2015 – positive contract wins so far, focus on backlog “burn”
*Petrofac ended 2014 with an order book of c $21.2bn (a net gain of $7.2bn over close 2013). The order book is more sensitive to Onshore Engineering ($12.2bn / growth 56%) than other areas, Offshore Projects ($3.7bn) Engineering/ Consulting ($1.5bn) and Integrated Energy ($3.8bn). Using 2013 annual revenues of US$6.3bn the order book equates to approx. 3.3 years of revenues – giving an order book burn rate of around $525m per month. The challenge for Petrofac is to at least replace its burn rate with new contract wins. However the backlog is a decent cushion that gives the board time to manage the downturn.
*The uncertainty over order books, comprising the project cancellation and lower contracting have been factors undermining investor sentiment towards oilfield service companies. Unlike the US oil field companies that have far more exposure to global oil majors; Petrofac’s client base are mostly the NOCs (national oil companies) hence quasi government entities. NOC’s are less sensitive to owner pressure for capital spending cuts but are likely to want more competitive terms.
*2015 has got off to a good start with a $4bn contract win from Kuwait Oil Co for the central processing facility at the Lower Fars programme. This work runs over 52 months hence boosting the Petrofac order book at a critical time. We await further details from Offshore Projects and Operations which is exposed to the UK North Sea and Iraq, both difficult areas, and the impact of the Mexican government reforms which encourage the migration of existing contracts onto production enhancement contracts. This latter issue caused the updated guidance in November.
*The board’s updated guidance (24th November 2014) estimated net profit of between $580m- $600m (EPS $1.70/ 111p) for FY14 declining to $500m (EPS $1.44/ 94p) for FY15. The guidance reflected a number of assumptions including a) the forward curve in oil prices b) a break-even for the Laggan-Tormore project in Shetland. In terms of the forward price, the average Brent price for Q4 2014 was $77 around $20 above current levels.
Petrofac has de-rated sufficiently
We expect Petrofac will meet and possibly slightly beat revised EPS guidance. The guidance equates to a historic P/E rating of 7.4x which rises to 8.7x for 2015. These are depressed nearly ex-growth multiples for a company that is normally in the mid-teens in terms of multiple. Forthcoming preliminary results on the 25th February 2015 should provide guidance on the payout for 2015 but our suggestion is the dividend will be held. The board said it will pay the same final dividend for 2014 as 2013 hence a 43.8 cents final dividend and 65.8 cents annual.
Petrofac has been cited as a potential target for US giants Schlumberger or Halliburton due to its complimentary niche and relative size at about one tenth of its larger US peers. There is a high probability of sector M&A emerging as operators consolidate and reduce competition. Our view is Petrofac’s high margin portfolio is a highly desirable and affordable target for its larger peers.