ii view: Petrofac fleshes out cash saving action

Salary cuts and a removal of the dividend payment help ease investor concerns, but headwinds remain. 

Covid-19 trading update

• Cancelling 2019 final dividend payment
• Reducing costs by $100 million in 2020 and up to $200 million in 2021
• Cutting capital expenditure by 40%
• Withdrawing previous 2020 financial estimates

Chief executive Ayman Asfari said:

"We have a resilient business model, strong competitive position and a differentiated in-country value proposition that is highly valued by our clients. Nevertheless, we are taking swift, decisive action in response to the Covid-19 pandemic and lower oil prices to reduce costs, retain our competitiveness and preserve the strength of our balance sheet.  These best position us to protect our business, stakeholders and the communities we serve."

ii round-up:

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

Petrofac, which designs, builds, operates, maintains and manages oil and gas facilities in countries such as Saudi Arabia and Iraq, is cancelling its previously announced dividend of 25.3 US cents per share and pursuing a series of cost cutting measures in order to conserve cash. 

Cancellation of the dividend will save $85 million, with staff cuts and salary reductions helping it to save around $100 million this year and up to $200 million next year.  

Capital expenditure is being cut by 40% or $60 million to further protect its $1.1 billion of funds as of early April, while the uncertain outlook meant that management was withdrawing previous 2020 estimates.

Petrofac shares rose by more than 4% on the announcement, countering a 40%-plus fall year-to-date. The oil price has halved in 2020 as Saudi Arabia and Russia have failed to agree on supply cuts and Covid-19 hits demand. Rival Wood Group (LSE:WG.) shares are also down over 40%, with shares of oil giant Shell (LSE:RDSB) down over 30%. 

Engineering and construction activity has continued at most of Petrofac’s project sites, although supply chain disruptions, travel restrictions and government enforced lockdowns in India and Iraq are hampering progress.  

Order intake of $2 billion during the first quarter increased its backlog to $8.2 billion. 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 remains a potential investment for higher risk investors only.   

Positives: 

• Actions being taken to conserve cash
• S&P recently 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