Share your thoughts on our News & Insights section. Complete our survey to help us improve.

Share research

Petrofac - awards of offshore wind framework

Petrofac and Hitachi Energy have been awarded a framework worth about €13bn.

No recommendation - 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.

Prices delayed by at least 15 minutes

This article is more than 1 year old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

Petrofac and Hitachi Energy have been awarded a framework worth about €13bn.

The agreement, which represents the largest in Petrofac's history, covers six offshore wind power projects for TenneT, the Dutch-German Transmission System Operator.

The first project contract has already been awarded with a further expected later this year. The remaining four are expected to be awarded over the next three years.

Petrofac will undertake the Engineering, Procurement, Construction and Installation (EPCI) of the offshore platforms, as well as elements of the onshore converter stations which allow connection to the grid.

The shares were up 67% in early trading.

View the latest Petrofac share price and how to deal

Our view

Petrofac's disappointing 2022 performance demonstrated the scale of the task that incoming CEO, Tareq Kawash, has ahead of him. The backlog of orders at Group level fell from $3.7bn to $3.3bn over the year but there are significant opportunities available, with Petrofac highlighting $68bn of contracts up for grabs out till mid-2024. The €13bn framework awarded by TenneT demonstrates that the company is in a strong position to win big tenders, but note that the spoils of that deal are being shared with Hitachi Energy. Petrofac has suffered the fallout from contracts with poor margins of late. The key will be not just conversion, but also securing strong commercial terms. Pricing discipline is essential, to avoid a race to the bottom.

Whilst the oil field services industry is showing some signs of recovery, oil prices have come down from their recent highs, and the outlook for crude remains murky in the face of a challenging global economy. That's something the new boss is going to have to face head on. Until clarity emerges over his strategic focus, investor sentiment could continue to weaken.

The core engineering business has continued to struggle against elevated covid-related costs, which holds margins back. However, with the rest of its legacy contracts set to expire in 2023, it gives the division the chance to make a fresh start. It looks as though the absolute worst is over, and it's this division that dominates the 18-month pipeline. We're encouraged by the group's approach to the energy transition, which is seeing strong momentum.

Upcoming full year results will provide the Group with an opportunity to update investors on its medium-term targets. In the last annual report these included a revenue target of $4-5bn with operating profits margin ambitions of 6-8%. Given the difficulties seen in 2022, we'd expect those targets to come under pressure.

We also see rising debt as a key concern to call out. In 2023, Petrofac's Board will focus on ensuring there's sufficient liquidity to support its growth ambitions. But with $230m of debt expiring in October 2023, further refinancing may well be required. We're therefore sceptical about an imminent return to dividend payouts, and as ever no dividends are guaranteed.

On a price-to-sales basis, the valuation has been well below the long-term average, reflective of the downward trend in earnings estimates which are now expecting a loss for the current financial year. The market reacted enthusiastically to the TenneT deal. But if that isn't accompanied with a return to profitability, sentiment could quickly turn the other way. We hope to get a fuller picture in Petrofac's results which are expected on 25 April 2023.

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.

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.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 30th March 2023