Petrofac Limited (PFC) Earnings Call Transcript & Summary

Good morning. I'm delighted to welcome you to our full year results presentation for 2020. I'm Sami Iskander, Group CEO. I'm joined today by Al Cochran, our CFO, who will take you through the financial results shortly. This is our standard disclosure statement. Please read at your convenience. Today, I'll offer my reflections after 3 eventful months leading the group. I'll give you a brief overview of 2020 and key focus areas for 2021. I will cover the financials. Then I'll run through 2020 operational performance, outline my thoughts on strategy and how we are navigating our immediate challenges and opportunities, then we'll open for Q&A. At the outset, I want to assure you that I and my executive team fully understand our challenges. We are clear on the actions we must take to rebalance the company, reshape it and regrow our backlog. Despite the unexpected challenges of my first months, I have seen much to be encouraged by. We have outstanding people and expertise, whose resilience and commitment are evident. We operate in attractive core markets and have differentiated capabilities spanning the asset life cycle from design to decommissioning. These competencies, supported by flexible commercial models, robust local delivery and a technology neutral approach set us apart in the industry. Furthermore, the flexibility of our capital-light business gives us the ability to generate attractive free cash flow and attractive returns. Now to the areas to build on. Over the last few years, Petrofac has gone from being best-in-class in all metrics to disappointing stakeholders too often. The SFO investigation is clearly the elephant in the room. We will deal with this, and we will move on. Firstly, we're doing everything we can to help the SFO bring their investigation to conclusion as expeditiously as possible. Secondly, the Petrofac that I lead today has one of the best compliance regimes in the industry. The SFO aside, we have also suffered too many self-inflicted wounds with inconsistent performance and disappointing returns on some of our investments. My role is to restore your confidence, take the best qualities and capabilities that drove Petrofac early success and rebuild it into something new and relevant for today. We will rebuild our backlog by growing in addressable core markets and diversifying into new geographies. We are accelerating our pivot to new energies. We have a decade of offshore wind experience and are building strong subject matter expertise in blue hydrogen, carbon capture and storage and waste fuels. Lastly, we will simplify the organization to drive greater consistency and efficiency, portfolio-wide. Turning now to a brief snapshot of last year. 2020 was defined by the COVID pandemic and the collapse in oil prices, which together created an environment beyond parallel. Its operational and commercial impact is evident in our financial performance. Order intake was disappointing although 22% of it was in new energies, and EPS showed exceptional resilience with a book-to-bill of 1x. We did, however, protect the business through our early actions to conserve cash and cut costs, delivering above target cost savings of USD 140 million. We continued to serve our clients, clocking up 136 million work hours while navigating health, safety and travel controls, and we maximized our remote cloud-based applications and technical solutions. Our 2021 priorities can be summarized in 3 words: Rebalance, reshape and rebuild. Rebalance is about resolving the SFO, progressing outstanding commercial settlements and protecting the balance sheet and liquidity, all the while executing to the highest standards of service quality for our customers. Reshape is simplifying the company for consistent execution, enhanced cost of competitiveness and pursuing growth. From this simpler platform, we will rebuild the business, pursuing growth opportunities in both addressable core markets and new markets and by pivoting towards new energies. Turning now to look at the integration of ESG into our business model. How we do business is as important as why we do business. Together, our strategy and values drive our ESG practices to reshape Petrofac and, in a small part, our industry for a sustainable future. Our environmental focus is to reduce both our carbon footprint and our clients', supported by our ambition to achieve net zero by 2030 and to optimize our use of resources. Our social agenda is driven by people-first principles of safety, human rights and localization that support a diverse and inclusive environment. Governance is enshrined in our continued commitment to the highest ethical principles supported by culture of integrity, transparency and trust. Our performance reflects our commitments. Our Carbon Disclosure Project B rating is 2 grades above sector average. The intensity of our greenhouse gas emissions in our core businesses have almost half since the 2015 baseline year. Women comprise nearly 20% of our leadership and 30% of our Board. And shortly, we will publish our first full climate response report in line with the task force on climate-related financial disclosures. Last summer, we set several long-term milestones related to our net zero ambition by 2030, diversity and governance. In the planned period to 2023, we are targeting further reductions in Scope 1 and 2 emissions intensity through switches to renewable energy, emissions reduction schemes and utilization of cleaner transport. We will establish a program to assess our Scope 3 emissions baseline as we look to decarbonize our supply chain in future years. And we will set emission reduction targets grounded in climate science through science-based target initiative. Our social agenda will help us better reflect the communities we work in and promote diversity and inclusion in its widest sense. We will create in-country value beyond our contractual or regulatory obligations, continue to build our local capacity and channel project opportunities towards suppliers who fulfill our ethical and human rights due diligence criteria. Our unequivocal drive to remain a trusted responsible partner is underpinned by a well-developed, comprehensive and independently audited compliance and governance regime. With that, I will now hand you over to Al to take you through our financial performance.

