24 June 2020
Petrofac Limited - Trading update 24 June 2020
Petrofac issues the following pre-close update on trading ahead of the announcement of its half year results on 11 August 2020, and on the swift and decisive action the Company is taking to respond to the COVID-19 pandemic and sharp fall in oil prices.
- Continuing to safely deliver our projects and operations worldwide
- On track to deliver US$125 million of cost savings in 2020 and up to US$200 million in 2021
- Trading and awards materially impacted by COVID-19 and the sharp fall in oil and gas prices
- New order intake (1) of US$1.0 billion in the year to date
- Net debt (2) of c.US$139 million at 31 May 2020
Ayman Asfari, Petrofac’s Group Chief Executive, commented:
“The health and well-being of our people, suppliers and our communities continues to be our top priority. I want to personally thank all of our employees for their hard work and dedication in enabling us to deliver safely for our clients in the most challenging market conditions. Nevertheless, despite all of our efforts, the COVID-19 pandemic and sharp fall in oil prices have materially impacted financial performance and new orders in the first half of the year.
“In these unprecedented times, we are doing everything within our control to protect the long-term health of the business. We have taken swift, decisive action to structurally reduce costs, preserve cash and maintain our competitiveness. In doing so, we have preserved core capability whilst continuing to invest in digitalisation and our client relationships. Looking ahead, it is unclear how long market conditions will continue to disrupt business activity and delay awards. Notwithstanding this, we have a tendering pipeline of US$48 billion of opportunities scheduled for award by the end of 2021 and an order book that gives us good near-term revenue visibility.
“Over the last three years we have transitioned Petrofac back into a more resilient, capital light business and strengthened the balance sheet. We have also grown our position in gas, clean fuels, renewables and carbon capture. This strategy, combined with the accelerated and structural reduction of our cost base and continued investment in capability, best positions Petrofac to weather the current storm and emerge stronger as markets recover.”
Engineering & Construction (E&C)
E&C financial performance for the first six months of 2020 has been significantly impacted by the deterioration in market conditions. First half revenues are expected to be around US$1.6 billion, driven by COVID-19 related project delays. Furthermore, we expect first half E&C business performance net margins to be between 2.00% and 2.25% largely reflecting COVID-19 related costs, project mix and commercial settlement of the Jazan project at completion. Excluding this non-recurring settlement, the underlying impact of current headwinds on E&C margins in the period was c.1% due to swift management action to reduce costs.
COVID-19 has caused significant disruption to our E&C projects year to date. Activity on our lump-sum projects in Iraq and India was suspended in response to Government-enforced lockdowns. Elsewhere, progress has been materially impaired due to stringent health protocols, supply chain disruption and travel restrictions. Whilst projects are still progressing, this has inevitably resulted in material delays in construction activity, which will not be recovered in 2020. Restrictions are beginning to ease in several countries, but it is not possible to predict when construction activity will return to pre-COVID levels.
We have secured new orders worth US$0.4 billion in E&C in the year to date (1H 2019: US$1.6 billion), comprising the EPC contract for the Seagreen project and net variation orders. Seagreen will be Scotland’s largest offshore wind farm and is a landmark award in our continued diversification into renewable energy. The US$1.5 billion Dalma project, which was awarded in February 2020, was subsequently terminated by the Abu Dhabi National Oil Company in April following the collapse of global oil prices. Under the contract, Petrofac will be reimbursed for all costs incurred.
Engineering & Production Services (EPS)
EPS is also being affected by the deterioration in market conditions. First half revenue is expected to be around US$450 million, in line with the prior year comparable period. Modest growth in Projects has been offset by a decline in operations activity and the COVID-19 related closure of our training centres. Net margins for the first six months of 2020 are expected to be between 3.5% and 4.0% driven primarily by a contraction in brownfield project contract margins. The year-on-year reduction in margins has been partly mitigated by overhead cost reductions and a first-time contribution from associates.
Operations and maintenance activity in EPS continues in all regions, albeit COVID-19 related travel and social distancing restrictions are having a modest impact on activity levels and our training centres have been temporarily closed. In addition, the decline in oil prices is expected to reduce brownfield projects activity as upstream asset operators seek to defer capital expenditure and reduce operating costs.
We have secured US$0.6 billion of awards and extensions in the year to date (1H 2019: US$0.2 billion), a positive start to the year with contract awards in the UK North Sea, Iraq, Bahrain and the UAE. Of particular note was the award of an engineering and project management support contract for the Acorn Carbon Capture and Storage project, which will provide CO2 mitigation infrastructure essential for meeting the Scottish and UK Government Net Zero targets.
Integrated Energy Services (IES)
Net production is expected to be approximately 2.2 million barrels of oil equivalent (mmboe) for the first half of the year (1H 2019: 2.1 mmboe), in line with management expectations. The average realised oil price (net of royalties) for the first half is expected to be approximately US$39 per boe (1H 2019: US$69/boe), largely reflecting the fall in oil prices in the second quarter. Performance in the period has benefitted from a reduction in operating and other cost savings. Associate income from the Group’s investment in PetroFirst Infrastructure Limited entities were reclassified from IES to EPS from 1 January 2020.
Group order backlog (3) was US$6.4 billion on 31 May 2020:
31 May 2020
31 December 2019
Engineering & Construction
Engineering & Production Services
Net debt (2) was approximately US$139 million as at 31 May 2020 (31 December 2019: US$15 million net cash) reflecting the anticipated reversal of temporary favourable working capital movements at the end of 2019, disposal proceeds (4), the suspension of the 2019 final dividend and a reduction in capital expenditure. Liquidity was approximately US$1.2 billion at 31 May 2020 (5) (31 December 2019: US$1.5 billion (6)) following the repayment and retirement of US$75 million of facilities during the period. At the beginning of June, the Group retired a further US$200 million tranche of our US$1.2 billion revolving credit facility as planned.
We are on track 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 will conserve an incremental US$145 million of cash flow in the year.
Looking ahead, it remains unclear how long COVID-19 and low oil prices will continue to disrupt business activity and impact business performance. As a result, full year 2020 revenue and margin guidance remains suspended. However, we remain confident that the actions we have taken to strengthen the balance sheet, invest in our core capability and reduce structural costs will best position us for the recovery when it occurs.
Alastair Cochran, Chief Financial Officer, will host a conference call for analysts and investors at 8am today.
2020 Half Year Results
Petrofac is scheduled to announce its results for the six months ending 30 June 2020 on 11 August 2020.
(1) New order intake comprises new contract awards and extension, net variation orders and the rolling increment attributable to EPS contracts which extend beyond five years
(2) Net debt comprises interest-bearing loans and borrowings less cash and short-term deposits (i.e. excludes IFRS 16 lease liabilities)
(3) Backlog consists of: the estimated revenue attributable to the uncompleted portion of Engineering & Construction division projects; and, for the Engineering & Production Services division, the estimated revenue attributable to the lesser of the remaining term of the contract and five years
(4) Greater Stella Area divestment: US$57 million of deferred consideration was received in April 2020 ahead of the previously scheduled payment date in October 2020
(5) Gross liquidity of US$1.2 billion as at 31 May 2020 consisted of US$0.8 billion of gross cash and US$0.4 billion of undrawn committed facilities (difference due to rounding)
(6) Gross liquidity of US$1.5 billion as at 31 December 2019 has been restated from US$1.6 billion. The difference of US$100 million related to overdraft facilities, which the Group no longer considers to be liquidity on the basis that it is repayable on demand