Following last week’s publication of the delayed full year results, Petrofac shares have been re-admitted to trading by the Financial Conduct Authority.
The shares were up 66% in mid-morning trading.
Full-year results 31 May 2024
Petrofac’s full-year revenue fell from $2.6bn to $2.5bn, in line with prior guidance. The small drop in revenue comes as growth in Asset Solutions was more than offset by reduced activity in Engineering & Construction (E&C).
Underlying operating losses widened from $229mn to $393mn, reflecting losses on its legacy contract portfolio.
Free cash outflows worsened from $188mn to $223mn. The net debt position grew from $349mn to $583mn, reflecting the cash outflows over the period.
The order backlog more than doubled to $8.1bn at year-end, with most growth seen in E&C.
Activity in E&C is expected to improve this year, but still be “sub-scale” as the portfolio moves from legacy to new contracts. In Asset Solutions, the group expects to maintain or increase its activity levels in the medium term, with expansion into new geographies.
Our view
Investors breathed a sigh of relief with Petrofac’s valuation rallying strongly after the suspension on trading its shares was lifted. But its delayed results showed that it’s been a challenging year for the group, with losses widening largely as a result of unprofitable legacy contracts.
After missing debt payments in May 2024, the group’s yet to come up with a concrete plan to fix things, with financial restructuring discussions still ongoing. These are critical. Petrofac needs to strengthen its balance sheet, improve liquidity, and secure bank guarantees to support current and future contracts.
As a result, there are still pressing concerns about the company’s ability to survive. Even if the situation is resolved, paying its lenders in shares rather than cash is a distinct possibility. That would mean investors’ ownership of the company would be significantly diluted. We don’t see any possibility of an imminent return to dividend payments.
Talks are also underway to sell off parts of the business. Until clarity emerges on the shape of the business, investor sentiment is likely to remain negative. Unless a suitable rescue plan is negotiated with lenders or a buyer swoops in for some or all of the business, shareholders may suffer losses.
Petrofac designs, builds, manages and maintains oil, gas, refining, petrochemicals and renewable energy infrastructure. It's been 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 continues to be disappointing. That’s heaping further pressure on Petrofac's balance sheet.
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 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 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’s deep expertise across the energy industry has led to one of its best years in terms of new contract awards, pushing the backlog up to more than $8bn at year-end. If it can meet its ambition of returning to industry leading margins over the medium-term then there’s the potential to rebuild investor confidence.
In the immediate future, we caution that efforts to shore up the company's finances are likely to be the key driver of Petrofac's valuation. Whilst the company’s very future hangs in the balance it’s impossible to make a convincing investment case. We see more compelling names elsewhere in the sector.
Environmental, social and governance (ESG) risk
The oil and gas industry is one of the most at-risk industries in terms of ESG. 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 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.
The Share Research team is ceasing coverage of Petrofac. This is the last update and house view HL will produce on this stock. You can still find out more about our thoughts on the Financials industry by signing up to our Share Insight email.
Petrofac key facts
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