Petrofac: Short- term pain, long- term problems
PETROFAC provides construction and engineering services to the oil and gas industry. That’s not been the best place to be this year.
The collapse of the oil price back in March saw some existing contracts delayed or cancelled. New contract awards have been delayed and the pipeline of future projects is also likely to be disrupted.
As a result, Petrofac looks set to post revenues of $ 4billion (£ 2.958billion) this year, 27.3 per cent lower than 2019.
On the plus side, revenue in the smaller production services division has held up rather well. Its more maintenance- focused contracts are essentially non- optional for customers.
Still, given the tough market conditions, it’s no surprise management’s attention has turned to cost cutting.
The most recent round of cost savings are brutal. Most staff have seen their pay cut, and one in five jobs have gone altogether. Even then, the group’s looking to cut expenditure and slash the dividend to keep cash in the business.
All in all, revenues and profits are going to look pretty ugly this year. But we’re actually more concerned about trends in the order book.
Over the year, Petrofac’s landed just $ 1.4billion (£ 1.035billion) in new contracts. Subtract the work completed, and the net effect is a 31 per cent decline in the order book since last December. It now stands at $ 5.1billion (£ 3.771billion), well under two years’ business.
Winning new work is crucial, and will be top of the to- do list for incoming CEO, Sami Iskander.
However, we worry the pressing need to win business could lead to overly aggressive bids to win business. That would boost revenues, but at the expense of margins and profits.
That’s an age- old problem in the construction sector – and one Petrofac needs to avoid.
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