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Cash conversion key for Petrofac

A mixed outlook for Petrofac at the half-year mark despite record order books
August 27, 2014

Shares in Petrofac (PFC) slipped after the oil services group announced a 16 per cent reduction in cash profits for the half year, to $340m (£205m). But with revenue receipts weighted towards the second half of 2014, and a record order book in tow, the outlook for Petrofac is far from gloomy. Management felt able to reiterate guidance for full-year net earnings in the range of $580-600m. That said, a succession of profit warnings has left investors doubtful of Petrofac’s ability to hit its targets.

IC TIP: Hold at 1120p

Last year’s problems were linked to order delays – many of them out of Petrofac’s control - at the engineering, construction, operations and maintenance (ECOM) division. Though orders at ECOM have recovered strongly since, delays in commissioning the Greater Stella field in the North Sea has impacted the performance of Petrofac’s other division, Integrated Energy Services.

ECOM’s order backlog stood at $20.3bn at the period-end, up from $15bn a year earlier. Contract awards at ECOM include a $3.7bn clean fuels project in Kuwait, together with a $1.2bn deal serving the Khazzan gas project in Oman. Meanwhile, Petrofac’s Offshore Projects & Operations unit (part of ECOM) secured new contracts with North Sea driller EnQuest (ENQ), as well as a multi-year phased remit for a big wind farm off the coast of Germany. Post period-end, Petrofac also signed a potentially long-term deal with French energy giant GDF Suez.

These deals improve the visibility of the company's earnings, but investors' near-term focus is likely to be on the working capital position. Petrofac’s net debt, at $1.3bn, has all but doubled since the year-end, not least because the group’s capital and operating expenses resulted in a net working cash outflow of $229m in the period. Petrofac’s management said cash and profits would be “significantly” weighted towards the second half, due to the timing of projects. But it’s no use racking up orders unless they’re duly transformed into cash.

Shareholders might also be anxious at an element of geographical risk - notably Petrofac’s business in Iraq. However, management has stressed that less than 5 per cent of the group’s expected revenues for 2014 are at stake, and there has been no significant impact on operations to date.

Natixis predicts EPS of 103p for this year, rising to 117p in 2015.

PETROFAC (PFC)
ORD PRICE:1,120pMARKET VALUE:£3.9bn
TOUCH:1,119-1,121p12-MONTH HIGH:1,525pLOW: 1,057p
DIVIDEND YIELD:3.5%PE RATIO:12
NET ASSET VALUE:580¢*NET DEBT:65%

Half-year to 30 JuneTurnover ($bn)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
20132.83007122
20142.51884022
% change-9-37-44-

Ex-div:17 Sep

Payment:17 Oct

£1 = $1.66 *Includes intangible assets of $538m, or 156¢ a share