ii view: Petrofac's cost cuts are on track and the City likes it

Shares for the oilfield services provider have more than halved in 2020, but investors are now piling in.

First-half results to 30 June 

• Revenue down 25% to $2.1 billion
• Adjusted profit (EBITDA) down 58% to $129 million
• Including exceptional items, a loss of $78 million, down from a profit of $139 million
• No interim dividend payment
• Net debt of $29 million 

Chief executive Ayman Asfari said:

"Our first half results reflect the deterioration in market conditions triggered by the Covid-19 pandemic and subsequent decline in oil prices.  In response, we are doing everything in our control to protect both the health and well-being of our people, suppliers and communities, as well as the long-term health of the business. 

"These swift and decisive actions are structurally reducing costs, conserving cash and maintaining our competitiveness. Furthermore, our longer-term strategy has transformed Petrofac into a more resilient, capital light business with a strengthened balance sheet and a clear commitment to sustainability.  I am confident that this strategy and our actions best position Petrofac for the recovery when it occurs.”

ii round-up:

Oilfield services provider Petrofac (LSE:PFC) today reported a more than halving in adjusted profits, hit by Covid-19 and the sharp fall in oil and gas prices. 

Given challenges and the uncertain outlook, it declared no interim dividend payment, although noted that it remained on track to deliver $125 million of cost savings in 2020 and up to $200 million in 2021.

Petrofac shares rose by nearly 10% in UK afternoon trading having more than halved year-to-date. Rival Wood Group's (LSE:WG.) shares are down by just over 40%, while shares of oil giant Royal Dutch Shell (LSE:RDSB) are down by close to 50% in 2020 so far.

Petrofac designs, builds, operates, maintains and manages oil and gas facilities in countries such as Saudi Arabia and Iraq.

The oil price has floundered this year as Saudi Arabia and Russia failed to agree on supply cuts and Covid-19 savaged demand. Brent crude is currently down by around a third in 2020. 

Customer new orders for the period have halved at Petrofac to $1 billion. Sales for its core engineering and construction division, accounting for around four-fifths of 2019 sales, fell by 28% to $1.6 billion. Covid-19 related project delays underlay the downturn. 

Activity on projects in Iraq and India were previously suspended given government enforced lockdowns. Stringent health protocols, supply chain disruption and travel restrictions have all impeded operations. 

In tandem with the results, and in line with its push to expand its clean fuels, renewables and carbon capture business, the company also outlined plans new sustainability goals. It hopes to achieve net zero emissions by 2030, reflective of broader targets and in line with those recently detailed by oil major BP (LSE:BP.).  

ii view:

Petrofac 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 wars, geopolitical tensions and now Covid-19 also need to be navigated. 

For investors, swift action to cut costs and conserve cash have been taken. A competitive position in the Middle East, where the cost of production is low, and moves to expand its position in gas, clean fuels, renewables and carbon capture, add to the positives. 

But the suspension of the dividend payment, a key attraction, the hit to oil demand from Covid-19 and the still ongoing Serious Fraud Office (SFO) investigation into business practices, all provide reasons for caution. For now, Petrofac remains a potential investment only for investors with an strong appetite for risk.  

Positives: 

• Cost saving targets on track 
• 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:

Strong hold