REG-Petrofac Limited Petrofac Limited: Trading Update

PetrofacAnnouncement

20/12/2022 07:15

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   Petrofac Limited ( PFC)
   Petrofac Limited: Trading Update

   20-Dec-2022 / 07:00 GMT/BST
   Dissemination of a Regulatory Announcement, transmitted by EQS Group.
   The issuer is solely responsible for the content of this announcement.

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                                PETROFAC LIMITED

                                 TRADING UPDATE

     • Continued strong  performance in  Asset Solutions  and IES  offset  by
       challenges in E&C
     • Expect a full year  EBIT loss in E&C  of approximately US$190  million
       for 2022, yielding  a total  Group EBIT loss  of approximately  US$100
       million

          ◦ Reflecting adverse commercial settlements, further unrecovered
            cost overruns in the legacy portfolio and cost increases on the
            Thai Oil Clean Fuel joint venture contract
          ◦ We will seek, working closely with our Thai Oil joint venture
            partners, to mitigate those increases over the remainder of that
            contract in addition to seeking to realise other portfolio
            upsides

     • Six legacy  E&C lump-sum  contracts  were completed  or  substantially
       completed (1) in the second half
     • Asset Solutions on track to deliver full year EBIT margin of 5-6%
     • Robust  IES  performance  driven   by  high  production,   operational
       performance and oil prices
     • Positive outlook for the recovery in E&C and continued growth in Asset
       Solutions, with  a  healthy  total Group  pipeline  of  US$68  billion
       scheduled for award in the next 18 months
     • Pipeline includes  bids submitted  of US$5.5  billion, and  a  further
       US$1.5 billion where we are at preferred bidder stage
     • Net debt  was  US$396 million  (2)  at  15 December  2022,  with  cash
       management partly offsetting the delays in E&C contract awards and the
       unrecovered cost  overruns  in the  E&C  legacy portfolio  during  the
       second half

    

   Sami Iskander, Petrofac’s Group Chief Executive, commented:
   "We have maintained strong  momentum in Asset  Solutions and IES,  however
   Group performance  for 2022  has been  impacted by  further cost  recovery
   challenges in E&C.  Good progress has  been made in the second half  where
   we have completed or  substantially completed (1) six lump-sum  contracts,
   with five of the  remaining eight active  lump-sum contracts scheduled  to
   complete in 2023.  This  will largely close-out  the mature E&C  portfolio
   that was heavily impacted by pandemic delays.  On the Thai Oil Clean  Fuel
   contract, we are working closely with our joint venutre partners to pursue
   the recovery of costs over the remaining course of the contract.

    

   “Looking forward, whilst E&C awards were slower than expected in 2022, the
   market outlook remains positive and we are well positioned on a number  of
   near-term prospects, with US$1.5 billion of E&C opportunities where we are
   at preferred bidder stage, and a further US$3.5 billion of bids  submitted
   in E&C. We expect these  opportunities to provide  backlog growth in  2023
   and lay the foundations for a return to profitability, positive free  cash
   flow and continued recovery thereafter.

    

   “In 2023,  we will  continue to  close out  the legacy  E&C portfolio  and
   associated commercial settlements. We retain our focus on cost discipline,
   unwinding working capital and  ensuring Petrofac has sufficient  liquidity
   to support our growth ambitions.”

    

                                 GROUP TRADING

   The Group’s performance in 2022 will reflect continued strong  performance
   in Asset Solutions and IES, offset by the challenges in the E&C portfolio.
   Management expects to report Group revenue of approximately US$2.5 billion
   and a full-year  business performance  EBIT loss  of approximately  US$100
   million for 2022.

    

                             DIVISIONAL HIGHLIGHTS

   Engineering & Construction (E&C)

   Second half  performance in  E&C  was further  adversely impacted  by  the
   mature, Covid-affected legacy contracts. The additional costs incurred  on
   these contracts due to  extended schedules have  not been fully  recovered
   from our customers,  resulting in  net cost  overruns. Six  of the  active
   lump-sum contracts were  completed or substantially  completed (1) in  the
   second half and five of the  remaining eight are scheduled to complete  in
   2023.

