Petrofac, listed on the London Stock Exchange’s Main Market (PFC), designs, builds, and manages infrastructure for the oil and gas sector. Over the 40 years since the company was founded Petrofac has built an international presence, employing more than 10,000 staff across 31 offices worldwide. It is a well-established contractor for national oil companies, including Saudi Aramco. Though specialising in the Middle Eastern and North African (MENA) market Petrofac has expanded into South East Asia, India, East Africa, the Americas, and the CIS. The company also provides North Sea decommissioning services.
Petrofac has won contracts for some notable mega-projects over the past decade, including the $3.4bn Galkynysh gas field project in Turkmenistan, the Salalah LPG extraction project in Oman (one of four in the sultanate together valued at more than $5bn), and the $1.4bn transformation of the Sriracha oil refinery in Thailand.
The company’s niche position as a key infrastructure provider for the vast MENA market established the solid reputation it enjoyed with investors for many years. Petrofac’s share price has touched heights of more than 800p, and it has consistently offered attractive dividends.
Three years ago this month that position was shaken when the Serious Fraud Office (SFO) announced the company was being investigated for suspected bribery, corruption, and money laundering, as part of an inquiry into Unaoil, a Monaco-based firm that has been accused of corruptly securing contracts for multinationals. Petrofac had employed Unaoil for consultancy work in Kazakhstan between 2002 and 2009.
Petrofac’s former global head of sales has since pleaded guilty to bribery relating to corrupt payments made to win multi-billion contracts in Iraq and Saudi Arabia.
Unfortunately for the company, the ongoing investigation has added interest for the media because CEO Ayman Asfari is a well-known donor to the Conservative Party. Senior Tories including David Cameron, Teresa May, and Liam Fox have made representations to Middle Eastern governments on behalf of the company.
Investor fears that the reputational damage would limit Petrofac’s ability to secure lucrative new contracts in the region caused its share price to tumble. The company was Europe’s worst-performing large-cap in 2017, and it suffered the indignity of being downgraded to speculative territory by rating agency Moody’s.
And as Petrofac’s most recent results have acknowledged, the company has indeed found it harder to win new deals. Results published this February warned revenues will continue to be depressed as the company suffers a hangover from low orders taken in recent years. Petrofac admitted it had not managed to secure any of the contracts worth $10bn in Saudi Arabia and Iraq for which it had been bidding in 2019: the company would normally have expected to secure around $3bn of those bids. The value of the company’s backlog of work stood at $7.4bn at the end of December 2019, against $9.6bn a year earlier.
Revenues in 2019 were down 5pc to $5.53bn, and earnings before interest, tax, depreciation, and amortisation (EBITDA) fell to $559m from $671m a year earlier. The company’s share price is currently hovering around 200p, down nearly 80% over the past three years.
Well-positioned – possibly
There is a case to be made that Petrofac is seriously undervalued at that price. Despite the shadow of the SFO investigation, this is a company well-positioned to continue to provide a comprehensive suite of engineering services to the MENA oil and gas sector. Petrofac has a track record of delivering onshore, offshore, subsea and subsurface services spanning the oil and gas asset life cycle, from conceptual greenfield developments through to brownfield modifications, late life and decommissioning. The company continues to turn a profit: in 2019 pre-tax profits rose to £148 million from £82m. Its market cap is nearly £700m.
Petrofac’s solid fundamentals should allow it, over time, to weather any further fall out from the SFO investigation. But it is less clear how it will emerge from the current crisis washing over the industry.
In an upbeat statement accompanying the February results, Ayman Asfari said Petrofac had the opportunity to bid for $37bn worth of contracts by the end of 2020. Update on 6th April in light of the Covid-19 fall-out sounded a much gloomier note.
The company is cutting capital expenditure by 40% (US$60 million), and project support costs by at least $100m, including a 20% reduction in staff. Previous revenue and margin guidance have been suspended, and the recommendation of a final dividend of 25.3 US cents ($85 million) announced in February has been withdrawn. The dividend payment will be reviewed when the impact of Covid-19 is better known. A further announcement on 16 April said that another consequence of the crisis was the termination of contracts for the Dalma Gas Development Project in Abu Dhabi, worth around $1.5bn.
Petrofac and the future of oil and gas
Petrofac’s historic strengths put it in a good position to benefit from a robust upturn in its core markets. As of April 2020, the company had liquidity of $1.1bn, and an order backlog of $8.2bn.
It remains to be seen how strong and long-lasting that upturn will be. Betting on an established services provider like Petrofac is rather like gambling on the wider prospects for the oil and gas sector. It is for investors to decide whether to continue to back the industry and its major players, or look to providers of new sources of energy perhaps better placed to serve a post-crisis economy that might have shifted on its axis.
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