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Petrofac - full year operating loss of c.$100m expected

Petrofac expects full year Group revenues of $2.5bn and an operating loss of about $100m.

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Petrofac expects full year Group revenues of $2.5bn and an operating loss of about $100m. The expected uptick in second half performance did not result in improved profitability.

A strong performance in Asset Solutions (AS) and Integrated Energy Services (IES) was offset by challenges in Engineering and Construction (E&C). Specifically, these included cost overruns on legacy contracts, and an upwards review of costs on the Thai Oil Clean Fuel project.

Net debt was $396m at 15 December, up from $144m at the last year end.

E&C has $0.9bn secured so far in 2023, but is expected to make a small operating loss next year. Petrofac sees a robust outlook for new contract awards for the division, and is preferred bidder on $1.5bn of opportunities. The Group is confident the division will return to profitability the year after next.

In Asset Solutions further revenue growth is expected, but Petrofac guides that divisional operating profit will fall in 2023, reflecting the wind down of higher margin contracts. 2023 production at IES is expected to be in line with 2022, but at an oil price of $85 per barrel, cash profit would be lower than this year.

The shares were down 9.0% following the announcement.

View the latest Petrofac share price and how to deal

Our view

Petrofac's disappointing 2022 performance demonstrates the scale of the task that incoming CEO, Tareq Kawash, has ahead of him. The backlog of orders at Group level has fallen from $3.7bn to $3.3bn over the year but there are significant opportunities up for grabs, with Petrofacin the running for $68bn of contracts over the next 18 months. But 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. But with $7bn of the pipeline relating to New Energy Services per the 2022 half year statement, this is still a relatively small piece of the jigsaw.

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. With that in mind, we're sceptical about the 1% forward dividend yield, and as ever no dividends are ever guaranteed.

Despite recent falls, valuation remains above the long-term average on a forward price-to- earnings basis. Following the year end update, we see scope for further earnings downgrades for 2023 which would see this valuation look even more demanding. For investor sentiment to improve, we need to see solid evidence of a recovery in revenues and profits.

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: 20th December 2022