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Petrofac - first half loss, order book nearly doubles

Petrofac's first half sales fell by 3% to $1.2bn, with low levels of activity in Engineering & Construction (E&C) division...

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Petrofac's first half sales fell by 3% to $1.2bn, with low levels of activity in Engineering & Construction (E&C) division, offset by growth in Asset solutions.

Group operating losses came in $96m down from a profit of $52m in the first six months of 2022. The movement was largely driven by a $122m loss in E&C, which includes a $67m write-down relating to legacy projects.

There was a free cash outflow of $225m, reflected in the increase in net debt from $225m to $584m. The Group expects the full year cash flow to broadly reverse in the second half, as it benefits from cash advances from contracts awarded in the first half.

The order backlog has nearly doubled to $6.6bn since December 2022 with most of the growth seen in E&C.

Assuming an oil price of $85 per barrel, 2023 cash profits (EBITDA) for last year's most profitable division, Integrated Energy Services, are expected to fall from $109m to between $65m and $75m.

No dividend was declared.

The shares were down 1.7% following the announcement.

View the latest Petrofac share price and how to deal

Our view

Petrofac designs, builds, manages and maintains oil, gas, refining, petrochemicals and renewable energy infrastructure. It's making solid progress in rebuilding its order book and sales pipeline. And further significant opportunities are available, with Petrofac highlighting $73bn of contracts up for grabs by the end of 2024. But what investors really want to see is a return to profits and cashflows, and progress on that front has so far been disappointing.

A €13bn framework awarded by TenneT demonstrated that the company can win big tenders in energy transition infrastructure, but note that the spoils of that deal are being shared with Hitachi Energy. The key will be not just conversion, but also securing strong commercial terms. Pricing discipline is essential, to avoid a race to the bottom.

The same can be said of the Group's fossil fuel focussed activities. The oil field services industry is having a better time of things currently than oil & gas producers. That's a good backdrop for bid pipeline, but Petrofac is a relative minnow in the space, meaning it's got less to spend on expensive tendering programs. That also gives it less bandwidth to invest in hiring skilled engineers in anticipation of new business. Over-hire and the bottom line gets punished. Hold back and there could be problems delivering projects.

Whilst we see the recent recovery in oil prices as broadly positive, they're still sharply down over the last year and this is directly hurting profits in the Integrated Energy Services division.

We also see rising debt as a key concern to call out. Petrofac's not expecting any material cash call on debt till 2024. But its ability to fund operations and meet its lenders' financial criteria depends on cash collections related to legacy contracts. Any material delays could threaten Petrofac's ability to bid for and take on new work. We're therefore sceptical about an imminent return to dividend payouts, and as ever no dividends can be assured.

Petrofac's demonstrated that it has the expertise to help clients roll out much-needed energy infrastructure. And whilst it's becoming less reliant on the problem projects of the past, they're still dragging down financial performance. Tareq Kawash has set out his vision of building a more diversified business leveraging its technical expertise to take advantage of opportunities in the energy transition.

In the medium term, Petrofac's targeting $4-$5bn of sales annually and a return to industry-leading margins. If this can be achieved, shareholders are likely to be rewarded, but getting there won't be easy and nothing is guaranteed. His first job is to steady the ship and deliver financial stability. Until such time, investors should expect some volatility.

Environmental, social and governance (ESG) risk

The ESG risk to oil and gas service providers runs parallel to those impacting producers. Environmental concerns are the primary driver of ESG risk for this group, with carbon emissions and waste disposal being the main issues. Health and safety, community relations and ethical governance are also contributors to ESG risk.

According to Sustainalytics, Petrofac's management of ESG risks is average.

It has a strong environmental policy and has appointed a management committee for ESG issues, but its ESG reporting doesn't align with leading reporting standards. Its whistle-blower programme is strong, reflecting changes to the governance regime following an investigation by the Serious Fraud Office. Although ESG targets have been included in executive performance reviews, they're not clearly outlined in the remuneration policy.

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.

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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.

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Article history
Published: 10th August 2023