Petrofac Limited results for the six months ended 30 June 2023

First half highlights

• Major increase in Group backlog to US$6.6 billion at 30 June 2023 (31 December 2022: US$3.4 billion) with strong order intake in both E&C and Asset Solutions
• Strong operating performance in Asset Solutions and IES, in line with expectations
• E&C first half EBIT loss of US$122 million reflecting the combination of lower levels of activity, onerous contracts with no margin recognition, adverse operating leverage, and US$67 million one-off write downs in contract settlements resulting from measures taken to protect full year cash flows
• Good progress in resolving historical contractual disputes to release working capital in the second half
• As a result of these actions, the free cash outflow of US$225 million in the first half is expected to largely reverse in the second half, maintaining a target of broadly neutral free cash flow for the full year
• Well positioned to continue backlog growth in both E&C and Asset Solutions, with a healthy pipeline scheduled for award in the next 16 months of US$60 billion

Tareq Kawash, Petrofac's Group Chief Executive, commented:

“Whilst the first half of 2023 reflected the challenges of the legacy contract portfolio, it was also Petrofac’s strongest period for new awards in many years. Thanks to the efforts of our people around the Group, we secured US$4.3 billion of new orders in core markets and in new energies. This high-quality backlog, a growing talented team and a diverse pipeline of future opportunities provides Petrofac with a strong base from which to move forward.

As I look ahead to the second half, my focus is on continuing to close out the legacy portfolio, improving our financial resilience and strengthening the balance sheet through the commercial settlements and advance payments due in the period, whilst delivering exemplary execution and selectively bidding to grow our high-quality backlog.

After four months as CEO, I am encouraged by the energy and drive in the business. We have demonstrated the strength of our competitive position with a succession of significant contract wins, providing us with confidence and momentum to deliver further progress in the second half and beyond.”

Divisional highlights

Engineering & Construction (E&C)

E&C nearly tripled its backlog in the first half, securing US$3.4 billion of new awards, in both our core markets, with long-standing clients, and in new energies.

In core markets, Petrofac won two major contracts, a gas compressor station for ADNOC in the UAE, and a petrochemical facility for Sonatrach in Algeria, broadening our portfolio within this sector in partnership with a petrochemicals technical specialist. In new energies, TenneT selected the Petrofac-Hitachi Energy partnership for a multi-year framework agreement covering six projects, worth approximately €13 billion, with the first contract already awarded and valued at over €2 billion, split between the partnership.

E&C financial results for the six months ended 30 June 2023⁽¹⁾

• US$3.4 billion of new order intake resulting in backlog of US$4.5 billion (31 December 2022: US$1.6 billion)
• Revenue down 32% to US$0.5 billion (H1 2022: US$0.7 billion)
• EBIT loss of US$122 million

The financial performance in the first half reflected low levels of activity on the legacy portfolio of contracts, with the new awards driving the growth in backlog but with minimal impact on other financial metrics in the period. Revenue in the first half reflected the lower levels of activity from the lower opening backlog compared with the prior period. The first half EBIT loss of US$122 million included approximately US$67 million of one-off write-downs on legacy contracts resulting from actions taken by management to protect full year cash flows. E&C results also continue to reflect the impact of onerous contracts with no margin recognition, adverse operating leverage due to low levels of activity and an element of additional cost overruns on legacy contracts.

We remain focused on closing out legacy contracts, with five of the remaining eight contracts expected to be completed⁽⁵⁾ during the second half of the year or early in 2024. On the Thai Oil Clean Fuels contract, good progress is being made on the construction phases of the project. The execution plan remains in line with the update provided with the 2022 year-end results and operational and commercials discussions with the client are ongoing.

Bidding activity remains high with a total pipeline scheduled for award in the 16-months to December 2024 of approximately US$44 billion, of which US$8 billion is scheduled for award in 2023. Activity on new contracts is moving apace and we continue to build on our existing talent base through active recruitment across the project delivery disciplines.

Asset Solutions

Asset Solutions delivered a robust financial performance in the first half, with backlog growth resulting from the new order intake of US$0.9 billion in the period. It maintained its core 40% market share in the UK, and a renewal rate of over 80% for operations and maintenance contracts. In line with our strategy to leverage our UK centre of excellence and expand our geographic footprint into higher margin markets, in July, Petrofac was awarded a three-year multi-million pound integrated services contract for an FPSO⁽⁷⁾ vessel by CNRI in Ivory Coast, growing our presence in Africa.

Asset Solutions financial results for the six months ended 30 June 2023⁽¹⁾

• US$2.1 billion in backlog with a book-to-bill of 1.4x in the first half of 2023
• Revenue up by 34% to US$0.7 billion (H1 2022: US$0.5 billion)
• EBIT of US$14 million (H1 2022: US$33 million)

Asset Solutions also delivered revenue growth in the first half, underpinned by the strong order intake in 2022 and the year to date. EBIT margin decreased to 2.1% (H1 2022: 6.5%), in line with expectations, due to contract mix across the service lines, with the completion of historic high margin contracts in the first half of 2022, and a higher contribution of pass-through revenue.

