Petrofac and Hitachi Energy have been awarded a framework worth about €13bn.
The agreement, which represents the largest in Petrofac's history, covers six offshore wind power projects for TenneT, the Dutch-German Transmission System Operator.
The first project contract has already been awarded with a further expected later this year. The remaining four are expected to be awarded over the next three years.
Petrofac will undertake the Engineering, Procurement, Construction and Installation (EPCI) of the offshore platforms, as well as elements of the onshore converter stations which allow connection to the grid.
The shares were up 67% in early trading.
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Our view
Petrofac's disappointing 2022 performance demonstrated the scale of the task that incoming CEO, Tareq Kawash, has ahead of him. 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. 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.
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. We're therefore sceptical about an imminent return to dividend payouts, and as ever no dividends are guaranteed.
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 now expecting a loss for the current financial year. The market reacted enthusiastically to the TenneT deal. But if that isn't accompanied with a return to profitability, sentiment could quickly turn the other way. We hope to get a fuller picture in Petrofac's results which are expected on 25 April 2023.
Petrofac key facts
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