Petrofac (LON:PFC) has today issued the following pre-close trading update ahead of the announcement of its full year results for the year ending 31 December 2019 on 25 February 2020.
· Trading in line with guidance
· New order intake (1) of US$3.0 billion in the year to date
· Net debt (2) expected to be around US$0.1 billion at 31 December 2019
Ayman Asfari, Petrofac’s Group Chief Executive, commented:
“We remain on course to report good results for 2019 in line with prior guidance, which reflect solid operational performance across the business and continued progress delivering our strategy.
“We are encouraged by the improving market outlook and our busy tendering pipeline, with US$39 billion of bid opportunities scheduled for award by the end of 2020 in both core and growth markets. We have seen delays in E&C bidding processes in the second half of the year, which has further impacted new order intake following the previously announced loss of awards in Saudi Arabia and Iraq in the first half. However, we are well-placed on several opportunities.
“We remain committed to our strategy of best-in-class delivery, enhancing returns and positioning the business for a return to growth. This year we have made further good progress improving cost competitiveness and divesting non-core assets, whilst maintaining a strong balance sheet. Looking forward, the fundamentals of our business remain robust, with an improving market outlook, a strong competitive position and excellent customer relationships. We are therefore investing in maintaining our bench strength and technical capability to position Petrofac for a recovery in new orders in 2020 and future growth.”
Engineering & Construction (E&C)
We are making steady progress delivering our portfolio of E&C projects, with revenue and net margin for 2019 in line with previous guidance. The BorWin 3 offshore grid connection project in the North Sea, the RAPID project in Malaysia, the Upper Zakum Field Development in the UAE, the Jazan North tank farm and Fadhili projects in Saudi Arabia, and the KNPC Clean Fuels project in Kuwait are all substantially complete. A major milestone was also recently achieved on the Lower Fars Heavy Oil plant in Kuwait with the commencement of steam injection. The Khazzan Phase 2 (Ghazeer) gas development in Oman remains ahead of schedule.
Our EPCm projects are also progressing well. The Al Taweelah Alumina Refinery in the UAE has started up, the Rabab Harweel Integrated Project in Oman has commenced production and gas has recently been introduced into TurkStream in Turkey.
New order intake of US$2.0 billion in the year to date (2018: US$4.3 billion(3)) includes: a lump-sum engineering, procurement and construction (EPC) contract for the Ain Tsila Development Project in Algeria; the Mabrouk Project in Oman; and, the second of two platforms for the HKZ offshore wind project.
Engineering & Production Services (EPS)
Engineering & Production Services is performing in line with expectations, with growth in Projects more than offsetting lower activity from Operations.
The recovery in market conditions is reflected in the acceleration of orders in the second half. In total, US$1.0 billion of awards and contract extensions have been secured in the UK North Sea, Oman, UAE, Malaysia and Azerbaijan (2018: US$0.7 billion(3)). We have also secured contract extensions in Iraq in the second half of the year.
The Group also recently completed the small bolt-on acquisition of W&W Energy Services (“W&W”). This provides the Group with an entry-level position in the US onshore operations and maintenance market and an additional platform for growth in the attractive Permian basin.
Integrated Energy Services (IES)
Net production is expected to be approximately 4.2 million barrels of oil equivalent (mmboe) in 2019 (2018: 6.2 mmboe), in line with expectations and reflecting divestments in the second half of 2018. The average realised oil price (net of royalties) for the year is expected to be approximately US$66 per barrel of oil equivalent (2018: US$59/boe) reflecting higher commodity prices and production mix.
Financial position
Group backlog stood at US$7.4 billion at 30 November 2019:
| Backlog (3) | 30 November 2019 | 31 December 2018 |
| US$ billion | US$ billion | |
| Engineering & Construction | 5.9 | 8.0 |
| Engineering & Production Services | 1.5 | 1.6 |
| Group | 7.4 | 9.6 |
Net debt is expected to be around US$0.1 billion at 31 December 2019 (2018: US$0.1 billion net cash) reflecting lower order intake and delays in some commercial settlements, which we expect to be resolved in 2020.
Outlook
We expect to report good results for 2019 in line with prior guidance. Group revenue for the full year is expected to be approximately US$5.5 billion. We continue to expect E&C results for the full year to be in line with management guidance, with revenue around US$4.4 billion and net margin at the low end of guidance. EPS revenue is expected to be around US$0.9 billion for the full year and net margin in the middle of our guidance range. IES is expected to report a modest profit reflecting average realised oil prices in the year.
Looking further forward, we continue to expect a decrease in Group revenue in 2020 reflecting low new order intake in recent years. We currently have c.US$4.0 billion of secured revenue for 2020, comprising US$3.4 billion in E&C and US$0.6 billion in EPS. As previously guided, net margins in E&C are expected to decline in 2020 reflecting a higher contribution from contract awards in lower margin markets and a c.US$30 million investment in maintaining bench strength and technical capability in 2020. This investment ensures Petrofac can capitalise on the improving market outlook and best positions the Group for a recovery in new orders in 2020 and growth thereafter.
Conference call
Alastair Cochran, Petrofac Chief Financial Officer, will host a conference call for analysts and investors at 8am today.
Notes
(1) New order intake comprises new contract awards and extensions, net variation orders and the rolling increment attributable to EPS contracts which extend beyond five years.
(2) Net debt comprises interest-bearing loans and borrowings less cash and short-term deposits (i.e. excludes IFRS 16 lease liabilities).
(3) On 1 January 2019, the EPCm business was reclassified from the EPS division to the E&C division. The EPCm business is presented within the E&C division in prior year comparative figures.