Thank you, Sami, and good morning, everyone. As expected, our full year results for 2020 have been materially impacted by the COVID-19 pandemic and subsequent decline in oil prices. These delayed project schedules, increased associated costs and delayed new contract awards. However, swift management action has significantly mitigated the impact of these unprecedented market conditions by reducing costs, conserving cash and divesting noncore assets, resulting in a full year net profit of $48 million and net debt of $116 million. Group backlog declined to $5 billion, reflecting industry-wide dynamics with robust order intake and EPS, offset by low orders in E&C as clients deferred capital expenditure. In view of current market conditions, the Board has decided to continue to suspend dividend payments and does not expect to resume them until there is a sustained recovery in new order intake. So let's look at the full year results in a little more detail. At a group level, revenue of $4.1 billion reflects declines in our E&C and IES operating segments. EBITDA and net profit, excluding separately disclosed items, were also lower year-on-year, with higher project costs, changes in mix and the recognition of losses on a small number of E&C contracts, all reducing net margins. These headwinds were partly offset by cost savings and a lower tax expense. As a consequence, diluted earnings per share fell to $0.142. Reported earnings declined to a net loss of $180 million in 2020 after recognizing separately disclosed items of $228 million in the period. The majority of these were noncash charges incurred in our IES portfolio, most notably an impairment and fair value adjustment triggered by the sale of our Mexican upstream operations, and an impairment of the carrying amount of PM304, reflecting the decline in oil prices. Overall, the cash impact of separately disclosed items was only $19 million. At a divisional level, adverse market conditions had their greatest impact on Engineering and Construction. Revenue fell 31% to $3.1 billion, in line with guidance, reflecting lower project activity and lower variation orders. As you can see from the chart, net margin also decreased to 2%, driven principally by COVID-related cost increases and the recognition of losses on a small number of contracts. Consequently, net profit fell 78% to $62 million. As I commented in our December trading update, COVID-related project delays will be recovered in future periods. And we will also continue to benefit from both the structural reduction in our cost base and lower effective tax rates going forward. We therefore expect to burn $2.2 billion of E&C's backlog in 2021, and we are currently forecasting E&C net margins to grow modestly in the same period. Our reimbursable Engineering and Production Services business proved much more resilient in challenging market conditions. Revenue increased by 5% to $933 million with growth in projects more than offsetting a decline in operations as COVID restrictions reduced offshore manning and forced the temporary closure of our training centers. Net margins decreased to 4.2%, reflecting the expected decline in brownfield project margins as historic contracts rolled off as well as a lower contribution from associates, which were reclassified from IES at the beginning of the year. Once again, overhead cost savings and lower tax improved net margin. As a result, net profit declined 19% to $39 million. Looking forward, we expect revenue to increase this year, supported by robust order intake. As with E&C, we also expect a modest growth in net margins in EPS this year. Finally, financial performance in our Integrated Energy Services division was largely defined by a 42% year-on-year decline in average realized oil prices and the sale of our Mexican operations in Q4, both of which reduced revenue to $110 million. As you can see from the chart, these in turn depressed EBITDA, although the impact on profitability was mitigated by a significant reduction in operating and overhead costs as well as lower interest, tax and depreciation. As a result, IES reported a net loss of $18 million, in line with expectations. Following recent disposals, PM304 is our sole remaining upstream asset. Conservatively, we are forecasting lower production and continued losses in 2021 until the East Cendor development is fully onstream and the ongoing Cendor outage is resolved. One major highlight of our results is the positive impact of the swift measures we took to cut costs in response to COVID-19 and lower oil prices. Overall, these delivered gross cost savings of $140 million in 2020, some 40% higher than our original target. Despite this positive progress, we are ambitious to further improve our competitive position. Reshaping our business, investing in digital capability and increasing productivity will realize further savings, and we are targeting a $250 million reduction in costs in 2021 relative to the pre-pandemic levels. This represents a 30% reduction in less than 2 years, demonstrating how flexible our capital-light business model is, whilst also better positioning the business to win work as markets recover. I'd also like to remind you of 2 other things. Firstly, these initiatives pay back quickly with only $36 million of cash costs incurred in 2020. Secondly, IFRS 15 spreads the benefit of project support cost savings over the life of the relevant contract, modestly reducing the in-year impact. Moving now to the balance sheet. As expected, net contract working capital increased by 16 days in 2020 to $310 million, as DSO expanded at a faster rate than DPO. As the chart on this slide illustrates, the increase in days sales outstanding principally reflects an increase in billable WIP as clients took longer to approve and settle invoices. Both are evidence of clients managing their cash flow in tighter market conditions. However, I want to reiterate that this is a timing issue, and we are not currently concerned about our clients' ability to pay. Nevertheless, it is an unwelcomed development, and we're having to manage working capital judiciously. Looking forward, we do not anticipate a material working capital outflow in 2021. However, forecasts are very sensitive to the timing of commercial settlements and client behavior. In cash terms, the working capital outflow and the decline in EBITDA depressed cash conversion. However, lower tax and interest payments, together with actions to conserve cash, did significantly improve net cash flow. In 2020, we reduced CapEx by more than 60%, divested our Mexican operations and suspended dividends. Collectively, these measures resulted in a free cash outflow of $73 million and better-than-forecast net debt of $116 million. We also closed 2020 with $1.1 billion of liquidity, an ample covenant headroom. Since then, the group has successfully refinanced all its near-term maturities by issuing $410 million in commercial paper under the U.K. government CCF facility and extending $700 million of our committed facilities by 12 months. These preserve liquidity in line with business requirements as we continue to deleverage over time. All our actions in the last 12 months have been driven by a strategy to best position the business for recovery in market conditions and to capitalize on our transition back to a capital-light business. The divestment of noncore assets over the last 3 years means Petrofac is inherently a more cash-generative business, capable of generating higher returns. We've built on this foundation by taking swift and decisive action to improve our competitive position. We have structurally reduced costs in 2020, and we'll reshape the organization in 2021 to improve execution and to ensure it is the right size for current business volumes. Finally, we are continuing to work hard to protect our balance sheet by conserving cash and maintaining liquidity. All these actions will best position Petrofac to rebuild its order book and improve returns as markets recover. With that, I'll hand you back to Sami.

