ii view: Petrofac shares collapse to new low

This oilfield services company has halved in size during a stock market slump in 2022. We assess prospects. 

Full-year trading update to 31 December

• Expects full-year revenue of $2.5 billion (£2.06 billion), down from last year’s $3 billion. 
• Expects a full-year loss of $100 million

Chief executive Sami Iskander said:

“Looking forward, whilst E&C awards were slower than expected in 2022, the market outlook remains positive and we are well positioned on a number of near-term prospects, with US$1.5 billion of E&C opportunities where we are at preferred bidder stage, and a further US$3.5 billion of bids submitted in E&C. We expect these opportunities to provide backlog growth in 2023 and lay the foundations for a return to profitability, positive free cash flow and continued recovery thereafter.”

ii round-up:

Oilfield services provider Petrofac Ltd (LSE:PFC) today flagged its expectation for a full-year loss given ongoing project cost overruns in relation to delays caused by the pandemic and elevated costs for its Thai clean fuel joint venture contract.

Petrofac, which counts many of the major oil companies as customers, expects an underlying loss of around $100 million, with a loss of around $190 million for its Engineering & Construction (E&C) division, partially offset by gains for both Asset Solutions and Integrated Energy Services.

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Petrofac shares slumped by more than 11% in UK trading to a record low, having come into this latest announcement down by just over a third year-to-date. Shares in fellow energy industry services provider John Wood Group (LSE:WG.) are down by around a third during 2022 while the FTSE 250 index has fallen by over a fifth. 

Petrofac designs, builds, operates, maintains, and manages energy facilities in countries such as Saudi Arabia. Overall revenues for the year are expected to come in at around $2.5 billion, down from last year’s $3 billion. 

The order book at the end of the year is expected to be $3.3 billion, down from the prior year’s $4 billion, with net debt of $396 million, up from June’s $341 million. 

In November, Petrofac announced the pending departure of its chief executive Sami Iskander at the end of March 2023 to be replaced by McDermott International executive Tareq Kawash.  

Petrofac management highlight a robust outlook for the E&C division, supported by high energy demand and an increased focus on energy security and energy transition. 

ii view:

Petrofac’s core markets are in the Middle East and North Africa and the UK North Sea. Founded over 40 years ago, today it employs around 8,000 people across more than 30 offices worldwide. The E&C division generates its biggest slug of revenues at close to two-thirds, followed by Asset Solutions including such activities as oil well decommissioning at around a third and Integrated Energy Services at under 2%. The UK, its biggest customer, contributed around a quarter of overall sales. 

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For investors, rising costs and contract cost overruns following the pandemic cannot be ignored. Customer investment is historically volatile and uncertain, hindered by the ups and downs of energy prices, while the dividend has remained suspended and talks with its lenders ongoing given loans totalling $230 million mature in October 2023.  

More favourably, the outlook for the currently challenged E&C division is supported by high energy demand and an increased focus on energy security and energy transition. A pending new chief executive will hopefully reinvigorate its strategy, while cash flow in 2023 is expected to be broadly neutral, aided by new contract awards. 

On balance, and while a price-to-net asset value comfortably below the three-year average may suggest the shares are good value, clearly sentiment is against Petrofac while a number of significant risks overhang the business. 

Positives: 

• Pending new CEO 
• Geographical diversity

Negatives:

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

The average rating of stock market analysts:

Buy