In new energies, we saw increased levels of activity in the first half, as we continued to secure further early-stage awards and strategic alliances with technology providers, including an exclusive partnership with OCI Global to deliver their gasification-based green methanol projects. We remain well positioned over the medium-term to secure engineering, procurement and construction scopes of work, as well as other execution phase project work, as projects reach final investment decision. 

Integrated Energy Services (IES)

IES delivered another period of strong financial performance in the first half, with higher revenue and higher production compared to the prior period.

IES financial results for the six months ended 30 June 2023⁽¹⁾

• Net production up 16% to 640 thousand barrels of oil (kboe) (H1 2022: 553 kboe)
• Revenue increased 13% to US$63 million (H1 2022: US$56 million)
• EBITDA increased to US$48 million (H1 2022: US$44 million)

Cash flow and net debt

In the first half, there was a free cash outflow of US$225 million, which resulted in a net debt of US$584 million at 30 June 2023 (31 December 2022: US$349 million). This movement reflects both the operating loss and a net working capital outflow. The net working capital outflow was principally in the E&C operating segment due to delays in the settlement resolutions required to secure cash collections. Progress on these resolutions was made in the first half however, with corresponding receipts expected during the second half. Alongside cash advances on the new contract wins, we expect that this will result in a broadly neutral free cash flow for the full year. Liquidity⁽⁸⁾ was US$253 million at 30 June 2023 (31 December 2022: US$506 million).

In the short term, the Group is reliant on a small number of relatively high value collections in respect of the conclusion of historical contracts, settlements and new awards. The expected timing and realisation of these collections reflect management’s assessment of the most likely outcome. However, the resolution of these matters is not wholly within Petrofac’s control and, consequently, there remains a level of uncertainty which is disclosed within note 2.4 to the interim condensed consolidated financial statements.

Order backlog

The Group's backlog⁽⁶⁾ increased substantially to US$6.6 billion at 30 June 2023 (31 December 2022: US$3.4 billion), reflecting significant order intake in E&C (US$3.4 billion) and in Asset Solutions (US$0.9 billion), with three major EPC project awards in the first half of the year, which also included a six-project €13 billion framework agreement expected to provide an additional five future 2GW HVDC projects, with the first contract awarded in March 2023 and valued at over €2 billion, split between the partnership.

Outlook

The outlook for new awards in E&C is robust, with a total pipeline scheduled for award by December 2024 of approximately US$44 billion, of which US$8 billion is scheduled for award in 2023. Bidding activity also remains high, with US$6 billion of bids submitted.

E&C has secured revenue of US$0.5 billion for the second half of 2023, approximately a third of which from contracts with no future margin contribution. Due to the small portfolio of active contracts, and an adverse operating leverage, we expect an EBIT loss of approximately 10% in E&C for the full year, before the impact of the US$67 million of write-downs.

Asset Solutions has a strong pipeline of opportunities with US$16 billion scheduled for award by December 2024, of which US$7 billion is scheduled for award in 2023.

Asset Solutions has secured revenue of US$0.7 billion for the second half of 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. We expect EBIT to be second half weighted, with a healthy full year EBIT in 2023, albeit lower than 2022, reflecting the roll-off of certain high margin contracts and a higher proportion of pass-through revenue.

IES is expected to deliver another robust production performance in 2023, with production marginally lower than 2022. At US$85/bbl oil price, EBITDA is expected to be in the range of US$65 million to US$75 million, taking into account hedging.

At Group level, we expect cash flow to be broadly neutral in 2023. In the second half, we expect a positive tailwind from cash advances collected from new E&C awards won in the first half, coupled with an unwind of working capital. 

Financial statements

Click on, or paste the following link into your browser, to view the Group’s interim condensed consolidated financial statements for the six months ended 30 June 2023: https://www.petrofac.com/media/i4khgz50/petrofac-half-year-2023-results-financial-statements.pdf 

Presentation

Our half year results presentation and equity analysts call will be held at 8:30am today and will be webcast live via:

https://broadcaster-audience.mediaplatform.com/#/event/64bf64ce1c86d434a61289d6/registration

Notes

1. Business performance before separately disclosed items. This measurement is shown by Petrofac as a means of measuring underlying business performance. See note 4 to the interim condensed consolidated financial statements.
2. Attributable to Petrofac Limited shareholders.
3. The prior year numbers are restated; see note 2.6 to the interim condensed consolidated financial statements
4. 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.
5. 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.
6. Backlog consists of: the estimated revenue attributable to the uncompleted portion of Engineering & Construction division projects; and, for the Asset Solutions division, the estimated revenue attributable to the lesser of the remaining term of the contract and five years.
7. Floating Production Storage and Offloading (FPSO) vessel.
8. Gross liquidity of US$253 million on 30 June 2023 consisted of US$253 million of gross cash. Gross cash included US$9 million held in countries whose exchange controls significantly restrict or delay the remittance of these amounts to foreign jurisdictions. It also included US$127 million 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.