Thank you, Al. I'll now take you through our operational highlights, strategy and outlook. Turning to health and safety performance. The safety and well-being of our employees, suppliers and clients has been our top priority. Acting swiftly as the pandemic spread helped mitigate COVID's impact. The chart on the right shows COVID's challenges led to a slight deterioration in safety performance despite fewer work hours. Most regrettably, we had 2 fatalities in our operations. In response, we have enhanced our regime of visible safety leadership with weekly virtual site visits by all leadership members to support our teams on the ground in line with our Horizon Zero ambition. Our health and safety focus, combined with our people's tenacity and creative use of technology, kept projects moving and operations running. We achieved several important milestones such as the commissioning of BP's Ghazeer project in Oman, and successful integration of KOC's new crude oil control center. Nonetheless, the pandemic materially impacted E&C's operational performance. Progress has largely recovered in engineering and procurement although, as the left-hand chart demonstrates, on-site construction is still impacted by lockdown and travel restrictions. EPS' operational performance was more resilient and largely unaffected, other than by temporary closure of in-person training facilities. We closed 2020 with good revenue visibility for 2021 with $3 billion of backlog scheduled for execution in the year. $2.2 billion relating to E&C and $0.8 billion in EPS. This chart depicts key projects currently in execution, ranging from downstream projects in Oman and Thailand, to gas projects in Algeria and Russia, and offshore winds in the U.K. and the Netherlands. On to our building pipeline. As mentioned earlier, our second priority is to rebuild the group pipeline by pursuing opportunities in core markets, new markets and new energies. Nonetheless, we will be replacing mature prospects with more early stage opportunities where development will take a little longer. The 2021 E&C pipeline chart on the right reflects the short-term loss of the UAE market plus deferral of some opportunities now scheduled for 2022. This will inevitably impact 2021 order intake and revenue in the near term. However, a healthy rebound in opportunities next year, which I will cover in more detail later, presents a solid 2022 E&C pipeline of $28 billion, more consistent with our historic norms. EPS' 2021 pipeline remain resilient and healthy with $9 billion of opportunities. Based on awards secured year-to-date, plus our future pipeline, we expect EPS to deliver a book-to-bill in excess of 1x, which will deliver growth year-on-year. Looking closer at the E&C pipeline, you'll see from the chart on the left, our attractive exposure to upstream gas, downstream, most of which relates to clean fuels, and new energies in 2021. Opportunities are dispersed across core markets in Algeria, Kuwait and Oman and growth geographies of Russia, India, Libya and Europe, which comprises a large portion of new energy projects. Unsurprisingly, 39% of EPS' 2021 pipeline is U.K.-based. However, no single other country covers more than 10%, which indicates diversity of opportunities. Turning now to strategy. We exist to enable our clients to meet the world's evolving energy needs. Three cornerstones underpin our strategy: The organization that delivers it and the values that guide us everyday application. Combined, they support our purpose and the discharging of our responsibilities to all stakeholders. Our strategy encompasses best-in-class delivery, return to growth and superior returns. I will cover the tactics to support these later. As mentioned, our organization will be structured to drive consistent execution to a single Petrofac standard of excellence. Our values have been recently updated to reflect both our past heritage and the attributes that will drive our future success. We are driven, we are agile, we're respectful and we're open. They guide our everyday activities and are surpassed only by our uncompromising commitment to safety and ethical business practices. Looking deeper, to assure best-in-class delivery, we will simplify the organization, creating an optimal structure supported by technology, efficient processes and local customer-focused delivery to a global standard. We will develop our competitive advantage by amplifying what makes our offering unique, embedding digital solutions and leveraging our agility as a technology-neutral player, tailoring solutions to suit our clients' needs. To support our return to growth, we will put new focus on customer centricity, becoming closer to both existing and new clients to drive growth in core markets, pursue growth opportunities in selected new markets and accelerating our expansion into new energies. A new value assurance framework will help drive consistent execution across the portfolio, complement our existing risk management processes and enhance our ability to deliver strong, consistent margins with the flexibility of an asset-light business model and a strong balance sheet. Going into more detail on best-in-class delivery. We are creating a single technical function, 1tec, that will be the backbone of assuring consistent, efficient delivery to one global Petrofac standard, and providing independent value assurance across the group. It will eradicate