which would change the situation dramatically - although we note no charges have been brought against either the company or any current employees.

Against this backdrop the decision to cut the dividend is probably the right one. If the coronavirus and oil price disruption proves short lived there's always scope for a bumper return later in the year. However, recent history suggests to us that investors should be taking a cautious view.

Petrofac key facts

  • Current 12m forward P/E ratio of 7.8
  • 10 year average P/E - 10.1
  • Prospective yield - 3.8%

We've introduced this section in response to recent survey feedback - email our share research team to let us know what you think. Please don't include any sensitive information, like account details.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Trading Update

The Engineering & Construction business (E&C) expects first half revenues of $1.6bn, as the coronavirus outbreak delayed planned work. Net profit margins are expected to be between 2% and 2.25%, compared to 6.2% last full year, reflecting project mix, coronavirus related costs and the commercial settlement of the Jazan project at completion. The division secured $0.4bn of new orders during the half, compared to $1.6bn in the first half of last year.

Engineering & Production Services (EPS) revenues are expected to come in at $450m in the first half, broadly in line with what was achieved last year.Net profit margins in the half are expected to be between 3.5% and 4%, compared to 3.6% last full year. The divisions secured $0.6bn of new business in the half, up from $0.2bn in the first half of last year, thanks to contract extension in the UK North Sea, Iraq, Bahrain and the UAE.

Petrofac's own production assets, held in Integrated Energy Services (IES), produced slightly more oil year-on-year - up from 2.1 million barrels to 2.2 million. However average realised oil prices are expected to fall dramatically from $69 a barrel in the first half of 2019 to $39 in 2020.

Net debt at the end of the half stood at $139m, compared to $15 net cash at the start of the year. The group has access to $1.2bn of liquidity, down from $1.5bn at the start of the year.

Suspension of the dividend and a 40% reduction in capital investment is expected to conserve $145m of cash flow this year.

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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.

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