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Petrofac - order momentum accelerates despite 2023 woes

Petrofac's 2023 revenues are expected to reach around $2.5bn, in-line with guidance.

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Petrofac's 2023 revenues are expected to reach around $2.5bn, in-line with guidance. Operating losses of about $180mn include $122m of contract write down's and allowances for bad debts. Net debt is expected to be modestly higher than the $584mn seen at the mid-year results.

Order intake across Asset Energy Solutions and Engineering & Construction has totalled $6.8bn so far, and the order backlog is expected to reach $8.0bn by the year end. Also, the company announced a further $1.4bn joint contract with Hitachi Energy to expand off-shore wind power capacity in the North Sea.

The Group has secured a financial guarantee for an earlier contract under the framework, and a guarantee for another major project.

The shares rose 60.1% in early trading.

View the latest Petrofac share price and how to deal

Our view

Petrofac designs, builds, manages and maintains oil, gas, refining, petrochemicals and renewable energy infrastructure. And we're impressed with its range of capabilities across the energy mix. It's making solid progress in rebuilding its order book and sales pipeline. But what investors really want to see is a return to profits and cashflows, and progress on that front has so far been disappointing. The poor trading results and increasing demands on cash to service the company's contracts have heaped pressure on Petrofac's balance sheet.

Investors have however taken some reassurance from the latest steer on trading. We're impressed by the rate of order in-flow and there's been solid progress on securing financial guarantees for major contracts. Together this suggests that customers and lenders aren't unduly concerned about Petrofac's financial position. But, there's still some work to do to assure the company's future.

Talks are under way to sell off parts of the business or attract investment for other activities. The orderbook and new business pipeline could well be of interest to competitors. But until clarity emerges on the shape of the business, it makes it difficult to form a view about the future prospects for the group.

For now, there is no certainty that further funding will be secured. Disappointments on this front would likely cast a shadow over the company's future and therefore sentiment towards the shares.

Should a solution be found, the key will be not just winning new business, but also securing strong commercial terms. Pricing discipline is essential, to avoid a race to the bottom. We also see headcount as a key metric to get right. Petrofac is a relative minnow in the energy equipment and services space. That also gives it less bandwidth to invest in hiring skilled engineers in anticipation of new business. Over-hire and the bottom line gets punished. Hold back and there could be problems delivering projects. Volatile oil and gas prices make this equation even harder to balance, as customers evaluate whether or not to embark on new projects. Fortunately, recent success in securing work in the renewable energy space shows the business doesn't have all its eggs in one basket.

Petrofac has previously set out its stall of achieving $4-$5bn of sales annually and a returning to industry-leading margins over the medium term. Progress toward this could be rewarding for investors with some analysts even forecasting a return to dividend payments. But given the pressure on cash flows we don't currently see any scope for handouts to shareholders.

And in the immediate future we caution that its efforts to shore up the company's finances that are likely to be the key driver of Petrofac's valuation, and here there are no guarantees of success.

Environmental, social and governance (ESG) risk

The ESG risk to oil and gas service providers runs parallel to those impacting producers. Environmental concerns are the primary driver of ESG risk for this group, 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 strong . However, there are concerns surrounding the strength of the company's disclosures.

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. Its whistle-blower programme is strong, reflecting changes to the governance regime following an investigation by the Serious Fraud Office. Although ESG targets have been included in executive performance reviews, they're not clearly outlined in the remuneration policy.

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 2023