the variances in execution that occurred in the past, which led to variable outcomes for customers and consequently, variable margins and financial outcomes for ourselves. Functional excellence will lead to execution excellence in E&C and EPS, and also accelerate the growth of our newly created new energies business, which will leverage the best of both businesses to deliver in this space. I am confident this new model will lead to better customer outcomes and restoration of consistent premium margins. I'd like now to focus on the return to growth pillar of the strategy. Whatever your view on the energy transition and decarbonization, all energies will be required to serve an increasingly global energy demand driven by a population growth of 2.2 billion people in the next 30 years. We have modeled a range of demand scenarios, state of policy, delayed recovery and net zero by 2050. Absolute energy demand is likely to increase between 2019 and 2050 in all scenarios. Renewables will grow rapidly. But oil and gas will still constitute a considerable proportion of total energy supply in 2050. By 2025, we expect the world to be spending around $850 billion on all forms of energy each year, presenting us with 3 compelling addressable markets. First, CapEx on oil, gas, refining and petrochemicals, our bread and butter. Second, CapEx in new energy markets, where we are accelerating our efforts. And thirdly, OpEx for upstream and new energies infrastructure. This chart shows the large and growing addressable market from which we will develop the pipeline. We expect the total annual addressable market to Petrofac to be over $100 billion by 2025, including $20 billion in new energies. We've currently excluded the UAE, Saudi Arabia and Iraq from the addressable market, although clearly, within the time frame, I will expect to reenter these markets. Turning to pipeline development. Our pipeline comprises opportunities that we have high graded based on their likelihood to proceed and our ability to compete. We anticipate E&C's pipeline for next year to increase, driven by more customer-centric focus and more local presence. While most new energy E&C opportunity in 2022 are offshore winds, we expect to add more as existing early-stage feed opportunities we are executing in carbon capture and storage and hydrogen and waste to fuels progress towards project sanction. The left-hand chart shows the geographies that contribute most to our pipeline growth. Our core geographies, which cover 31% of the 2022 pipeline underpinned the growth. We also see attractive potential in India, Russia, Kazakhstan, which are countries that are familiar to us. We'll see good opportunity set in Libya, where we have been performing feed and pre-feed work today. New energy is also showing significant growth. The medium-term increase in renewable and low-carbon investment presents us with substantial opportunities, with our addressable market expected to rise from $3 billion today to $20 billion by 2025. While projects of scale have been predominantly in the more mature offshore wind sector, we are close to the inflection points where meaningful opportunities in other markets are likely to accelerate. We have selected our target markets based on areas where our differentiated skill sets add most value to clients. With a 10-year pedigree in designing and building offshore wind electrical substations, we are currently executing 3 European EPC projects. For carbon capture and storage, our extensive gas processing expertise is supplemented by a unique integrated service offering that spans facilities, pipelines and importantly, well engineering capability for the design, construction and monitoring of injection wells, an important component of any CCS project. We will combine our gray hydrogen experience from our downstream projects with our carbon capture and storage to deliver blue hydrogen solutions. Our EPC experience and process knowledge, combined with our refinery design, supports our growing credentials in waste to fuels. Finally, we are already supporting our traditional oil and gas clients to reduce their own emissions using our extensive experience in operating and optimizing oil and gas assets. To conclude, while recent history has been particularly challenging and near-term headwinds linger, Petrofac remains a compelling investment proposition over the medium term, driven by sustained recovery in addressable core markets, geographic diversification to target new market opportunities and accelerated growth in new energies. On this basis, we expect to deliver $4 billion to $5 billion in group revenue in the medium term. We are targeting $1 billion of this to come from new energies, which would represent at least 20% of group revenues. With a simplified structure driving consistent local delivery, customer centricity at the heart of business pursuit and execution and an enduring commitment to ESG, we expect to return to achieving differentiated net margins, enhanced by our transition to a leaner, low-cost business enabled by digitalization and automation. Finally, with our asset-light business model, we expect to return to a net cash position and repay the trust our investors have placed in us with the reinstatement of a sustainable dividend as a key element of a disciplined capital allocation framework. With that, I'll now hand you back to the operator to open for the Q&A.

