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Petrofac - first half performance in line with guidance

First half revenue dropped by $367m to $1.2bn, with the bulk of the fall driven by a 40% decrease from the Energy & Construction division.

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First half revenue dropped by $367m to $1.2bn, with the bulk of the fall driven by a 40% decrease from the Energy & Construction division.

Underlying operating profit were just above breakeven, reducing from $49m to $2m as good momentum in Asset Solutions and Integrated Energy Services was offset by challenges in Engineering & Construction.

The group expects an uptick in second half performance, with an increase in contracted business.

The shares were broadly flat following the announcement.

View the latest Petrofac share price and how to deal

Our view

With the SFO investigation concluded, Petrofac's been focussed on rebuilding. But the pandemic's thrown a wrench in those plans, pushing any hope of a material rebound further into the future.This was borne out in the first half results, but the indicators suggest that we could see a recovery in the second half of 2022 and beyond.

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 has been struggling against elevated covid-related costs, which holds margins back. Plus, the division's first half order intake was significantly below revenues, which were already down sharply. 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, with $7bn of the pipeline relating to New Energy Services.

There's $57bn up for award over the next 18 months, an increase of $4bn since the June trading update.. So far growth in new orders has been somewhat disappointing, with the backlog still lower than at the end of 2021. But with new contracts weighted toward the second half, we should get a better picture of how demand is shaping up now that Saudi Arabia and the UAE are back on the table at the full year.

We have no reason to believe the medium term goals set out in the annual report have changed. These include a revenue target of $4-5bn in the medium term with operating profits margin ambitions of 6-8%. Should even the bottom range of these targets be achieved that would drive operating profits of $240m, a multiple of 2021 levels. There is significant execution risk to reaching these targets.

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 with so much uncertainty ahead, caution is warranted.

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

In the Engineering & Construction division, revenue fell 40% to $673. This reflected the continued fall out from the pandemic, lower activity levels more generally and project delays. The division saw a fall of $65m in underlying operating profits into loss making territory, to the tune of $44m.

In Asset Solutions, revenue fell 3% to $508m and underlying operating profit fell 25% to $33m. That was due to a change in business mix and higher margin contracts completed in the comparative period.

Integrated Energy Services, Petrofac's upstream oil and gas business, outperformed the other divisions, benefitting from an increase in both production and oil prices. Revenue more than tripled to $56m, generating underlying operating profit of $21m up from a loss of $6m.

Free cash outflows were $193m with net debt more than doubling to $341m. This was largely due to lower cash profits, higher working capital and a penalty relating to the SFO investigation.

Order intake of $1.1bn came in at just under the $1.2bn first half revenue reported .The 18 month prospective pipeline stood at $57bn, underpinning management's near term optimism.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 11th August 2022