Petrofac IMS

An oil & gas services company providing design and build for oil and gas infrastructures; operates, maintains and manages assets and trains personnel. I have a holding in my growth portfolio (epic code: PFC)

Petrofac issued an interim management statement today, which started well with "...We continue to deliver good operational performance across our portfolio of projects and are on track to achieve our guidance of modest growth in net profit in 2013..." and "...The Group has continued to secure new awards during the second half and we expect to exit 2013 with our highest ever year-end backlog... " , but ended by reducing expectation for 2014 and creating some uncertainty with respect to their 2015 target.

 

They expect Group net income in 2014 to show flat to modest growth year-on-year this is due to the re-phasing of two projects one in Abu Dhabi and one in Malaysia.  This is an approximate $100m decline in expectations for 2014 earnings to $650m, reducing EPS to $1.9. 

 

They also state that achievement of their 2015 earnings target* will be dependent on the timing of potential ECOM (Engineering, Construction, Operations & Maintenance)  contract awards during 2014.  The growth in earnings will need to be about 33% in 2015 to meet their earnings target, although they have achieved this in the past (2008), it was from a much lower base. 

 

Group backlog was declared as US$14.3bn at 31 October 2013 the same level as at their half-year and net debt position was US$0.5bn at 31 October 2013 an increase from US$0.4bn at the half-year.  They also anticipate remaining in a net debt position for the remainder of 2013 and throughout 2014, which they say will result in a significant increase in year-on-year interest costs in 2014.  I have voiced my concerns before here about their weak free cash flow in contrast to their earnings declarations.  They clearly require high levels of working capital and capital expenditure, of which both have increased at a faster rate than turnover over the past 5 years.

 

I first purchased PFC in February 2010 for 882p and sold half six months later after it rose 59% from an under-priced share to an over-priced one at 1406p.  It may be time now to sell the remainder of my holding, as the company struggles with generating sufficient cash returns on its investments.    

* Management's earnings target for 2015 was $862m.