    

   In addition, we have recognised cost increases on the Thai Oil Clean  Fuel
   contract – where the  partners are jointly liable  for the performance  of
   the contract  –  driven by  a  reassessment,  with the  partners,  of  the
   forecast costs  to  complete  this  highly  complex  project.  This  is  a
   loss-making contract and  the expected full-life  loss has therefore  been
   recognised immediately. There  is no  cash outflow  associated with  these
   cost increases  in  2022, as  the  cash impact  will  be spread  over  the
   remaining life of  the contract.  Petrofac will continue  to work  closely
   with its partners to pursue the recovery  of costs over the course of  the
   contract and, in addition, seek to realise other portfolio upsides.

    

   Full year  revenues in  2022  are expected  to  be around  US$1.3  billion
   reflecting the lower levels of activity compared with the prior year.  The
   combined impact of  the cost  overruns described  above mean  that E&C  is
   expected to report a full year EBIT loss of approximately US$190 million.

    

   Year to date, E&C has secured new  order intake (3) of US$0.5 billion  and
   signed a collaboration with Hitachi to provide joint grid integration  and
   associated infrastructure  to support  the rapidly  growing offshore  wind
   market. The addressable pipeline for E&C remains healthy, although clients
   have been slower  to award  contracts in  the second  half than  expected.
   These awards are now expected to be made in 2023, and this is reflected in
   the healthy E&C pipeline of US$54 billion scheduled for award in the  next
   18 months.  This includes bids  submitted of approximately US$3.5  billion
   and a further US$1.5 billion where we are at preferred bidder stage. As  a
   result, the business remains well placed to deliver a sustained period  of
   growth in backlog in the near and medium term.

    

   Asset Solutions (AS)

   Asset Solutions has continued to  deliver robust performance, with  strong
   order intake in the year to date and a healthy margin.

    

   Full year revenue is expected to be approximately US$1.1 billion, and EBIT
   margins are expected to be between 5% and 6%, in line with guidance.  This
   includes the  impact  of lower  margins  in the  second  half due  to  the
   roll-off of  certain  historic  high-margin contracts,  as  noted  at  the
   half-year.

    

   Year to  date  order  intake  (3),  comprising  new  contract  awards  and
   extensions,  is  US$1.4  billion,   including  material  awards  in   Well
   Engineering and Decommissioning in Australia and the Gulf of Mexico. Asset
   Operations and Asset Developments secured  awards across the UK, MENA  and
   India.

    

   In New  Energy Services,  the  momentum gained  over  the last  two  years
   continues. The  market remains  active and  we have  secured a  series  of
   early-stage awards and strategic alliances with technology providers. This
   leaves us well  positioned over the  medium-term to secure  EPC and  other
   execution phase project work, as projects reach final investment decision.

    

   Integrated Energy Services (IES)

   IES’ financial  performance  during  the  year has  been  robust,  with  a
   significant increase in production and the benefit of high oil prices. Net
   production is  expected  to  be  between  3.0-3.5  kbbl/d  for  the  year,
   reflecting a  full year’s  production from  the East  Cendor  development,
   which commenced in  June 2021, and  the reinstatement of  the main  Cendor
   field production.

    

   The average realised oil price (net of royalties) (4) for the year to date
   is expected to  be approximately US$110/bbl  (2021: US$75/bbl),  including
   the impact of hedging,  with the full year  EBITDA expected to  marginally
   exceed the guided range of US$90 million to US$100 million.

    

                                 ORDER BACKLOG

   The Group's backlog (5) is expected to be approximately US$3.3 billion  at
   31 December  2022  (30 June  2022:  US$3.7 billion),  reflecting  industry
   delays to awards, partially offset  by continued new order intake  success
   in AS in the second half.

