ii view: Petrofac orders increase but market demands more

This oilfield services company is down around 40% over the last year. Buy, sell, or hold? 

First-half trading update to 30 June

Chief executive Tareq Kawash said:

“By further progressing our plans to strengthen the financial position of the Group by unlocking the working capital built up through the pandemic, and building on the momentum of the significant awards won in the first half, we are focused on delivering Petrofac’s potential. 

“We have an exceptional Engineering, Procurement, and Construction and Operations capability that is well positioned to deliver and support critical energy infrastructure for the world’s leading resource holders.”

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ii round-up:

Oilfield services provider Petrofac Ltd (LSE:PFC) today detailed strong new customer orders over the last six months for both traditional and new energy projects. 

Its order backlog had risen to $5.6 billion as of the end of June, up from $3.4 billion back in late December. Petrofac designs, builds, operates, maintains, and manages energy facilities in countries such as Saudi Arabia. Its biggest division - Engineering & Construction (E&C) - is expected to report a first-half loss due to previous onerous contracts and write-downs of over $50 million.

Petrofac shares lost around 3% in UK trading having come into this announcement down by almost 40% over the last year. Fellow energy industry services provider John Wood Group (LSE:WG.) has fallen by around a quarter, while the FTSE All Share index is up by less than 1%. 

Petrofac, which counts many of the major oil companies as customers, pointed to a heathy pipeline of potential awards over the next 18 months, with a possible $73 billion of contracts due to be made.

Order intake for the E&C business over the first half are expected to be around $2.5 billion, more than doubling the division’s backlog. Orders for its Asset Solutions business are expected to be in the region of $1 billion. 

Negative cashflow over the first half is expected to see debt rise, but with positive flows in the second half, then taking net debt lower. 

First-half results are likely to be announced in mid-August. 

ii view:

Started in 1981, Petrofac today employs more than 7,900 people across more than 30 offices worldwide. The E&C division generates its biggest slug of revenues at around a half, followed by Asset solutions including such activities as oil well decommissioning at around 45%, and Integrated Energy Services the balance. The UK and the North Sea are its biggest geographical region at around a quarter of sales, followed by Algeria and Thailand at close to 15% and 11% respectively.  

For investors, contract cost overruns given previous challenges of the pandemic cannot be ignored. A net loss of $310 million was made over its last financial year, with net debt coming in at $349 million. Customer investment is historically volatile and uncertain, hindered by the ups and downs of energy prices, while its dividend payment remains suspended. 

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On the upside, the outlook for the challenged E&C division is supported by an increased focus on energy security and energy transition. New orders are being won, there's diversity of both business type and geographical region, while a focus on strengthening its financial position is ongoing. 

For now, and while the global push towards an energy transition offers hope for the longer term, investors may demand further evidence of recovery from the business.  

Positives: 

• Growing order backlog 
• Geographical diversity

Negatives:

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

The average rating of stock market analysts:

Strong hold