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Petrofac - Covid and oil crash hit revenue and profit hard

Nicholas Hyett, Equity Analyst | 11 August 2020 | A A A
Petrofac - Covid and oil crash hit revenue and profit hard

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Petrofac Ord USD0.02

Sell: 164.70 | Buy: 165.50 | Change -9.90 (-5.67%)
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Petrofac reported revenues of $2.1bn in the first half, 25.5% below the same period last year. That reflects project delays caused by the coronavirus outbreak and lower oil & gas prices. Despite significant cost savings delivered during the year, underlying profits after tax fell 86.4% to $21m.

The total order book shrunk from $7.4bn at the start of the year to $6.2bn at the end of the half.

The dividend remains suspended.

Petrofac shares fell 10.7% 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 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 have had 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 - which shrunk by 22.9% in 2019. Commentary around new orders isn't encouraging, with awards delayed into next year. By then Petrofac will have burned through another $1.7bn of its existing backlog.

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 - although we note no charges have been brought against either the company or any current employees - then it could face a significant cash fine which would change the situation dramatically.

Cost savings might be making the business more efficient, but even the most efficient business can't make money without any projects to work on. Ultimately it's order growth that will drive any recovery and while the group's keen to point to offshore wind projects as a potential source of contracts, we think it will be new oil & gas projects that are key in the short term. The outlook there isn't terribly promising.

Petrofac key facts

  • Price/Earnings ratio: 7.0
  • 10 year average Price/Earnings ratio: 9.9
  • Prospective yield over the next 12 months: 4.1%

All ratios are sourced from Refinitiv. 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 Results

Engineering & Construction saw revenues fall 28% in the first half to £1.6bn, as COVID-19 disruption delayed projects. Additional costs related to the outbreak and changing project mix meant net profits fell 76% to $35m. The division won $0.4bn of new contracts during the period, resulting in a decline in the divisional backlog from $5.7bn at the start of the year to $4.3bn.

The Engineering & Production Services division saw revenues fall 5% to $426m. Profit after tax fell 53% to $17m, as associate investment fell and brownfield project profitability declined. The division reported new contracts worth $0.6bn, more than offsetting work done, and driving an increase in the order-book from $1.7bn at the start of the year to $1.9bn.

Integrated Energy Services suffered from the lower oil price environment, with revenue down 39% to $61m despite a 10% increase in production. Despite lower operating costs the division's loss after tax increased to $10m from $6m last year.

Petrofac believes it's on track to reduce costs by $125m this year and $200m in 2021. This resulted in reorganisation and redundancy costs of $13m, with in the first half (this also includes SFO legal costs), with headcount falling by 800 in the last 6 months.

The group reported a $13m free cash outflow during the half, reflecting lower cash from operations.

Net debt at the end of the half stood at $29m, compared to a $15m net cash position at the start of the year. The group retained $1.2bn of liquidity the end of the half - subject to a maximum of 3 times historic cash profits (EBITDA) (currently 0.5 times).

The group's tendering pipeline out to the end of 2021 stands at $46bn, although the majority of these awards are likely to be delayed until 2021 given current conditions.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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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