Petrofac Limited (PFC) is an international company into oilfield services, providing integrated services to the manufacture and processing companies. The group builds and designs oil and gas facilities; manages, maintains and operates facilities on behalf of its consumer and trains personnel. The company also co-invests and develops in infrastructure and upstream projects. Petrofac Ltd. offers engineering services, including feasibility and conceptual studies and FEED (front-end engineering and design) to consumers across the oil and gas asset life cycle, on either an integrated or stand-alone basis. The company operates through a network of operational centres, offices and training facilities worldwide. The company presently has 31 offices with an employee base of around 11,500 professionals with over 80 nationalities. The company is having seven operational centres located in Kuala Lumpur, Woking, Mumbai, Chennai, Aberdeen, Sharjah and Abu Dhabi.

The current Non-executive Chairman is René Médori and was appointed in 2018 as Non-executive Chairman. Ayman Asfari holds the responsibilities of the Chief Executive Officer and joined the group in 1991. Alastair Cochran holds the responsibilities of Chief Financial officer.

Key Statistics




Top Shareholders

 

Trading Update

Petrofac Ltd. announced a trading update for the first half of the FY 2019 ending 30^th June 2019. The company’s performance remained solid and in line with the previous guidance set by the company. The company’s new order intake for the year to date stood at US$1.7 billion.The company’s net debt is expected to be US$0.1 billion (approx.) for the period.

The company’s Engineering & Construction (E&C) business results are in line with the management expectations. The business is expected to generate revenue of around US$4.5 billion for the full year. The company’s net margins to be on the lower side of the guided forecasts. The new orders had been secured by the company amounting US$1.6 billion for the year to date.

The company’sEngineering & Production Services (EPS) performance was also in line with management expectations. The company had secured awards and extensions of US$0.1 billion for the period versus US$0.5 billion in H1 FY2018. 

The company’s Integrated Energy Services (IES) is expected to have a production (net) of (approx.)  2.1mmboe (million barrels of oil equivalent) for the H1 FY2019 against 3.1 mmboe in H1 FY2018. The company is expected to get average realised oil price with a net of royalties of US$69 per boe (barrel of oil equivalent) versus US$56/boe in H1 FY2018.

Segments

The company’s operations are divided into three reportable segments being Integrated Energy Services (IES), Engineering & Production Services (EPS) and Engineering & Construction (E&C) for management purpose. The company’s E&C segment provides engineering and construction facilities at a fixed price to the oil and gas industry. EPS segment provides reimbursable engineering and production facilities to the industry. IES business is engaged in providing value from current asset collection. In the financial year 2018, the company’s revenue, net profit and EBITDA from its Engineering & Production Services and Integrated Energy Services had increased as compared to the previous financial year. Engineering & Production Services posted revenue of $1,479 million in FY2018 versus $1,392 million in FY2017. Integrated Energy Services revenue stood at $282 million in FY2018 as against $228 million in FY2017. The revenue from Engineering & Construction had declined for the period.

Financial Highlights – Financial Year 2018 (USD, million)


(Source: Annual Report, Company Website)

For the Financial Year ending 31^st December 2018, the company reported revenue of $5,829 million, a decrease of around 9 per cent over FY2017 of $6,395 million. The decrease was due to the low revenue generated by the Engineering & Construction segment in the current financial year. Gross profit decreased by $66 million from $785 million in FY2017 to $719 million in FY2018. EBITDA dipped by 10 per cent to $671 million as compared with the financial year 2017 data of $748 million.
 
The company’s Business performance operating profit was $515 million in FY2018 against $560 million in FY2017. The company’s operating profit was $159 million in FY2018 against $104 million in FY2017.
 
The company’s Business performance profit before tax was $463 million in FY2018 against $501 million in FY2017. The profit before tax for FY2018 increased by $62 million to $107 million from $45 million in FY2017.
 
The Business performance net profit of the company was $350 million in FY2018 as compared to a $363 million recorded in FY2017. The net profit of the company was $61 million in FY2018 as compared to a net loss of $27 million in FY2017.
 
The effective tax rate decreased by 3.1 ppts to 24.4 per cent in FY2018 as compared with the fiscal year 2017 of 27.5 per cent. 
 
The group’s business performance basic earnings per share was 104.4 cents in FY2018 as compared to 106.2 cents in FY2017. The group’s reported basic earnings per share were 18.9 cents in FY2018 as compared to negative 8.5 cents in FY2017. The business performance diluted earnings per share for FY2018 was 102.3 cents against 106.2 cents in FY2017. The reported diluted earnings per share for FY2018 was 18.6 cents against negative 8.5 cents in FY2017. The dividend per share was 38.0 cents, which remained flat as reported last year.
 
Key Performance Indicators
 

 
Reported net profit
This indicates the net profitability of the company during the financial year. Petrofac Ltd generated a net profit of $64 million in FY2018 versus a net loss of $29 million in FY2017.


