ii view: Petrofac says outlook improves

A net cash position and a dividend yield of over 7%. Investors take a closer look. 

Full-year results to 31 December 2020

• Revenue down 5% to $5.53 billion
• Adjusted profit (EBITDA) down 17% to $559 million
• Maintained total year dividend at 38 US cents per share
• New order intake down 36% to $3.2 billion

Guidance:

• Continues to expect a fall in 2020 revenue reflecting low new order intake in recent years

Chief executive Ayman Asfari said:

"Our results for 2019 reflect solid operational performance across the business and good progress delivering our strategy.  

"Best-in-class execution has delivered attractive margins in our core businesses, underpinned by an unrelenting drive to strengthen our cost competitiveness by investing in talent, local content and digital technology.  

"Looking forward, we expect 2020 to be a year of transition. We are encouraged by the improving market outlook, recent new awards and US$37 billion of bid opportunities scheduled for award by the end of 2020.  Consequently, we are investing in maintaining our bench strength to preserve our market-leading execution capability. This investment - together with project mix and the low new order intake of recent years - will impact financial performance in 2020, but best positions us for a return to growth as we rebuild our order book."

ii round-up:

Oilfield services provider Petrofac (LSE:PFC) reported sales and earnings in line with analysts’ forecasts in these latest results. 

Adjusted profit (EBITDA) fell by 17% to $559 million, hit by a 36% drop in new order intake to $3.2 billion, as the company continued to suffer from previous bribery allegations.

Its order backlog declined by 23% to $7.4 billion, as the company which designs, builds, operates, maintains and manages oil and gas facilities in countries such as Saudi Arabia and Iraq continued to suffer an ongoing investigation by the UK’s Serious Fraud Office (SFO). 

Management continues to cooperate with the SFO, although no charges have to date been brought against any of its current employees. It reiterated expectations for 2020 revenues to also fall. 

Nonetheless, a move to a capital light business and tighter working capital management had improved group cash flow, with a year end net cash balance of $15 million better than management’s prior estimate for $100 million of net debt. 

Accompanying group outlook comments also pointed to an improving market outlook. 

The share price rose by more than 2% in afternoon UK trading, contrasting with falls for rivals Wood Group (LSE:WG.) and Hunting (LSE:HTG) and partially offsetting a near 20% drop during 2019. 

ii view:

Petrofac employs over 11,000 people and 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 conflict and geopolitical tensions also often need to be navigated. Currently, a bribery investigation and its impact on Petrofac’s ability to win new business add to the mix. 

For investors, a maintaining of the dividend payment and a historic dividend yield of over 7% (not guaranteed) - covered twice by earnings - offers clear attraction in the current ultra-low interest rate environment. So does an estimated single-digit price/earnings (PE) ratio. But with the SFO investigation still ongoing and concerns for global economic health and the coronavirus influencing the oil price, some caution remains warranted. 

Positives: 

• Moved to net cash from a net debt position
• Cost reduction being pursued

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