ii view: Petrofac dives on Covid warning

Lockdowns have impacted operations and the oilfield services provider's shares have halved in 2020.

Trading update ahead of half-year results

• Targeting $125 million of cost savings in 2020 and up to $200 million in 2021
• New order intake of $1 billion in the year to date
• Net debt of $139 million at 31 May 2020

Chief executive Ayman Asfari said:

"The Covid-19 pandemic and sharp fall in oil prices have materially impacted financial performance and new orders in the first half of the year.

“We have taken swift, decisive action to structurally reduce costs, preserve cash and maintain our competitiveness. In doing so, we have preserved core capability whilst continuing to invest in digitalisation and our client relationships.  Looking ahead, it is unclear how long market conditions will continue to disrupt business activity and delay awards. Notwithstanding this, we have a tendering pipeline of US$48 billion of opportunities scheduled for award by the end of 2021 and an order book that gives us good near-term revenue visibility."

ii round-up:

Oilfield services provider Petrofac (LSE:PFC) today warned that trading and contract awards have been materially hit by Covid-19 and the sharp fall in oil and gas prices. 

Profit margin for its core Engineering & Construction division, accounting for four-fifths of last year's sales, are expected to be between 2% and 2.25%, around half of broker Morgan Stanley’s estimate. Divisional sales of $1.6 billion, hindered by pandemic project delays, also fell below the broker’s forecast. 

Petrofac shares fell by 10% in early UK trading having nearly halved year-to-date. Rival Wood Group's (LSE:WG.) shares are down by a similar amount, while shares of oil giant Royal Dutch Shell (LSE:RDSB) are down by just over 40% in 2020 so far. 

The oil price has floundered in 2020 as Saudi Arabia and Russia failed to agree on supply cuts and Covid-19 savaged demand. 

Petrofac designs, builds, operates, maintains and manages oil and gas facilities in countries such as Saudi Arabia and Iraq. New orders of $1 billion year-to-date compare with $1.7 billion this time last year. 

Activity on projects in Iraq and India was suspended given government enforced lockdowns. Stringent health protocols, supply chain disruption and travel restrictions have all impeded operations. 

In its battle against Covid-19 and the fall in energy prices, it remains on track to deliver $125 million of cost savings in 2020 and up to $200 million in 2021. 

In April, it announced cuts to its capital expenditure budget and the cancellation of its latest dividend payment - the two combined conserving $145 million. 

Petrofac previously came under the gaze of the Serious Fraud Office (SFO) regarding corrupt practices. 

ii view:

Petrofac operates out of seven strategically located operational centres, in Aberdeen, Sharjah, Abu Dhabi, Woking, Chennai, Mumbai and Kuala Lumpur. As a service provider to many of the world's leading oil and energy companies, customer demand is linked to the volatile oil price. Higher prices potentially generate business and vice versa. Other factors outside of management’s control such as wars, geopolitical tensions and now Covid-19 also need to be navigated. 

For investors, swift action to cut costs and conserve cash have been taken. A competitive position in the Middle East where the cost of production is low and moves to expand its position in gas, clean fuels, renewables and carbon capture add to the positives. But the removal of an attractive dividend payment, the hit to oil demand from Covid-19,and the prior SFO investigation all provide reasons for caution. For now, Petrofac remains a potential investment for higher-risk investors only.   

Positives: 

• Actions being taken to conserve cash
• Tendering pipeline of $48 billion of opportunities

Negatives:

• Order intake down by 41% year-to-date to $1 billion
• Factors outside of management’s control - geopolitical tensions, wars, the oil price

The average rating of stock market analysts:

Strong hold