[Operator Instructions] And our first question comes from the line of Guillaume Delaby from Societe Generale.

A very down-to-earth question, and I do apologize for that, but I think it's important. When I look at the cash flow statement for 2020, there doesn't seem to be a lot of cash inflow from disposals. So maybe, could you remind us your plan for the remaining disposals? I know you are discussing $80 million with Perenco. But could you basically tell us what are the likely cash inflows? And what are the remaining disposals, which are on the agenda?

This is Sami. I'll maybe say a few words and then I'll pass to Al to elaborate a little bit more. I think in essence, what you should read, and I think what you have already read with a very good question, is that the majority of the proposals that we have are done. The focus of us as a company right now is to do the collections, and you referred to some of the disputes and settlements that we have with a few of the counterparties. And clearly, moving forward with some of the -- maybe slightly different from disposal, some of the commercial settlements with customers. Al, would you like to add to that?

Sure. So first, on 2020 divestment proceeds. The one thing just to be aware is, whilst we actually secured $140 million of gross proceeds, it is split into 2 different parts of the cash flow statements. So we had to deconsolidate $65 million of Mexican cash and $44 million of proceeds actually went through the working capital line. So that reconciles to the $31 million net proceeds you see in the cash flow statement. But actually, gross proceeds were $140 million as we previously announced. In terms of 2021 and beyond, we have already secured -- well, already agreed deferred and contingent consideration of up to $309 million. We've only actually recognized $94 million out on the balance sheet. So we significantly risked that. The majority of that $309 million is in Mexico. It's $230 million, $80 million of which is disputed. We've started arbitration against Perenco to recover that amount. And then we have a further $79 million of deferred and continued consideration, principally in GSA in the next couple of years.

Our next question comes from the line of Amy Wong from UBS.

I have a couple of questions, and good to virtually see you, Sami, for the first time. First question is in driving that growth that you're talking about in your strategy update, can you talk about some of the changes that you've had to put in place in Petrofac? Or potentially any changes that you look to make to either in business development or any part of the organization you want to talk about to make sure you can capture that kind of growth? That's my first question.