    

    

   Expected Backlog           31 December 2022 30 June 2022
                                   US$ billion  US$ billion
   Engineering & Construction              1.4          1.8
   Asset Solutions                         1.9          1.9
   Group backlog                           3.3          3.7

    

    

                       CASH FLOW, NET DEBT AND LIQUIDITY

   Net debt (2) was US$396 million at 15 December 2022 (30 June 2022:  US$341
   million). Liquidity (6) was US$451 million on the same date (30 June 2022:
   US$511 million). This reflects a delay in the expected receipt of  certain
   2022 settlements and milestone collections to early 2023, the delay in new
   awards and  the unrecovered  cost overruns  in the  E&C legacy  portfolio,
   partly mitigated through active cash flow management.

    

   We have engaged with our lenders  to extend the revolving credit  facility
   and a bilateral loan – totalling  US$230 million – which are scheduled  to
   mature in October 2023.

    

                                OUTLOOK FOR 2023

   The outlook for new awards in E&C remains robust, supported by high energy
   demand and increased focus on  energy security and energy transition.  E&C
   is well positioned on a number of near-term prospects, with US$1.5 billion
   of opportunities where  we are at  preferred bidder stage,  and a  further
   US$3.5 billion of bids submitted.  Bidding activity remains high, with  an
   18-month  pipeline,  including  bids  submitted,  of  approximately  US$54
   billion, of which US$33 billion is scheduled for award in 2023.

    

   E&C has secured revenue of US$0.9 billion for 2023, approximately a  third
   of which from contracts with  no future margin contribution. Coupled  with
   the adverse  operating  leverage due  to  the small  portfolio  of  active
   contracts, we  expect  a small  EBIT  loss in  E&C  in 2023.  Our  healthy
   pipeline and projected order intake in 2023 mean that we remain  confident
   of delivering a return to profitability and positive cash flow in 2024 and
   significant growth in the E&C business over the medium term.

    

   Asset Solutions has  US$2 billion  of bids submitted  as part  of a  US$14
   billion 18-month pipeline of  opportunities, with US$11 billion  scheduled
   for award in 2023.

    

   Asset Solutions  has  secured revenue  of  US$0.8 billion  for  2023.  The
   business is  expected to  continue to  perform well,  with revenue  growth
   driven by  focused  geographic expansion  and  new order  intake  in  Well
   Engineering & Decommissioning in 2022. We expect EBIT in 2023 to be  lower
   than 2022 reflecting the roll-off of certain high-margin contracts in  the
   first half of 2022  and a larger portion  of pass-through revenue in  Well
   Engineering & Decommissioning contracts.

    

   IES is expected to deliver another robust production performance in  2023,
   in line with 2022. At US$85/bbl oil price, EBITDA is expected to be in the
   range US$70 million to US$80 million, taking into account hedging.

    

   At Group level, we expect broadly neutral cash flow in 2023 as a result of
   new awards and the partial  unwinding of working capital balances,  offset
   by capex of US$25-35 million,  tax payments of US$70-80 million  (relating
   to the closure of prior periods’ assessments) and interest costs of  US$80
   million.

    

                                Conference call

   Afonso Reis e Sousa, Chief Financial Officer, will host a conference call
   for analysts and investors at 8.30am today.

    

   Analysts and investors can access the call on: +44(0)330 551 0200.
   Password: Quote ‘Petrofac’ when prompted by the operator

    

      

    

