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Petrofac - revenues, profits, and order books slump

Nicholas Hyett, Equity Analyst | 16 December 2020 | A A A
Petrofac - revenues, profits, and order books slump

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Petrofac Ord USD0.02

Sell: 119.90 | Buy: 120.30 | Change 0.10 (0.08%)
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Petrofac now expects to report full year revenues of around $4.0bn, versus $5.5bn reported in 2019, and "materially lower" profitability. That's despite at least $125m in cost savings delivered during the year.

The order book fell from $7.4bn at the start of the year to $5.1bn at the end of November, as completed work more than offset $1.4bn of new orders during the year.

Petrofac shares fell 0.9% in early trading.

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Our view

The dramatic decline in the oil price earlier this year has hit capital spending across the oil & gas industry. As a key supplier of engineering and construction services to the sector, that's had inevitable consequences for Petrofac.

Some existing contracts have been delayed or cancelled, negatively effecting revenues. The award of new contracts has been delayed and the pipeline of future projects is also likely to be disrupted. The net result is that Petrofac's order book has shrunk some 31% since the start of the year - as new business wins fail to make up for work completed.

On the plus side while construction may be on hold, Petrofac's servicing activities are the kind of essential work that, by and large, needs to continue throughout any lockdown. Revenues in the smaller EPS division have held up rather well as a result. A bias towards lower cost Middle Eastern and North African oil markets should provide some shelter too - since these fields remain profitable at lower oil prices.

However, the group didn't go into the current crisis in the best of shape.

It's been under investigation by the Serious Fraud Office (SFO), and we suspect that has contributed to an extended decline in the size of the order book - which shrunk by 22.9% in 2019.

Net debt has risen substantially this year, despite slashing the dividend. Current levels remain manageable, and existing loan facilities means the group 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.

Looking ahead the group's bidding on some $42bn of business next year, and could do with landing a sizeable portion of those contracts. It managed just $1.4bn from $37bn of opportunities in 2020, a win rate which would see the order-book shrink again in 2021 if it was repeated (although that should be taken with a good pinch of salt given the disruption caused by coronavirus).

Nonetheless we worry that the pressing need to win business could lead to overly aggressive bids for what contracts are available, boosting revenues at the expense of margins and profits. That's an age-old problem in the construction sector and one Petrofac needs to avoid. It's something incoming CEO Sami Iskander will have to watch closely when he takes over the reins in January.

With revenue likely to struggle in the near term, 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.

Long term we struggle to be enthusiastic about Petrofac. Planned 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 oil & gas projects are key in the short term. The outlook there isn't terribly promising.

Petrofac key facts

  • Price/Earnings ratio: 8.1
  • 10 year average Price/Earnings ratio: 9.6
  • Prospective dividend yield (next 12 months): 3.5%

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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Full Year Trading Update

Engineering & Construction is expected to deliver revenues of $3.0bn, down from $4.5bn in 2019. The decline reflects lower project activity and coronavirus related project delays, although the impact on margins has been mitigated by cost reduction. The division secured new orders worth $0.6bn (compared to $2.1bn in 2019) during the year - including the Seagreen offshore wind project.

Revenue in the Engineering & Production Services business is expected to be broadly in line with what was achieved last year. However, profits are expected to fall, as cost savings failed to completely offset lower contract margins and a reduced contribution from associates. The division secured new orders worth $0.8bn, with a significant contribution from new energies.

Integrated Energy Services revenue is expected to be materially lower than last year - reflecting a 42% decline in averages realised oil process and lower production following the sale of the group's Mexico assets at the start of November.

Petrofac currently has $3.0bn of revenue secured for 2021, and as a result revenue is expected to be lower next year. The group is bidding on $42bn of work scheduled for award before the end of 2021 - around 11% of which relates to new energy projects.

Petrofac is planning further cost savings next year, with total estimated savings of $250m in 2021.

The company finished November with net debt of $272m, up from $29m at the half year. Liquidity stood at $1.0bn.

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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 Refinitiv. 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.