Business Overview
Petrofac Limited (LON: 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 have 31 offices with an employee base of around 11,500 professionals with over 80 nationalities. The company is having seven operational centres located across 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

 

Recent News

On 31st December 2019, Petrofac Ltd. announced that the company had been awarded a new contract and additional scope of work with PDO (Petroleum Development Oman). The additional scope of work award and the new contract hold a combined value of USD 130 million (approximately). The new contract is a part of Framework Agreement signed with PDO for a 10-year period in the year 2017 for offering EPCM (Engineering, Procurement & Construction Management) facilities for Oman’s Development Project in the Mabrouk North East. The company will execute full-field development work in a phased manner as planned. The company awarded with a 34-month project scope under which  Petrofac will develop 16 wells for gas production and export to Central Processing Plant at Saih Rawl. The project will also be integrated with Pipe Procurement Project, given to Petrofac in June 2019, at Mabrouk North-East Line. The additional scope of work award will provide 20 months contract at Yibal Khuff Project of PDO for providing Engineering, Procurement and Construction and Commissioning services. The company will construct and commission nine more wells for better production and putting gas pipelines between the main processing facility and Yibal “A”.

On 20^th November 2019, Petrofac announced that the company had been awarded a contract extension for delivering EPS (Engineering & Production Services) into new geographies and markets with a combined value of over USD 120 million.

On 20th November 2019, Petrofac announced the signing of Sale and Purchase Agreement with W&W’s (W&W Energy Services) shareholders. As per the agreement, the company will acquire an entry-level position in the Maintenance market and onshore Operations in the US.

Trading Update

On 17^th December 2019, Petrofac announced the pre-close trading statement for the year ending 31st December 2019. The company’s trading was in line with the guidance. On the year to date basis, the company’s new order intake was US$3 billion which includes the Engineering & Construction (E&C) new order intake at US$2 billion in the year to date basis. The company is making constant growth, delivering the portfolio of E&C projects, with revenue and net margin for the financial year 2019 in line with the prior guidance. Engineering & Production Services (EPS) is performing in line with the anticipations, with progress in projects more than offsetting lower activity from operations. In the UK North Sea, Oman, UAE, Malaysia and Azerbaijan, the awards and contract extensions for EPS have been secured for a total consideration of US$1 billion. In EPS, the company have secured contract extensions in Iraq in H2 FY19. Recently, the company has completed the small bolt-on acquisition with W&W Energy Services (W&W). In Integrated Energy Services (IES), the net production for the financial year 2019 is expected to be around 4.2 mmboe (million barrels of oil equivalent), in line with anticipations. In the year 2019, the average realised oil price is expected to be around US$66 per barrel of oil equivalent, an increase from the previous year. This would reflect the higher production mix and commodity prices. On 31st December 2019, the net debt is expected to be approximately US$0.1 billion, reflecting delays in some commercial settlements and lower order intake, which the company anticipate being resolved in 2020.

Financial Highlights -  H1 Financial Year 2019 (30^th June 2019, USD, million)


(Source: Interim Report, Company Website)
 
In the first half of the financial year 2019, the company reported revenue of $2,821 million, an increase of 1 per cent over H1 FY2018 of $2,785 million. The increase was driven by a good performance by the Engineering & Construction and Engineering & Production Services segments for the period. EBITDA dipped by 9 per cent to $305 million in H1 FY2019 as compared with the first half of the financial year 2018 data of $334 million. The company’s Business performance operating profit was $218 million in H1 FY2019 against $248 million in H1 FY2018. The company’s operating profit was $203 million in H1 FY2019 against an operating loss of $32 million in H1 FY2018. The company’s Business performance profit before tax was $208 million in H1 FY2019 against $228 million in H1 FY2018. The profit before tax for H1 FY2019 increased by $245 million to $193 million from a loss before tax of $52 million in H1 FY2018. The net profit of the company was $135 million in H1 FY2019 as compared to a net loss of $21 million in H1 FY2018. The group’s business performance basic earnings per share was 45.7 cents in H1 FY2019 as compared to 56.3 cents in H1 FY2018. The group’s reported basic earnings per share were 41.2 cents in H1 FY2019 versus a basic loss per share of 5 cents in H1 FY2018. The reported diluted earnings per share for H1 FY2019 was 40.5 cents against a diluted loss per of 5 cents in H1 FY2018.
 
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, reflecting an increase of 321 per cent.


