Petrofac (PFC) Ord USD0.02
HL comment (28 June 2022)
Delays and rising costs have hit performance in Engineering & Construction, which is still expected to drive a ''modest'' free cash outflow at the full year. Asset Solutions continues to see strong demand and an expanding order book, while Integrated Energy Services is ramping up production to capitalise on strong oil prices.
CEO Sami Iskander said, ''Looking forward, we expect Asset Solutions and IES to continue to deliver strong performance. Notwithstanding the short-term challenges in the existing E&C portfolio, we continue to expect the second half of 2022 to mark an inflection point for a sustained period of growth in backlog. We have a healthy 18 month Group bidding pipeline and we expect to grow the E&C backlog in 2022 and to secure significant new orders in 2023, underpinned by opportunities in the UAE and offshore wind.''
Petrofac shares were up 3.7% following the announcement.
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 won't be on the cards.
There's $53bn up for award over the next 18 months, with the bulk of that in 2023. So far growth in new orders has been somewhat disappointing, with the majority of contract wins coming for variations on existing contracts. 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.
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
- Forward Price/Earnings ratio: 20.8
- 10-Year Average Price/Earnings: 9.6
- Prospective dividend yield (next 12 months): 0.7%
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.
Engineering & Construction continues to see project delays due to the pandemic and cost increases have impacted profitability on contracts to be completed this year and early 2023. This will feed into first half revenue of around $0.6bn. Second half revenue is expected to be similar. The division's expected to report an operating loss between $35m and $45m.In the second half, depending on final settlements, the division should report a marginal operating profit. $53bn worth of projects are up for award through 2023 and the group expanded its order book by $125m, primarily by expanding existing contracts.
Asset Solutions revenue is expected to be around $0.5bn in the first half, with strong order intake supporting further growth in the second half. Operating margin for the full year's expected to be inline with guidance, between 5-6%. $0.8bn in contracts and extensions have been won in the first half and the group's book-to-bill ratio, which measures how quickly the group is able to fulfil demand, is expected to be over 1.
Net production in Integrated Energy Services is expected to be over 500,000 barrels of oil in the first half, rising further in the second half to meet full year guidance of between 3,000-3,500 barrels per day. Assuming an oil price of $100 per barrel, the segment should deliver cash profits between $80m and $90m.
Order backlog, which reflects the unearned value of current and future contracts, is expected to fall from $4.0bn to $3.8bn. This reflects progress on existing contracts and low order intake in Engineering and Construction, which more than offset strength in Asset Solutions.
As at 23 June 2022, net debt stood at $345m, up from $144m at the end of 2021. This increase can be attributed to slower payments from clients and the $104m SFO penalty. Net debt is expected to fall in the second half due to favourable working capital movements in Engineering & Construction.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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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