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Petrofac - Results delayed and write down possible

On 11 March, Petrofac announced it's planning to stop two of its Engineering, Procurement and Construction (EPC) projects...

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On 11 March, Petrofac announced it's planning to stop two of its Engineering, Procurement and Construction (EPC) projects, which will result in $5-$10m worth of asset write downs.

This will likely impact full year results, which will now be released a week later than previously announced on 23 March.

View the latest Petrofac share price and how to deal

Our view

With the SFO investigation concluded, it's all about rebuilding for Petrofac.

The end result was a £77m fine to be paid off in two chunks in January and February 2022. More importantly, the ordeal kept Petrofac from vying for new contracts in the UAE and Saudi Arabia, some of the most lucrative markets for oil & gas services. That's had a significant impact on the group's revenue and profits.

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.

Cost control in its core engineering businesses means the group will probably manage a slight operating margin improvement. 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 $2.0bn so far this year the group now has $40bn of new business due for award by the end of 2022. That suggests a win rate upwards of 14% - 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, but we wonder how much of the $54bn could be tied up with Russia and un-investible given the crisis in Ukraine.

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. 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). With a price/earnings ratio some way above the long-term average, the market's expecting a recovery. It looks like the group's firmly on that path, but we think there could be some volatility ahead if covid-related headwinds continue to hold back progress.

Petrofac key facts

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.

Half Year Results (16 December 2021)

Revenue for the year is expected to be around $3.0bn, down from $4.1bn last year but broadly inline with market expectations. Full-year net income is expected to be consistent with market expectations of $45.5m, helped by the release of $52m in unused tax provisions and $250m of targeted cost savings.

CEO Sami Iskander said, ''Our priority is to now rebuild our order backlog. We secured US$1.5 billion of new awards in the second half to date and the outlook for awards is improving in a more supportive macro environment. Petrofac's cost competitive model and strong client relationships mean that we are well positioned with a healthy pipeline of opportunities scheduled for award in 2022.''

Full year Engineering & Construction revenue is expected to come in around $1.9bn, down from $3.1bn last year, largely due to low order intake and the continuing impact of the pandemic on project schedules and costs. Unrecoverable covid costs will be somewhat offset by cost control and tax provision releases, but ultimately margins are expected to fall. The division's backlog rose from $2.1bn on 30 June to $2.4bn on 30 November.

Engineering & Production Services expects revenue to rise to around $1.1bn from $0.9bn last year, the result of strong order intake in both Projects and Operations. The group now expects margins to come in two percentage points above previous guidance for 5% to 6%. Order intake is $0.9bn so far this year, in line with 2020. As at November 30, the division's backlog was $1.6bn, down from $1.7bn on 30 June.

A ramp-up in production coupled with higher oil prices is expected to increase second-half revenue and cash profits in Integrated Energy Services. But the division expects to report a full year loss as revenue is seen coming in materially lower than last year. This is due to the disposal of the group's Mexico operations as well as an unplanned outage in the PM304 Cendor field that's persisted most of the year.

The group's taken new orders worth $2.0bn so far this year, up from $0.5bn at the half and is on track to fulfil orders totalling the same value this year. The pipeline includes $40bn for award in 2022, $7bn of which is in New Energies.

Net debt is seen coming in at around $0.2bn for the year, up from $0.1bn last year.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 15th March 2022