ii view: Petrofac cautious near term, optimistic long term

The pandemic has hurt, but a now elevated oil price should be good for its customer’s confidence to spend. Buy, sell, or hold? 

Full-year results to 31 December

• Revenue down 25% to $3.06 billion (£2.33 billion)
• Loss of $195 million, compared to a loss of $192 million in 2020
• Net debt up 24% to $144 million
• Order backlog down 20% to $4 billion
• No dividend (2020: Nil)

Chief executive Sami Iskander said:

“We continued to manage the challenges of Covid-19 while delivering our significant cost reduction targets to enhance our competitiveness. Our relatively mature portfolio has shielded us from the current inflationary environment.

“Looking forward, we are focused on securing the backlog that will deliver profitable growth whilst retaining a strict approach to bidding discipline. While clients continue to prioritise cash preservation over new investments, we expect the increasingly supportive energy price environment to improve the outlook for awards as the year progresses.”

ii round-up:

Oilfield services provider Petrofac (LSE:PFC) today reported a second consecutive annual loss along with expectations for subdued trading in the near term. 

A loss of $195 million (£148 million), including a fine of $106 million to settle previous contract related bribery charges, compared to a loss of $192 million in the prior pandemic-hit 2020. 

Petrofac shares fell by more than 5% in UK trading, although that still leaves them up by around a fifth over the last year. Oil major BP (LSE:BP.) is up around 30% during that time, while rival services company Wood Group (John) (LSE:WG.) has fallen by just over a third. The price of Brent crude oil has almost doubled over the last year. The FTSE 100 index, heavily exposed to commodities, has risen by around 11%. 

• Video: inflation, dividends and a new commodities supercycle
• Energy independence: shares to benefit from green energy boom
• Commodities shock: wild times as scarcity looms

Petrofac’s client base includes many of the world's leading energy companies. New order intake of $2.2 billion (£1.67 billion) over the year compared to $1.6 billion in 2020. 

Its order backlog declined 20% year-over-year to $4 billion, as it both delivered on existing projects and oil company customers continued to maintain capital discipline, delaying new capital expenditure and contract awards in response to the global pandemic. Only 0.6% of orders relate to Russia. 

Targeted cost savings of $250 million were achieved during the year, with its previous ban on bidding for work by the Abu Dhabi National Oil Company (ADNOC) recently lifted following its fine, now paid, for contract bribery.  

Bid opportunities to be awarded totalling $37 billion during 2022 include nearly $7 billion of green or new energies work. 

ii view:

Petrofac’s core markets are in the Middle East and North Africa and the UK North Sea. Founded almost 40 years ago, today it employs over 8,000 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, the overhang from the pandemic remains, and oil majors continue to pursue conservative capital expenditure programmes. The dividend payment, a previous attraction, remains halted, while customer investment is historically volatile and uncertain.

On the upside, recent gains in the oil price, helping to boost oil company profits, may see customer confidence in executing capital expenditure grow. Uncertainty regarding a former bribery investigation is now removed and the targeting of new energy orders is positive and sees the Petrofac moving with its customers. In all, and while the shares remain speculative, management initiatives and a more favourable oil price arguably offer some room for cautious longer-term optimism. 

Positives: 

• Refreshed strategy under newish CEO 
• Expanding its clean energy business

Negatives:

• Suspended dividend payment
• Customer investment is historically volatile and uncertain

The average rating of stock market analysts:

Buy