Petrofac Limited (PFC) Earnings Call Transcript & Summary

Good day, and welcome to the trading update call. At this time, I would like to turn the conference over to CFO, Alastair Cochran. Please go ahead, sir.

Good morning, everyone, and thank you for joining our regular preclose trading update. I'll make some brief comments on our statement before opening the line for questions. Overall, the group is trading in line with expectations as we approach the end of the first half of this financial year. Challenging market conditions and COVID-19 continue to impact new order intake and project schedules in E&C. However, our EPS business has demonstrated its resilience by growing both revenue and margins in the period. Furthermore, we are making good progress on our strategic objectives to rebalance, reshape and rebuild our business. We are driving technical and functional excellence to improve execution quality for our clients, and we remain on track to reduce costs by $250 million this year relative to pre-pandemic levels. Collectively, these and other actions are protecting margins and improving our competitive position as well as providing a strong platform from which we are pursuing growth. So before we turn to Q&A, let me explore the key highlights from today's statement in a little more detail. In E&C, first half revenues are expected to be around $1 billion, reflecting lower levels of activity, COVID-19 related disruption to project schedules and a modest rescoping of the Sakhalin contract. Nevertheless, this decline in revenue has been partly mitigated by lower tax as well as a reduction in project support and overhead costs. Consequently, we currently expect to report a modest increase in first half business performance net margins up between 2% and 2.5%, in line with guidance. In contrast, EPS is forecast to grow both revenue and profitability in the first half of 2021, benefiting from robust order intake and cost discipline. First half revenue is expected to be approximately $0.5 billion, reflecting strong year-on-year growth in both operations and projects. In addition, EPS's business performance net margin is forecast to be between 5.25% and 5.75% in the same period, driven by a material increase in brownfield project contract margins and a lower overhead ratio. In our Integrated Energy Services division, net production is expected to be approximately 0.2 million barrels of oil equivalent in the first 6 months, reflecting the previously disclosed unplanned outage at East Cendor as well as the sale of the group's interest in Mexico in November last year. Despite this, year-on-year performance in IES will benefit from the recovery in average realized oil prices to an estimated $65 per barrel in the first half as well as a reduction in depreciation and finance costs. The recovery in oil prices in recent months is clearly a positive development, but it has yet to manifest itself in a significant expansion in capital spending by our clients. In practice, we have continued to see lump sum EPC awards be deferred by clients, compounded by our suspension from bidding for new awards in the UAE. Consequently, new orders in E&C have been weak year-to-date. EPS, on the other hand, has maintained its good momentum by securing $0.4 billion in contract awards across all business lines, reflecting improvements in market conditions and cost competitiveness. We've also made good progress in new energies with 10 contracts secured in our target markets of carbon capture and storage, blue and green hydrogen and waste to fuels. These early-stage concept and FEED contracts have the potential to develop into material project awards in the future. Looking ahead, the group has $3 billion of secured revenue for 2021 and a pipeline of $48 billion of bidding opportunities due for award in the next 18 months. We are prudently assuming that capital discipline by clients will continue to delay lump-sum EPC awards in the near term with new orders likely to remain depressed in E&C in the current year. However, EPS has had a solid start to the year, and we are targeting a book-to-bill of at least 1x in 2021. So to conclude, overall, the group is trading in line with expectations. We are making good progress in our strategic priorities to rebalance, reshape and rebuild our business. Furthermore, we remain committed to exercising capital discipline, cutting costs and conserving cash. This strategy is protecting our balance sheet and margins and improving our competitive position as we seek to rebuild our order backlog. With that, I'd like to open the line for questions.

[Operator Instructions] We'll now move to our first question over the phone, which will come from Amy Sergeant from Morgan Stanley.

Two questions from me. I wonder if you would just be to provide a bit more detail on the moving part around the net debt increase. And then secondly, on the bidding pipeline, the $48 billion you mentioned, and if you could just provide a bit more color around what type of work that you're [indiscernible] and how that's shifting without the UAE [ component ]?

