ii view: Covid caution dominates at Petrofac

An oil price recovery has yet to be seen in increased capital spending by its customers. Buy, sell or hold? 

First-half trading update to 30 June

Chief executive Sami Iskander said:

"We are making good progress on our strategic objectives to rebalance, reshape and rebuild our business.  We are continuing to drive technical and functional excellence, efficiency and consistent delivery to a single global standard of execution quality for our clients. 

“By continuing to deliver against our near-term strategic priorities, I am confident we will be successful in rebuilding our order backlog as the market recovers."

ii round-up:

Oilfield services provider Petrofac (LSE:PFC) today reported broadly inline trading as caution under the pandemic for its oil major customers continued to weigh on its core Engineering & Construction (E&C) division. 

First-half revenues for E&C during 2021, which accounted for three-quarters of sales last year, are expected to be around $1 billion, reflecting lower levels of activity. That’s down from $1.6 billion this time last year. 

Petrofac shares fell by just over 1% in UK trading, leaving them down by almost a third since pandemic induced lows in March 2020. Petrofac was previously barred from competing for new contracts in the United Arab Emirates following a guilty plea from a former executive under UK bribery charges.

Shares for rival Wood Group (LSE:WG.) are up by close to 60% since March 2020, while shares for oil major BP (LSE:BP.) are up by around a quarter.  

As expected, new orders are likely to remain depressed in E&C in the current year. Management noted that “the recovery in oil prices has yet to manifest itself in a significant expansion in capital spending by our clients.” 

However, and more favouably, Petrofac has an active bidding pipeline of $48 billion of opportunities due for award in the next 18 months. Progress regarding new or green energies is being made, helping its Engineering & Production Services (EPS) division to secured $0.4 billion of awards and extensions in the year to date, largely in the UK North Sea, Iraq and Oman. 

Petrofac designs, builds, manages and maintains oil, gas, refining, petrochemicals and renewable energy infrastructure. Over its last financial year to the end of December 2020, it reported a loss of $180 million. It remains the subject of an ongoing Serious Fraud Office investigation.

First-half results to the end of June are likely to be reported in mid-August. 

ii view:

Petrofac’s core markets are in the Middle East and North Africa and the UK North Sea. It employs over 9,000 people across more than 30 offices worldwide. The relatively new chief executive is now pursuing a strategy to position for growth, offer best-in-class delivery and enhance returns. Its six core values now include safety, being ethical and innovation. 

For investors, targeted cost savings of $250 million and a new chief executive injecting renewed focus and vigour is not to be forgotten. The winning of orders relating to new energies is positive and sees Petrofac moving with its customers, while all the executives working at Petrofac when the bribery allegations were made have previously left.

But this latest update continues to offer scant evidence of a recovery at its core E&C business. The SFO bribery investigation is yet to be concluded, with any possible fine yet unknown. The formerly attractive dividend also remains halted. The currently barred UAE accounted for around a tenth of sales in 2019, and competitors are also not standing still. In all, and while some progress is being made, the shares remain highly speculative. 

Positives: 

• New CEO and refreshed strategy 
• Expanding its clean energy business

Negatives:

• Suspended dividend payment
• Investigated by UK authorities for allegations of bribery

The average rating of stock market analysts:

Hold