ROCE (Return on capital employed)
ROCE indicates the operating profit the company is able to generate from its available capital. In the FY2018 the company’s ROCE stood at 26 per cent as against 22 per cent in FY2017.


Free cash flow
This indicator shows the cash generation capability of the company from its operations. The company remained highly cash generative with $921 million in FY2018 versus $281 million in FY2017.

Cash Conversion
This KPI measures the conversion of EBITDA to cash. In the financial year 2018, the company’s cash conversion stood at 101 per cent versus 77 per cent in FY2017.

Financial Ratios
  
 
The reported gross margin in FY2018 increased by 0.2 per cent to 12.3 per cent against 12.1 per cent reported last year for the same period. The reported EBITDA margin of 11.1 per cent for the FY2018 stood lower than the industry median of 16.2 per cent. The reported operating margin in FY2018 increased by 1.1 per cent to 2.7 per cent from 1.6 per cent reported last year for the same period. Net margin reported was 1 per cent for the financial year 2018. Return on equity for the Financial year 2018 stood at 7.9 per cent, which was higher than the industry median of 3.2 per cent. On the liquidity front, Petrofac Ltd.’s current ratio was lower than the industry median of 1.35, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Petrofac Ltd.’s was 1.54x, which was higher as compared to the industry median of 0.70x, reflecting that the company is more leveraged as compared to its peers.  

Share Price Performance

Daily Chart as at July-17-19, before the market close (Source: Thomson Reuters)

On July 17, 2019, at the time of writing (before the market close, at 12:27 PM GMT), Petrofac Ltd. shares were trading at GBX 415.40, down by 0.93 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 679.00/GBX 376.40. At the time of writing, the share was trading 38.82 per cent lower than the 52w High and 10.36 per cent higher than the 52w low. Stock’s average traded volume for 5 days was 1,254,557.80; 30 days – 1,853,095.70 and 90 days – 1,668,794.47. The average traded volume for 5 days was down by 32.30 per cent as compared to 30 days average traded volume. The company’s stock beta was 0.60, reflecting lower volatility as compared to the benchmark index. The outstanding market capitalisation was around £1.46 billion, with a dividend yield of 6.91 per cent.

Valuation Methodology
Method 1: Price to Book Value Approach (NTM)

 
To compare Petrofac Ltd. with its peers, Price/Book multiple has been used. The peers are Tekmar Group Plc (NTM Price/Book was 3.94), Spectrum ASA (NTM Price/Book was 2.49), Ocean Yield ASA (NTM Price/Book was 1.27), De Raj Group AG (NTM Price/Book was 1.45) and Endur ASA (NTM Price/Book was 1.97). The average of Price/Book (NTM) of the company’s peers was 2.22x (approx.)

Method 2: Price to Cash Flow Approach (NTM)


To compare Petrofac Ltd. with its peers, Price/Cash Flow multiple has been used. The peers are Vallourec SA (NTM Price/Cash Flow was 9.72), Subsea 7 SA (NTM Price/Cash Flow was 6.14), Fugro NV (NTM Price/Cash Flow was 3.73), CGG SA (NTM Price/Cash Flow was 3.42) and Eidesvik Offshore ASA (NTM Price/Cash Flow was 2.71). The Average of Price/Cash Flow (NTM) of the company’s peers was 5.15x (approx.)

Growth and Risk Assessments

The company had good volumes of order intake from its core market and as well as from emerging markets. In UAE, the company had nearly completed UZ750 offshore project in Upper Zakum oil field and company’s share is valued at US$3.5 billion. The company had won many contracts in growing markets like Thailand and India. The company had good organic growth in geographical areas such as Southeast Asia, CIS, Sub-Saharan Africa and India. Furthermore, the sector is exposed to political, financial and operational risks, each of which has the potential to impact company/industry performance significantly.

Conclusion

The company carries out the development, engineering, construction and facilities operation and maintenance, and provides training services for the oil and gas industry. Despite week Top-line performance,the company had reported a robust Bottom-line performance. Company’s revenue from Engineering & Production Services and Integrated Energy Services had increased in the current financial year.
 
Diversified operations, strong domain expertise in Engineering & Construction and order backlog strengthened its operations. New contracts, increasing demand for oil and petroleum products and upstream investment forecast for 2019 could provide new growth opportunities to the company.
 
The company had very little exposure in European markets; thus, its operations are not much impacted by the ongoing uncertainty created due to Brexit. However, fluctuation in oil and gas prices, risks associated with international operations and stiff competition could affect its operations.
 
Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 419.30 (as on 16th July 2019) with high single-digit upside potential based on 2.22x NTM Price/Book (approx.) on FY19E book value per share (approx.) and 5.15x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.).
 
*All forecasted figures and peers have been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.8065 GBP
*The buy recommendation is also valid for the current price as covered in the report (as on July-17-19).

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