Okay. Would you like me to answer? You -- Yes. Listen, I think -- good question, Amy. Thank you. And nice to -- meeting you virtually, but not on screen as well. I think -- when I think of the 3 pillars of the strategy -- and those are really not new. It's maybe going slightly back to the knitting with a few -- with quite a few changes. So what is best-in-class? Best-in-class is about continuing to do what we were doing, or accelerating our pivoting to digital -- the -- our local, and I'm going to discuss that a little bit more, our technology-neutral approach. So that's really simplifying the organization. That's a big change for our company. And what is simplifying the organization? It's really building a heart for Petrofac. A heart, which I've referred to 1tec, or in the slide that was referred to as 1tec. It's really a central organization that will drive consistency and efficiency, getting our company wherever it is, to work to one single standard, one common and single standard, irrespective of the country, irrespective of the project itself. This will -- I mean, this is quite a big change in the company. It will break down silos. It will create efficiency, but it will create excellence and it will drive excellence -- functional excellence. The second is really to talk about -- and when I talk about that, sorry, staying on that theme for a second, I'd like to think of functional excellence, driving execution excellence. So if you think about it, there is part of the company which defines how we do things and another part of the company that does things, executes. And that has always been sort of mixed in our company, to a large extent. So separating that will create efficiency and consistency. When I speak of a client-centric approach, again, it's building on what we are, Petrofac, we've always said how local we are. But we've been local in a few countries and primarily consumed by -- not consumed, [ busy ] in the core markets. I think -- as you think of the EPC market and how it shifted slightly away from these big projects that come through on ITT, through the mail, to a large extent, to some of those, but many smaller projects, the $200 million to $500 million, $600-odd million that are locally driven. So how do we pivot our business development organization to -- not to change, not to break the machine from what it is today, but to build on that machine to a more local presence, more customer-focused presence in the countries where we are and really in line with the strategy of country -- core countries, new countries and pivoting to new energies. And then the last part, and again, many of the things we have, we have a good risk management process, but how do we enhance that through assurance. So if you think about as functional excellence, execution excellence and assurance. And assurance is what I think about as technical governance, if you wish. As projects start moving from an ITT into engineering, into proposals and supply chain, into project management and execution, we need a small group to see that we don't let things fall through the cracks. When Al spoke and said there are a few -- losses on a few number of projects, these are the opportunities we missed, we didn't see. And when we saw them, it was too late. So it's really getting really the engine firing on all 6 cylinders or 8 cylinders, if you want, and getting a consistent, efficient organization, technology enabled on one side and an assurance organization to make sure that we don't go -- fall through the crack. So this is, in a sense, the journey we've started. We are at the start of the journey there. It's -- [ we have that ]. But I mean, we're going at pace. I'm going definitely at pace because something that we need, and it's an opportunity. I mean I see this really as an opportunity. It's not just about getting our organization being efficient, but getting the organization to be excellent at what we do. I think it would be a miss -- maybe I'm going a bit long but I missed to say and of course, we're creating the new energies focus. And that is really how we are going to deploy the E&C skills that we have developed primarily in our core markets with some of the sort of client focus that we've developed within our EPS business. So how do we -- how could we deliver lump-sum turnkey in some of the -- which is needed, by the way. We're being asked for by the customers in some of these new markets that are not used to this -- or there isn't a depth in the supply chain in delivering those sorts of models, if you wish. So quite a lot of change, but it is, on one side, this is a difficult time, but on the other side, I have to say it is a very exciting story.

Certainly a lot to -- hopefully speak to you in the very near future to get more details on that. I just had a very quick follow-up. And this probably is for Al. On your refinancing and your available liquidity, how should investors think about what's been taken into consideration in terms of handling any kind of contingencies and your -- for example, if you were to get a settlement number from SFO, do you have sufficient liquidity? Can those funds be used to handle those types of payments?

Thanks, Amy. So look, we're sizing our facilities to the requirements of the business. The facilities are for general corporate purposes. We -- the premise of any, and the underlying assumption, of any potential or possible exposure from the SFO is that, if we were to be charged and if we were subsequently found guilty of a charge, that any subsequent penalty would be affordable. And you can see that in all our disclosure. But look, we're not going to speculate, and we haven't speculated on what that -- what the outcome of the SFO investigation will be.

Our next question comes from the line of Mick Pickup from Barclays.

A couple of questions, if I may. I think you mentioned during the call that your E&C headcount is down 27%. But your backlog's down 40% and your execution beyond 2021. So I'm looking at 2022, is down at just over $1 billion. So I'm a bit surprised there's not further cost savings announced. Is that -- can you just talk about that? And then secondly, you talked about $4 billion to $5 billion in the medium term. Obviously, if you've only got 1,100 in E&C for execution beyond this year, it looks like 2022 is going to be down again, given that you think that awards are going to be late this year. So I'm just wondering how you define medium term and how -- what the trajectory is to get to that point. If you could answer those as a start, that would be great.

