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Petrofac - losses worse than expected but bid pipeline building

Full-year results saw revenue decline from $3.0bn to $2.6bn, with growth other divisions failing to offset the...

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Full-year results saw revenue decline from $3.0bn to $2.6bn, with growth in other divisions failing to offset the $0.6bn decline in the Engineering & Construction (E&C) division, Petrofac's largest.

Group operating losses widened from $189m to $212m and were worse than recently downgraded guidance of between $150m and $170m. Profitability was impacted by cost overruns in E&C, particularly those relating to the Thai Oil Clean Fuels and other legacy contracts.

Free cash outflow of $188m included the payment of a $104m penalty to the Serious Fraud Office. Net debt, excluding net finance leases, increased from $144m to $349m.

The order backlog fell 15% to $3.4bn but bidding activity is strong both in E&C and Asset Solutions.

The shares were down 1.6% 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 new CEO, Tareq Kawash, has ahead of him. Sometimes a new pair of eyes can be enlightening, and we hope that Petrofac has now given a sufficiently cautious outlook to avoid any further surprises from legacy contracts. But there can be no guarantee. As these contracts expire, it gives the core engineering division the chance to make a fresh start. It's this division that dominates the 18-month pipeline.

Significant opportunities are available, with Petrofac highlighting $51bn of contracts up for grabs until mid-2024. The €13bn framework awarded by TenneT demonstrates that the company can win big tenders, 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.

Whilst the oil field services industry is showing some signs of recovery, oil prices have come down from the heights of 2022, 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. Lower oil prices would also directly impact earnings at Integrated Energy Services, last year's best performing division in terms of profit growth.

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.

Petofac's demonstrated that it has the expertise to help clients roll out much needed energy infrastructure. And it's becoming less reliant on the problem projects of the past. 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 the shares still carry more risk than we're comfortable with.

Environmental, social and governance (ESG) risk

Environmental concerns are the primary driver of ESG risk for oil and gas producers, 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. The group's whistle-blower programme is strong, reflecting changes to the governance regime following an investigation by the Serious Fraud Office which completed in 2021. Although ESG targets have been included in executive performance reviews, they're not clearly outlined in the remuneration policy.

ESG data sourced from Sustainalytics.

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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: 27th April 2023