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Petrofac - losses increase, outlook tepid

Laura Hoy, Equity Analyst | 23 March 2022 | A A A
Petrofac - losses increase, outlook tepid

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Petrofac Ord USD0.02

Sell: 122.80 | Buy: 123.20 | Change 4.10 (3.45%)
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Full year revenue declined 25% to $3.1bn, as double-digit declines in Integrated Energy Services and Engineering & Construction more than offset an increase in Asset Solutions. This was largely due to Covid-related disruption, asset sales and unplanned disruption to production.

Together with rising costs meant group underlying cash profits fell from $211m to $104m. Including non-cash charges related to refinancing, the SFO investigation and the likely expiration of a production sharing contract in Malaysia, the group reported a $195m net loss.

Revenue and margins are expected to be ''subdued'' in the near term. CEO Sami Iskander said, ''While clients continue to prioritise cash preservation over new investments, we expect the increasingly supportive energy price environment to improve the outlook for awards as the year progresses.''

Shares fell 4.5% following the announcement.

View the latest Petrofac share price and how to deal

Our view

With the SFO investigation concluded, this was meant to be a year of rebuilding. But the pandemic's thrown a wrench in those plans, pushing any hope of a material rebound further into the future.

The group seems to be moving in the right direction under new CEO Sami Iskander, with a focus on winning new contracts and rebuilding the order book.

The core engineering business struggled against elevated covid-related costs, which kept margins depressed. Plus, order intake wasn't as robust as the group had been hoping as clients were tentative about loosening the purse strings. It looks as though the worst is over, which should set the stage for a strong rebound in 2022 with operating margins over 2.5%. The group's Russian tie-ups shouldn't impact performance severely, with just 0.6% of the value of current contracts exposed to the region.

Last year the group was bidding on $54bn of projects due for award before the end of 2022. Having won $2.2bn in 2021 the group now has $37bn of new business due for award by the end of 2022. That suggests a win rate of 13% - which if repeated over the next year would actually see the order book grow substantially. Having Saudi Arabia and the UAE back on the table should help with this.

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.

The all-important number at Petrofac continues to be the order book. The company's future depends on the fortunes of the wider oil sector, over which it has no control, but has been booming lately. With a price/earnings ratio some way above the long-term average, the market's expecting a sharp recovery. It looks like the group's firmly on that path, albeit at a slower pace than initially expected. Given the current volatility, sooner would have been better and management's subdued forecast doesn't fill us with confidence. With that in mind, we think caution is warranted.

Petrofac key facts

  • Price/Earnings ratio: 18.5
  • 10-Year Average Price/Earnings ratio: 9.4
  • Prospective dividend yield (next 12 months): 0%

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 Results

The UK was the group's largest contributor to overall revenue (24%), followed by Algeria and Thailand, which both contributed 14%.

Engineering & Construction (64% of group sales) revenue fell 36% to $2.0bn, as Covid-related disruption weighed on results. The recognition of claims made on two past projects together with increased costs associated with the pandemic meant underlying net profits fell from $63m to $8m. Client spending remained low, but showed signs of improving toward the end of the year. New order intake was $1.2bn, up from $0.7bn last year.

Revenue in Asset Solutions rose 19% to $1.1bn, reflecting growth across all services. Underlying net profits more than doubled to $86m, reflecting lower costs and more lucrative contracts as well as the release of money that had been set aside for tax obligations.

The sale of the group's Mexican operations together with an unplanned outage in the main Cendor field meant Integrated Energy Services revenue fell 54% to $50m. Excluding the impact of the asset sales, revenue rose 19% as higher oil prices offset a 35% production decline. Underlying net losses improved from $18m to $5m.

The group's order backlog, which reflects unearned value from current and future contracts, fell 20% to $4.0bn, reflecting caution among clients as they delayed spending in response to the pandemic. $2.4m of this is related to Russia.

Lower profits, employee severance pay, refinancing costs and SFO penalty payments meant the group's free cash outflow increased from $123m to $281m. The group's £200m share sale in November offset much of this, so net debt rose at a slower rate from $116m to $144m.

The group loan terms prevent it from paying dividends until 2023.

Find out more about Petrofac shares including how to invest

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.