Thank you, Amy. So net debt, really a couple of reasons. The principal one is obviously an unwinding of the favorable working capital movement we saw at the end of last year. But it's fair to say net cash collections remain under a little pressure, reflecting client behavior, in particular, it's taking them time to approve invoices. There's no issue of bad debt. It's just an issue of the process of getting invoices approved, but also, as you might expect, lower awards mean advanced payments haven't been forthcoming in the first half. So that's the main reason, net debt ticked up a little bit to $290 million at the end of last week. That said, average net debt has been around that level for most of the first half. So it's pretty indicative of what we've been running at. So in terms of the bidding pipeline, just to give you a little bit more color on that. So remember, this is a bidding pipeline for the next 18 months. If I just give you a little bit more of a split, just so you can calibrate some of your numbers, $13 billion of that is in the second half this year, with $35 billion for 2022. Just looking at each of the divisions in turn then. So E&C, as I said, no change to our guidance that we gave at our full year results a few months ago. We do continue to expect orders to be depressed in 2021 with a recovery in 2022. In the second half of this year, we've got opportunities in our core markets, particularly in Qat and Oman, but also new markets in India, a couple of projects there, and Eastern Europe as well as new energies with a couple of U.K. offshore wind opportunities we're pursuing. Then in 2022 for E&C, again, opportunities across all 3 target areas, so core markets, growth geographies and new energies. So core market, a lot of opportunity in Algeria and Kuwait, growth geographies, it's North Africa, CIS and India. New energies, again, more offshore wind opportunities in Europe. So you can see a fairly broad spread of opportunities across core growth and new energies. EPS, as I said, has had a continued its good order intake from last year. So Q1 book-to-bill was above 1, Q2 was another good intake with some pending awards, which we expect just to happen just shortly after this period end. So we are continuing to target a book-to-bill of more than $1 billion -- sorry, more than 1x in 2021. Its pipeline just for reference in 2021 for the second half is $7 billion. So look, a good pipeline of opportunities, a little depressed in E&C this year as expected. The EPS are continuing to perform well, and we are starting to see the pickup in activity that we had anticipated. I think the other thing just to emphasize, we are on track to deliver our $250 million of target cost savings for 2021, that does not only protect margin, but it has improved our competitiveness, and that is evident in some of the activity that we are actually tendering on.

We'll now move to our next question over the phone, which comes from Amy Wong from UBS. Apologies, it does appear we've lost Ms. Wong. Ms. Wong, if you'd like to resignal, you've disappeared from the queue, ma'am.

Let's give it a go again. Hello. Can you hear me? Okay. I got you there. Good. So my question was on a little bit more on the bidding pipeline. In your previous update, in the E&C, you said there was $11 billion for 2021 and $28 billion for 2022. How has that moved in the intervening period?

Okay. The -- let me try that. What I might do is just by reference to the group pipeline, it's just a little easier to do. So -- and I'm actually going to go back a little bit to where we were. I'll talk about 2021, first of all. So at the full year trading update, so about December last year, we signaled a $42 billion pipeline for 2021. Between that and when we last reported, in April, full year results, we've obviously had the U.S. mentioned book out $16 billion of pipeline in '21. And then since then, we've had about $8 billion of award deferred until '22. We bid [ a lot ] on about $5 billion of award. We've won just about $0.5 billion of awards, and we've had new opportunities about $0.5 billion come in. So that reconciles the $42 billion to the $13 billion we guided for 2021.

Great. Great. That's very helpful. So I mean in terms of just maybe following up on that, thinking about your win rate, it sounds about 10% or so, which seems to be a bit lower than where you guys have been historically around 25% to 30% or so. So can you give us some broad commentary on some of the reasons for not winning as high a win rate at this point?

Sure. So if I just take each business in turn, Amy, E&C, first of all, which I'm sure the one that you're focused most on. The win rate actually is lower than the number you gave. It's mid-single-digit percentages. Although that is on the base of a relatively low number of awards, so arguably not that representative for a 6-month period. But if you take that first half for E&C, $4 billion of awards got deferred. We've lost $4 billion, and we've won the Aman project of $100 million. So as you can see, 2 real trends there. One is the theme of continued deferral of awards at a pretty material level. Now all the indications are that they will get awarded in 2022. But until we see that happen, we'll remain pretty prudent in our guidance. Why we lost them? Well, we lost our most competitive market, the UAE, don't forget that. We're extremely well placed there. In fact, we expected to secure a number of awards, so that has cost us in the first half and will continue to cost us this year. Other projects we've lost, for a variety of reasons, principally price but also just our relative competitive position in a particular new market. So that's E&C. EPS, the win rate is actually nearer, well, it is basically at its historic level of around 20%. Again, there has been some deferrals of awards there, but at a much more modest level. So but -- but we've actually lost $1.6 billion of projects we bid on, but won $400 million of awards. So very typical of what we see in EPS.

Well, thank you very much for that commentary, Al. And before I let you go, I was just going to say, if we don't have another chance to speak in this forum, I'd like to just wanted to say thanks for your commentary all these years and good luck.

Thank you, Amy Wong. I'm sure we'll speak again.

[Operator Instructions] We'll now move to our next question, which comes from Mr. Mark Wilson from Jefferies.

I echo Amy's sentiment there. And my question first up is, is there any criteria attached to the UAE suspension, Alastair? And is there any comments you can talk about regarding dialogue with the authorities there in the past period?

Thanks, Mark. No, I mean it was built as a temporary suspension. I think inevitably, whilst it's not been signaled, the authorities there would like to see a conclusion of the SFO investigation, as you might expect, that's in everybody's interest to be perfectly honest. But there is no specific criteria applied to it. We have had ongoing dialog because we're obviously completing a number of jobs in the UAE. It hasn't affected our commercial relationship with the locator. It continues to be very professional, and we remain extremely focused on delivering the projects on time and to cost.

Okay. And then as regards to that, we're seeing peer group or -- connected peer group investigations being closed. Is there any expectation within Petrofac of a coming closure on that? Or indeed, is there any dialogue going -- regarding that? And the second point to that would be yourself as a CFO and given where we stand, there's not been any provisions taken, but what sort of provision would the business be able to -- on the balance sheet, be able to take on such a closure?