                                     NOTES

    1. Completed and substantially completed contracts: contracts where (i) a
       Provisional Acceptance  Certificate  (PAC)  has  been  issued  by  the
       client, or (ii) transfer of care  and custody (TCC) to the client  has
       taken place, or (iii) PAC or TCC are imminent and no substantive  work
       remains to be performed by Petrofac.
    2. Net debt comprises interest-bearing loans and borrowings less cash and
       short-term deposits (i.e. excludes IFRS 16 lease liabilities).
    3. New order intake is defined as new contract awards and extensions, net
       variation orders  and  the  rolling increment  attributable  to  Asset
       Solutions contracts which extend beyond five years.
    4. Average net realised price  is net of royalties  and hedging gains  or
       losses. It is based on sales volumes, which may differ from production
       due to under/over-lifting in the period.
    5. Backlog  consists  of:  the  estimated  revenue  attributable  to  the
       uncompleted portion of Engineering & Construction division  contracts;
       and,  for  the  Asset   Solutions  division,  the  estimated   revenue
       attributable to the lesser of the  remaining term of the contract  and
       five years.
    6. Liquidity consists  of gross  cash and  undrawn committed  facilities.
       Gross cash includes balances held in certain countries whose  exchange
       controls significantly  restrict  or  delay the  remittance  of  these
       amounts to foreign jurisdictions. It  also includes balances in  joint
       operation bank  accounts which  are generally  available to  meet  the
       working capital requirements of those joint operations, but which  can
       only be made available to the Group for its general corporate use with
       the agreement of the joint operation partners.

    

    

   ENDS

    

    

    

   Disclaimer:

   This announcement contains  forward-looking  statements  relating  to  the
   business, financial performance and  results of Petrofac and the  industry
   in which Petrofac operates.  These statements may  be identified by  words
   such as "expect", "believe",  "estimate", "plan", "target", or  "forecast"
   and similar expressions, or by their context. These statements are made on
   the basis  of current  knowledge  and assumptions  and involve  risks  and
   uncertainties. Various  factors   could  cause   actual  future   results,
   performance or events to differ  materially from those expressed in  these
   statements  and  neither Petrofac  nor   any  other  person  accepts   any
   responsibility  for  the  accuracy  of  the  opinions  expressed  in  this
   presentation or the  underlying assumptions. No  obligation is assumed  to
   update any forward-looking statements.

    

    

   For further information contact:

   Petrofac Limited

   +44 (0) 20  7811 4900

    

   James Boothroyd, Head of Investor Relations

    1 James.boothroyd@petrofac.com

    

   Sophie Reid, Group Head of Communications

    2 Sophie.reid@petrofac.com

    

   Tulchan Communications Group

   +44 (0) 20 7353 4200

   petrofac@tulchangroup.com

   Martin Robinson

    

    

    

   NOTES TO EDITORS

    

   Petrofac

    

   Petrofac is  a  leading  international  service  provider  to  the  energy
   industry, with a diverse  client portfolio including  many of the  world's
   leading energy companies.

    

   Petrofac designs,  builds,  manages  and  maintains  oil,  gas,  refining,
   petrochemicals and  renewable energy  infrastructure.  Our purpose  is  to
   enable our clients  to meet the  world's evolving energy  needs. Our  four
   values -  driven,  agile,  respectful and  open  -  are at  the  heart  of
   everything we do.

    

   Petrofac's core markets  are in the  Middle East and  North Africa  (MENA)
   region and the UK  North Sea, where  we have built  a long and  successful
   track record of safe, reliable and innovative execution, underpinned by  a
   cost effective and local delivery model with a strong focus on  in-country
   value. We operate in several  other significant markets, including  India,
   South East  Asia and  the United  States. We  have 8,000  employees  based
   across 31 offices globally.

    

   Petrofac is quoted on the London Stock Exchange (symbol: PFC).

    

   For additional information, please refer to the Petrofac website at
   www.petrofac.com

    

    

    

    

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   ISIN:           GB00B0H2K534
   Category Code:  TST
   TIDM:           PFC
   LEI Code:       2138004624W8CKCSJ177
   OAM Categories: 3.1. Additional regulated information required to be
                   disclosed under the laws of a Member State
   Sequence No.:   209769
   EQS News ID:    1517003


    
   End of Announcement EQS News Service

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References

   Visible links
   1. mailto:James.boothroyd@petrofac.com
   2. mailto:Sophie.reid@petrofac.com


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