ROCE (Return on capital employed)

ROCE indicates the operating profit the company is able to generate from its available capital. In the FY2018 period, 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 H1 FY2019 declined by 0.7 per cent to 11.7 per cent against 12.4 per cent reported last year for the same period. The reported EBITDA margin of 10.4 per cent for the H1 FY2019 stood slightly higher than the industry median of 10 per cent. The reported operating margin in H1 FY2019 increased by 8.3 per cent to 7.2 per cent from negative 1.1 per cent reported last year for the same period. The reported Pretax margin of 6.8 per cent for the H1 FY2019 stood higher than the industry median of 1.3 per cent. Net margin reported was 4.8 per cent for the first half of the financial year 2019, reflecting an increase of 5.6 per cent when comparedwith last year data for the same period. Return on equity for the first half of the Financial year 2019 stood at 18.9 per cent, which was significantly higher than the industry median of 1 per cent. On the liquidity front, Petrofac Ltd.’s current ratio was lower than the industry median of 1.33, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the group stood at 1.86x, which was higher as compared to the industry median of 1.03x, reflecting that the company is more leveraged as compared to its peers.
 
Share Price Performance
 

Daily Chart as of  January 15^th, 2020, before the market close (Source: Thomson Reuters)

Petrofac Ltdshares were trading at GBX 386.208 at the time of writing before the market close (at 9:23 AM GMT) on 15^th January 2020 and were up by 0.24% versus the previous day closing price. Stock 52 weeks High and Low are GBX 562.00/GBX 367.60. Stock’s average traded volume for 5 days was 665,819.60; 30 days – 1,057,781.70 and 90 days – 1,092,577.69. The traded (average) volume for five days was down by 37.06 per cent versus 30 days traded (average) volume. The group’s stock is reflecting significantly lower volatility as against the benchmark index based on the company’s beta of 0.56. The outstanding market capitalisation was around £1.33 billion, with a dividend yield of 7.67 per cent. The shares of the company have delivered a positive return of 0.08 per cent in the last week.

Valuation Methodology
Method 1: Price/Earnings Multiple Approach (NTM)

 

To compare Petrofac Ltd. with its peers, Price/Earnings multiple has been used. The peers are Polarcus Ltd (NTM Price/Earnings was 3.37), EnQuest Plc (NTM Price/Earnings was 4.58), ADES International Holding Plc(NTM Price/Earnings was 5.65), TechnipFMC PLC (NTM Price/Earnings was 13.74), and Tullow Oil Plc (NTM Price/Earnings was 8.12). The mean of Price/Earnings (NTM) of the company’s peers was 7.09x (approx.).

Method 2: Price/Cash Flow Multiple Approach (NTM)

 

To compare Petrofac Ltd. with its peers, Price/Cash Flow multiple has been used. The peers are Weir Group Plc (NTM Price/Cash Flow was 11.37), TechnipFMC Plc (NTM Price/Cash Flow was 9.92), Lamprell Plc (NTM Price/Cash Flow was 8.39), Hunting Plc (NTM Price/Cash Flow was 7.10) and Rosetti Marino SpA (NTM Price/Cash Flow was 16.32). The mean of Price/Cash Flow (NTM) of the company’s peers was 10.62x (approx.)

Growth and Risk Assessments

The company had good volumes of order intake from its core market and as well as from the emerging markets. In UAE, the company has 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

For the financial year 2019, the company expect to report excellent results and in line with previous guidance. The group revenue is expected to be around US$5.5 billion in FY19. In E&C, the revenue is expected to be approximately US$4.4 billion, and net margin will be at the lower end of guidance in FY19. In EPS, the revenue is expected to be approximately US$0.9 billion in FY19, and the net margin will be in the middle of the guidance range in FY19. The company is anticipated to report a decent profit in IES, reflecting average realised oil prices in 2019.

For 2020, the company persist in anticipating a decline in the group revenue, driven by a decrease in the new order intake in the current year. Currently, the company has secured revenue of US$4 billion for 2020, including US$0.6 billion in EPS and US$3.4 billion in E&C.
Looking forward, the fundamentals of the business stay strong, with a positive market outlook, excellent customer relationships and a strong competitive position. Therefore, the company is investing in maintaining technical capability and the bench strength to position the group for a recovery in new orders in 2020 with accelerating business growth in the near term.

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 current price of GBX 382.70 (as on 15^th January 2020, before the market close at 9:36 AM GMT) with low double digit upside potential based on 7.09x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.) and 10.62x 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 = 0.76839 GBP.

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