Petrofac has said it's experiencing near-term headwinds in its Engineering, Procurement and Construction projects. This reflects the ongoing effect of the pandemic on progress, costs and the timing of payments. Older projects closer to being finished in Engineering and Construction are also being affected by inflation, because of cost over-runs and unfavourable pricing terms.
Despite a stronger performance elsewhere, this means Petrofac now expects to report a "modest" free cash outflow for the full year.
Shares fell 5.2% following the announcement.
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Our view
With the SFO investigation concluded, this was meant to be a time to rebuild. 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 continues to struggle against elevated covid-related costs, which holds margins back. Plus, order intake wasn't as robust as the group had been hoping at the full year, as clients were tentative about loosening the purse strings. It looks as though the absolute worst is over, but more recent news of lingering issues and inflation related headaches, means a full rebound this year is a lot less likely. 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 4-13%, which in our view is tepid at best. Having Saudi Arabia and the UAE back on the table could help the order book, though.
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
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.
Full Year Results (23 March 2022)
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.''
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.
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.
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