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Fat Prophets
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Petrofac’s earnings outlook remains robust with a solid order book
While the Euro zone drama has twisted stock prices one way then another, latest results from Petrofac Middle East and Africa focused oil services group Petrofac (LON:PFC) suggest business as usual. A key indication of this is that the group’s order backlog at the 2011 midway point was US$11.4bn way above the US$6.9bn of 12 months previous.
By way of comparison revenue in 2010 came to US$4.3bn suggesting that the revenue for 2012 and 2013 are both covered by the order book. Meanwhile the overall order intake in the first half of 2011 came in at US$2.2bn which included new awards in Algeria, Malaysia and Iraq.
In terms of earnings the group stated that it is on track to achieve net profit growth of at least 15% in 2011 in line with expectations. The “medium term” target is to double 2010 recurring earnings by 2015... and this remains in place.
This is as the stock currently trades at around 13X next year’s earnings which falls to less than 9.4X 2013’s earnings. Petrofac has gross cash of US$1.8bn and with its strong order book looks set to achieve its medium term profits targets.
The group’s recently released interim results show 25% revenue growth and 7% profits growth. The confidence of the group is evident in a 26% increase in the dividend while return on capital employed remains above 60%.
Drilling down into the Petrofac engine of growth and the key division for the company in 2010 was Engineering and Construction. This generated 72% of revenue and 83% of net profits.
This division saw an order intake of US$1.6bn in H1 with new awards in Algeria, Iraq and Malaysia. Progress has continued on the South Yoloten development in Turkmenistan while the group completed a gas plant in Syria and a gas compression facility in Algeria.
Looking at the new awards in more detail and the group was awarded the US$1.2bn Salah Gas contract in Algeria in January 2011. The project lasts over 50 months and is aimed at supported gas production at 9 billion cubic metres per annum beyond 2013.
In Iraq the group achieved its first contract win in March 2011 at the Jajnoon field in the South of the country. The contract is worth US$240m and was awarded by Shell in order to meet production of 50,000 barrels per day. The project is expected to complete in the fourth quarter of next year.
In a reorganisation the Engineering and Construction division will from January 2012 joined by other divisions including Offshore Projects and Operations (16% of 2010 revenue and 4% of net profit) and Engineering Consulting services. The new division will be called ECOM or Engineering, Construction, Operations & Maintenance.
A new division called Integrated Energy Services (IES) will also be created and will encompass production solutions production solutions, energy developments and the training services business. The idea is to have an integrated offering that goes beyond engineering and construction.
Petrofac’s earnings outlook remains robust with a solid order book, continued contract wins and reorganization aimed at developing energy services opportunities. The de-rating of the stock makes it not overly expensive and earnings will continue to benefit from strong energy demand which should capital investment in the industry high.
