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Petrofac - SFO case concludes with 77m GBP penalty

Nicholas Hyett, Equity Analyst | 4 October 2021 | A A A
Petrofac - SFO case concludes with 77m GBP penalty

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Petrofac Ord USD0.02

Sell: 115.00 | Buy: 115.60 | Change 3.30 (2.93%)
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Petrofac's Serious Fraud Office (SFO) investigation into employee bribery allegations ended today with the court imposing a £77m penalty. The total cost of the penalty is to be paid by 14 February 2022.

Following the result, CEO Sami Iskander said, "We are now in a position to put this behind us. This part of our history does not represent the Petrofac of today."

The shares were up 9.2% following the announcement.

View the latest Petrofac share price and how to deal

Our view

The conclusion of the SFO investigation is a big deal.

The group's been under the microscope after a former employee pled guilty to offences under the Bribery Act in relation to contracts awarded to Petrofac. Not only were investors expecting a monetary penalty for the company, but it kept Petrofac from vying for new contracts in the UAE and Saudi Arabia, some of the most lucrative markets for oil & gas services.

The court closed the books on this tumultuous chapter in Petrofac's history with a £77m fine, which will be paid off in two chunks in January and February 2022. That will be a relief, given the far higher figures that were bandied about at the start of the investigation, and should be more than manageable given that at last check Petrofac had access to liquidity worth £0.9bn.

That's not to say the group's rolling in the dough. Having run a net cash position last year the group is back with a modest net debt position - despite cancelling the dividend and making disposals.

However, the group seems to be moving in the right direction under new CEO Sami Iskander.

Cost control in its core engineering businesses means the group hopes to modestly improve margins in 2021. Recent wins in renewables and low carbon energy are also a positive, albeit a small part of the business at present. If Petrofac can deliver both new business and margin improvements, 2020 will prove to be the low point in a hair-raising rollercoaster for shareholders. The upward slope could be sharp.

Back at full year results the group was bidding on $54bn of projects due for award before the end of 2022. Having won $0.5bn in the last six months the group now has $48bn of new business due for award by the end of 2022. That suggests a win rate of not more than 8.3% - which if repeated over the next year would actually see the order book grow slightly (although the true win rate is probably slightly lower). Having Saudi Arabia and the UAE back on the table should help matters.

There's still a chance that a 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.

The all-important number at Petrofac continues to be the order book. With the SFO ordeal now in the rear view, the company's future depends on the fortunes of the wider oil sector (over which it has no control - but which does show signs of improvement). Now that the shackles of the investigation are off, a path to sustained recovery should start to emerge.

Petrofac key facts

  • Price/Earnings ratio: 17.5
  • 10 year average Price/Earnings ratio: 9.1
  • Prospective dividend yield (next 12 months): 2.1%

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 Trading Update

In a brief update ahead of half year results Petrofac said that overall trading was in line with management expectations.

The Engineering & Production Services (EPS) business reported growth in both revenue and margins and ''robust order intak''. However, this was offset by continued challenges in Engineering & Construction (E&C), with the overall backlog falling by $1bn to $4bn.

E&C revenues are expected to come in at around $1bn, reflecting lower levels of activity and the reduction in scope of some projects. Lower tax and project support costs are expected to mitigate the revenue decline, with net margins expected to be between 2 and 2.5%. The division has secured new contracts worth $0.1bn in the half and expects clients to remain cautious in the near term. The division's backlog shrank from $3.3bn to $2.3bn.

EPS revenues are expected to be $0.5bn in the first quarter, with net margins of 5.25%-5.75%. The division won $0.4bn of new business in the quarter - across the North Sea, Iraq and Oman. The division has also made progress in new energy categories and secured 10 contracts covering carbon capture & storage, blue & green hydrogen and waste-to-fuels in the first half of the year. The division's backlog remained unchanged at $1.7bn.

Integrated Energy Solutions (IED) reported net production of 0.2m barrels in the half, down from 0.5m a year ago following asset sales and an unplanned outage at one field. The division will benefit from a higher oil price and lower depreciation and finance costs.

Petrofac finished the half with net debt of $290m (December 2020: $116m) as a favourable working capital position unwound.

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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.

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