ii view: Petrofac shares soar – here’s why

Full-year trading update to 31 December

Chief executive Tareq Kawash said:

“Our focus on rebuilding the backlog and unwinding historic working capital has resulted in tangible progress against our organic plan to strengthen the Group’s financial position.

 “To further accelerate progress, my near-term priority, and that of our Board and leadership, remains on improving liquidity and materially strengthening the Group’s balance sheet, to deliver on our long-term potential.”

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ii round-up:

Specialist energy engineer Petrofac Ltd (LSE:PFC) today eased concerns regarding its finances as it confirmed a performance guarantee for it first contract with Dutch electricity firm TenneT and agreed terms for its ADNOC Gas deal.

Active discussions to secure guarantees for other new contracts remain ongoing, which when combined with other management initiatives such as potentially selling non-core assets, are expected to improve its balance sheet.

Shares for the FTSE Small Cap company soared more than 40% in UK trading having come into this latest news down over 70% in the last three months alone. Shares for rival John Wood Group (LSE:WG.) are up around 3% during that time while the FTSE All Share index is little changed.

Petrofac, designs, builds, operates, maintains, and manages energy infrastructure such as oil and gas facilities and on and offshore wind farms. 

A second contract in partnership with Hitachi Energy to the value of $1.4 billion (£1.1 billion) for TenneT – the Dutch-German transmission system operator – to expand its offshore wind capacity in the North Sea was also announced.  

New orders year-to-date of around $6.8 billion (£5.4 billion) are expected to leave Petrofac’s end-of-year backlog standing at approximately $8 billion (£6.3 billion). 

Scheduled awards over the next 18 months of $62 billion and including remaining projects for TenneT offer a robust business outlook according to Petrofac. 

Group net debt at the year-end is expected to be modestly higher than at its June 2023 interim results where it stood at $584 million (£461 million).

ii view:

Started in 1981, Petrofac has experience of more than 200 major projects ranging from the arid terrain of the Omani desert, to the frozen Artic and the depths of the UK North Sea. Its Engineering & Construction (E&C) division generates around half of its sales, followed by followed by Asset Solutions including such activities as oil well decommissioning at around 45% and Integrated Energy Services the balance.

For investors, year-end net debt of just over $584 million (£461 million) compares to a stock market value of around $160 million. Customer investment is historically volatile and uncertain, hindered by the ups and downs of energy prices. An expected full-year adjusted loss (EBIT) of around $180 million cannot be overlooked, while the dividend has remained suspended since 2019. 

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On the upside, new orders are being won. Management initiatives to strengthen its balance sheet are being pursued. Its E&C division should be supported by an increased focus on energy security and energy transition, while a diversity of both business type and geographical region persists. 

For now, and while new orders and self-help initiatives are not to be ignored, shares for Petrofac remain highly volatile with more cautious investors likely awaiting evidence of an improvement in its balance sheet and a return to profits before taking any interest. 

Positives: 

• Winning new orders 
• Geographical diversity

Negatives:

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

The average rating of stock market analysts:

Hold