ii view: Petrofac flags Covid disruption

Additional costs savings have been found, but the shares have more than halved in 2020.

AGM trading update

• $25 million of additional savings
• Liquidity of $1.2 billion
• Previously announced – cancellation of 2019 final dividend payment

Chief executive Ayman Asfari said:

"In this unprecedented period, we are working tirelessly to safeguard the interests of all our stakeholders. We have implemented stringent health measures to protect our people, clients and suppliers.  We are working hard to mitigate the disruption caused by Covid-19 on project progress and lower oil prices on our bidding pipeline. And we have taken swift and decisive action to significantly reduce costs, retain our competitiveness and preserve the strength of our balance sheet."

ii round-up:

Oilfield services provider Petrofac (LSE:PFC) today warned of significant disruption being caused by the coronavirus pandemic on its engineering and construction projects. 

Lockdowns, health protocols, supply chain challenges and travel restrictions were all resulting in material delays in construction activity, delays which it doesn’t envisage it can recover from this year. 

In response to the Covid-19 pandemic and drop in oil prices, oilfield services provider Petrofac yesterday announced actions it is taking to help protect the company. 

Petrofac designs, builds, operates, maintains and manages oil and gas facilities in countries such as Saudi Arabia and Iraq.

Its shares were down by more than 4% in afternoon UK trading and have fallen by nearly 60% year-to-date. 

The oil price has all but halved in 2020 as Saudi Arabia and Russia failed to agree on supply cuts and Covid-19 savaged demand. Rival Wood Group's (LSE:WG.) shares are also down over 55%, with oil giant Royal Dutch Shell (LSE:RDSB) having also nearly halved year-to-date.

On the upside, Petrofac added $25 million to its previous estimate of at least $100 million in expected cost savings this year, with savings of up to $200 million staying unchanged for 2021.

Under Covid-19 and cash conservation measures, management announced back in early April cuts to its capital expenditure budget and the cancellation of its latest dividend payment. The two combined will conserve $145 million of cash flow. 

Management continues to cooperate with the Serious Fraud Office (SFO) regarding an investigation into corrupt practices, although no charges have to date been brought against any of its current employees.

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. A bribery investigation and its impact on Petrofac’s ability to win new business add to the current mix. 

A capital light business model and a strong competitive position in the Middle East where the cost of production is low, offer investor's positives. But the removal of the dividend payment, a key attraction, the hit to oil demand from Covid-19 and the ongoing SFO investigation all provide reasons for caution. For now, Petrofac would be a potential investment for higher risk investors only.   

Positives: 

• Actions being taken to conserve cash
• S&P previously affirmed its investment grade credit rating

Negatives:

• Investigated by UK authorities for allegations of bribery
• Factors outside of management’s control - geopolitical tensions, wars, the oil price

The average rating of stock market analysts:

Strong hold