ii view: Petrofac swings to a loss

There's a news strategy, but a SFO investigation is ongoing. We assess prospects. 

Full-year results to 31 December 

Chief executive Sami Iskander said:

"Since joining Petrofac at the beginning of November, I have spent a lot of time listening to our people, our clients and our stakeholders. These discussions have confirmed the fundamental strengths that have made Petrofac one of the leading service providers to the energy industry over many years. They have also clarified what we need to do better to restore confidence and set the business on a course to grow with existing and new clients. 

"Our 2020 results demonstrate it has been a difficult year for Petrofac and the industry. The way the business has adapted to new ways of working to deliver for our clients - whilst reducing costs and conserving cash - is testament to the hard work, agility and resilience of our people.

"We look to the future with a clear. This means reshaping our business to rebuild our backlog by capitalising on the recovery in addressable markets, diversifying into new geographies and accelerating our pivot to new energies. I am confident that we will recover to deliver sustainable value for all our stakeholders over the medium term."

ii round-up:

Energy services provider Petrofac (LSE:PFC) today reported a loss of $180 million (£129.6 million), as it wrote down the value of an oil well investment in Malaysia and adjusted for lower-than-expected sale proceeds from the sale of its Mexican operations. 

Excluding exceptional items, adjusted profit fell by 62% to $211 million as major oil company customers continued to rein in new project expenditure during the pandemic and related energy price uncertainty.

Petrofac shares fell by more than 3% in UK trading, leaving them down by around a quarter since virus induced lows back in March last year. Petrofac was recently barred from competing for new contracts in the United Arab Emirates following a guilty plea from a former executive under UK bribery charges.

Shares for rival Wood Group (LSE:WG.) have doubled since March 2020 while shares for oil major Royal Dutch Shell (LSE:RDSB) are up by around a quarter. 

Petrofac designs, builds, manages and maintains oil, gas, refining, petrochemicals and renewable energy infrastructure. Its order backlog fell by almost a third over the year to $5 billion. No final dividend was declared as the company continues to try and conserve cash and cut costs.  

The new chief executive since November last year also outlined a refreshed group strategy focused on consistent best-in-class execution, returning to growth and delivering superior returns. 

Management outlook comments pointed to challenging market conditions despite a recovery in the oil price and a pick-up in tendering activity in the first quarter of 2021. Clients are continuing to adopt tough commercial positions and delays in awards remain a risk.

ii view:

Petrofac employs over 9,000 people across more than 30 offices worldwide. Its core markets are in the Middle East and North Africa and the UK North Sea. 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 a global pandemic also need to be navigated.

For investors, cost savings of $140 million and a new chief executive looking to inject renewed focus are a clear plus. The winning of orders relating to new energies is positive, too, and sees Petrofac moving with its customers, while all the executives working at Petrofac when the bribery allegations were made have previously left.

However, today’s results offer little firm evidence of recovery as yet. The former attraction of the dividend remains halted and the UK’s bribery investigation is yet to be concluded, with any possible fine unknown. The currently barred UAE accounted for around a tenth of sales in 2019, while Petrofac's competitors are also not standing still. In all, and given the degree of ongoing uncertainty, Petrofac remains an investment for higher risk investors only.   

Positives: 

• New CEO and refreshed strategy 
• Looking to expand its clean energy business

Negatives:

• Suspended dividend payment
• Investigated by UK authorities for allegations of bribery

The average rating of stock market analysts:

Hold