Perfect. Thank you, Mick. Listen, I think when I arrived in late 2020 and I looked at the market, I mean, there were few things that we see in the market, which you do see, I don't know, a bit of easing, post-pandemic easing some sorts. There are green shoots. But clearly, at least, in my mind, those green shoots, which would lead to awards, would happen towards the latter portion of 2021. And at that point, we upped our cost savings, as Al mentioned, I believe, a little bit earlier, to the $250 million level. We've exceeded the target we have for this year, the target we set out of ourselves and delivered $140 million. And I'm confident that we will exceed the $250 million. But maybe if you allow me, let me talk to you about how I see going forward because I actually see an opportunity to reshape our company going forward and really restructure it. And in my answer to Amy, it's not just about simplifying the organization, and it's not just about functional excellence. This is really about building a very efficient organization, a very client-centric organization and an assured organization. And I think the outcome of that will be a machine that is well set for not only performing, but winning and performing and bidding, et cetera. I don't want to get drawn and I'm sorry about that, but I don't want to get drawn to a number, but I think the numbers are an output of this process. It's not an input to this process. It's not -- as you -- I can't remember the number, you said, 40% and 20% and so on. I mean I don't think there's -- this linear correlation between those 2. But the output of this process is an efficient, effective performing organization. And I think maybe, I'll probably stop here and maybe say that I won't -- I don't want to be drawn into a number, but I think as we progress, and you see our announcements soon, organizationally, as well as, hopefully, contract wins, it would -- to give you a bit more color and guidance to where I'm going. Good question around define medium term. I think it's -- I'm not trying to be cute with words here, but I think medium term is, in my view, is the coming 5 years. And I don't want to be sitting here to tell you, well, it's April 2026 or December 2025. I think this is giving us a bit of precision that may not be there. What I think I've tried to outline, I think I hope I've outlined to you and to colleagues, is we have an addressable market of $65-odd billion today, growing to over $100 billion. We are focused on converting that addressable market into pipeline. And clearly, as you rightly pointed, we have been adversely hit by the UAE announcements. And the pipeline is down to $20-odd billion, $11 billion and $9 billion. And what we tried to give you is color on how we're growing this pipeline by increasing in core markets. These are the markets of Oman, Kuwait, Algeria. The markets that we know and are in, but also where we see the growth in markets like -- in that core market, places like India, Russia, where we see the new energies progressing over the medium term, and that's rebuilding it back into the $28 billion pipeline in 2022. You're absolutely right. I mean there is -- we're replacing mature opportunities with more juvenile opportunities, which may impact short-term revenue. But the way I think about pipeline, if you'd allow me, is I'll give you a rule of thumb and then how we really think how we kind of marry those 2 in our heads. If you think of a pipeline, especially kind of in the era we're in with this COVID and delays and what's not, I take a pipeline -- you could take a pipeline, and I'm starting with the rule of thumb, by the way, is -- and think about 50% of that pipeline will be delayed. The customers will rebid. They will move forward projects out and so on. And then we've all spoken about the win rate of 20% to 30%, which I'm, to be honest, very comfortable with. Except probably I'll probably guide you towards the lower end of the range because of where the market is. Now that is the rule of thumb. When we go to what -- how we plan, these are specific projects that we are targeting. They're sort of -- it becomes more binary, ones and zeros. In Q1, we are bidding on, Al help me here, but $1.3 billion of bids and a very similar number in Q2. So these are real projects that we're bidding on that will decide, of course, where, if I get your drive, where '22 will be. But I hope what you're getting from this is that we're focused on building our pipeline. The pipeline has been hit. We're bringing the pipeline on the E&C side back to the $28 billion levels, not exactly where it was, but $28 billion level. EPS would be somewhere in the $10 billion to $11 billion. So we're kind of bringing it back over the coming 2 years, '21, '22, to, I won't say exactly where it was, but in the range of where it was. The precision on 2022 will depend absolutely on the awards, how we move the pipeline into awards and backlog this year. And I can't comment much further than that, but I hope that has given you the color of how I think about it and how hopefully you may think about it as well.

Yes. Magic. And just following up on that to Al. Obviously, I think Al mentioned that working cap will be flattish this year given that the business is shrinking this year and potentially shrinking into 2022. How do you keep working cap flattish? It tends to eke out towards the end of projects?

