Petrofac Limited (“Petrofac” or “the Company”) is today holding its Annual General Meeting. In an update to shareholders, Chief Executive Ayman Asfari will comment:
In this unprecedented period, we are working tirelessly to safeguard the interests of all our stakeholders. We have implemented stringent health measures to protect our people, clients and suppliers. We are working hard to mitigate the disruption caused by COVID-19 on project progress and lower oil prices on our bidding pipeline. And we have taken swift and decisive action to significantly reduce costs, retain our competitiveness and preserve the strength of our balance sheet.
Throughout this period, I have been overwhelmed by the dedication and commitment of my colleagues in taking the tough decisions necessary to best position Petrofac to weather this storm and to emerge stronger when markets recover.
Rene Medori, Chairman, will also comment:
This is the first year the Board will not have the opportunity to meet fellow shareholders in person, a necessary precaution to protect health at the current time. Nevertheless, I want to thank our shareholders, clients and other stakeholders for their continued support in these challenging times. Whilst the outlook remains unclear, the Board is fully supportive of the steps management are taking to preserve shareholder value.
Update on market conditions and our response
COVID-19 has caused significant disruption to our Engineering and Construction (E&C) projects due to stringent health protocols, supply chain disruption, travel restrictions and Government-enforced lockdowns. Whilst projects are still progressing, this has inevitably resulted in material delays in construction activity, which will not be recovered in 2020. Operations and maintenance activity in our Engineering & Production Services (EPS) business continues in all regions, albeit travel and social distancing restrictions are having a modest impact on activity levels and our training centres have been temporarily closed.
In addition, the collapse in oil prices has been the catalyst for clients to review their future investment plans. This is evident in delays to current tenders in E&C, as well as the recent termination of the US$1.5 billion Dalma contract. Whilst our bidding pipeline remains healthy and we are well positioned on several opportunities this year, we are now prudently anticipating that the majority of 2020 tenders will be delayed until 2021. Contract extensions in EPS, on the other hand, have remained strong with US$500 million of new orders secured year to date.
In order to mitigate the impact of the COVID-19 pandemic and lower oil prices on financial performance and order intake, we are taking action to reduce costs, retain our competitiveness and preserve the strength of our balance sheet. We are targeting additional savings to those announced on 6 April, and now expect to reduce overhead and project support costs by at least US$125 million in 2020 and by up to US$200 million in 2021. In addition, suspension of the final 2019 dividend payment and a 40% reduction in capital investment has conserved an incremental US$145 million of cash flow.
Looking ahead, it remains unclear how long COVID-19 and low oil prices will continue to disrupt business activity and impact business performance. Notwithstanding this, we have a healthy order book of secured revenue, a strong balance sheet, liquidity of US$1.2 billion (1) and we have taken immediate action to reduce our costs and protect our financial position. We believe that these factors, together with a capital light business model and a strong competitive position in the Middle East where the cost of production is low, will protect us against near term headwinds.
Our next market update will be the pre-close trading statement on our first half trading on 25 June.
(1) Gross liquidity of US$1.2 billion as at 30 April 2020 consisted of gross cash of $0.7 billion and $0.5 billion of undrawn committed facilities.
(2) Net debt was US$241 million as at 30 April 2020 and comprised interest-bearing loans and borrowings less cash and short-term deposits (i.e. excludes IFRS 16 lease liabilities).