Petrofac has updated on trading ahead of its 2022 results. Having undertaken a review of its contracts, the Group is recognising an additional reduction in operating profit. The reduction relates to legacy contracts including the Thai Oil Clean Fuels Project, reflecting additional contract costs and caution around additional revenues that the contracts might generate.
Full year group guidance is now for an operating loss between $150m and $170m, against an expectation of a $100m loss when Petrofac last guided in December 2022.
Year-end net debt was at $349m with headroom of a further $506m before it reaches its current borrowing limits. Petrofac has reached agreement in principle with its lenders to extend its borrowing facilities by 12 months to October 2024.
The shares were down 15.9% in early trading.
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Our view
Petrofac's disappointing 2022 performance demonstrated the scale of the task that new CEO, Tareq Kawash, has ahead of him. It was a further blow to investor sentiment to see him take a knife to guidance in just his second week in office. 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.
The backlog of orders at Group level fell from $3.7bn to $3.3bn over the year but there are significant opportunities available, with Petrofac highlighting $68bn of contracts up for grabs out till mid-2024. The €13bn framework awarded by TenneT demonstrates that the company is in a strong position to 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.
The core engineering business has continued to struggle against elevated covid-related costs, which holds margins back. With the rest of its legacy contracts set to expire in 2023, it gives the division the chance to make a fresh start. 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.
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 profit 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. Whilst Petrofac's lenders appear to be supportive, this may not continue if the Group can't return to profitability. We're therefore sceptical about an imminent return to dividend payouts, and as ever no dividends can be assured.
On a price-to-sales basis, the valuation has been well below the long-term average, reflective of the downward trend in earnings estimates which are expecting a loss for the current financial year. Tareq Kawash believes Petofac's capabilities leave it well placed to help clients roll out much needed energy infrastructure. He also intends to draw a line under problem projects of the past. If he can deliver, then investors may be rewarded. Until more detail of his strategy emerges the jury remains out.
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
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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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