Well, it's a function of a number of contracts being completed. As you'll appreciate, we've got some very mature projects now. So they -- those projects typically release working capital at the end of -- when you reach the final commercial settlement. So if you balance that with the rest of the portfolio that is under construction, that's what gets us to the guidance that we expect working cap broadly neutral this year. I have to say though, I did caveat it in my formal words, working capital, as always, is very sensitive to the timing of commercial settlements. And indeed -- and that has been the case actually in the last 12 months, to client behavior. So you'll see from DSO that -- why has DSO increased? Well, clients are aggressively managing their own working capital by squeezing the suppliers, and we are in the middle of that chain. So whilst we're doing our best to manage our working capital position very effectively and to a large degree, successfully. We have absorbed some of that squeeze during the course of 2020.

Our next question comes from the line of Amy Sergeant from Morgan Stanley.

I had 2 questions, if I may. So first would be just to talk a bit more around the sort of new energies business and particularly, in terms of what kind of margins you might be thinking about in this business and whether that's sort of comparable to your existing work or increasing or decreasing? And then also, with the return to growth in the medium term and the $4 billion to $5 billion revenue target or revenue estimate. And just sort of, if we were to think about say, Saudi, Iraq, UAE coming back into that and would that be sort of incremental to that estimate? Or would that likely replace some of the other things that you've put in there? That would be great.

Thank you, Amy. Listen, let me start with the new energies, your first question. I think what we tried to do in new energies is focus. And we focused on 4 areas: carbon capture and storage, blue hydrogen, waste-to-fuels and wind. And in others, I think we'll be very opportunistic. But in those 4 areas where we're building our subject matter expertise and where we believe we have competencies and transferable skills and why. So if you take -- if we start with CCS. CCS is -- we have undoubtedly a lot of gas processing experience. But we have sort of the integrated services beneath it, whether you're talking pipelines, facilities. But more importantly and quite uniquely for a company like ours, well. We have a well engineering business within Petrofac for the design, construction and monitoring, which is quite unique for -- in any -- certainly not present in any of our competitors, and that places us well in that area. When we talk about blue hydrogen, I think we're building over our experience in gray hydrogen with what we've done in Oman, what we've done in Kuwait, what we've done -- we're doing in Thailand and really marrying it with the CCS to be -- to build our expertise there, and we're building our subject matter expertise as well. And I think this is an area we definitely want to focus on. And then when we talk about waste-to-fuels, it's very much building on the downstream experience, very similar technology. So taking that forward. And wind, we've been in it for over a decade now. So I think we have the know-how. And then we bring back to the addressable market, and that's huge, $20 billion by 2025, which gave a bit of validation to our $1 billion that we spoke about. How we're structuring it, I think, is -- it's really the opportunity and the challenge. I think if you look at this market, there's a tension, if I can put it this way, between our investors, the clients, wanting financing and therefore, a lump-sum turnkey and where these projects are -- the majority of the projects are, which is U.K., Northern Europe-type, very little in the Middle East, where the supply chain is not familiar with this sort of structure. And this is really why we've created our new energies group, which really to take the best of the processes because invariably, it will lead to lump sum. So the best of our processes out of our EPS -- EPC organization, sorry, and then build it with the execution, know-how and muscle and be there in the feed process or the upfront feed as part of the feed before we go into the bidding and execution. And that is really the strategy that we've put together. And maybe if I can add, sorry, what really differentiates our company from others. I think 3 things I think about. One is our integration across the service offering. And that is -- it has been a selling point in oil and gas, but it's very powerful in new energies. Most of our customers are new customers. One single focal point for the technology selection and for the execution. The second is this is technology neutral. We don't own technology, and I'm not promoting a single technology. We have been doing it in oil and gas where we kind of integrate the best technology, but again, very key new energies where there's a lot of technology out there, whether you talk about hydrogen, whether you talk about carbon capture, whether we talk about waste of fuel and utilizing our subject matter expertise, utilizing the experiences we've had to integrate with that technology. And lastly, and not -- definitely not leastly, we are not interested in -- we're not a consulting company. We're interested in outcomes. And this really plays into the flexible sort of commercial models, including lump-sum turnkey, where I think we're in, I won't say, a unique position, but in a strong position to capitalize on this market. That's on the first question. Amy, you need to help remind me again with the second one, which was...

Yes, no problem. So thank you for answering the first one. That's very interesting. And on the second would be looking at the sort of $4 billion to $5 billion medium-term revenue target. If Saudi, Iraq and the UAE were to come back into the play, would these displace stuff that's currently in there? Or would this be additional or better [ for you ]?