Petrofac Limited (PFC) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining our regular pre-close trading update. I'm going to make some brief comments on our statements, and then we'll open up the line for questions. At our full year results, we talked about plan to rebalance, reshape and rebuild Petrofac. We have made real progress in 2021 with the closure of the SFO investigation, which is now behind us, and a refreshed strategy in place that will drive future growth. We also had the recent refinancing, which provided us with a long-term capital structure for the business and largely complete the work to rebalance the group. Operationally, we are making good progress in reshaping the organization, delivered consistently to best-in-class global standards through local execution. Our priority now is to rebuild the backlog. I'm pleased to say that we are experiencing good traction with clients since the SFO investigation was concluded, which gives us confidence in our growth ambition. We secured $1.5 billion of new awards in the second half of the year, and the outlook forward is strong in the context of a supportive macro environment. Let's turn to current trading. Overall, the net profit of the group is expected to be in line with market expectations for the year, supported by tax provision releases. We have continued to experience some challenging market conditions driven by COVID-19, which are impacting our E&C project schedules and increasing costs. However, our EPS business has delivered strong performance, growing both revenue and margins in the period. For the full year, we expect to report group revenue of approximately $3 billion, a full year net profit, which is in line with 2020 and also with market expectations. In the E&C division, full year revenues are expected to be around $1.9 billion with the reduction on last year due to the continued impact of COVID-19 on project progress, as well as lower order intake in recent years. Net margins are expected to be lower than the prior year, due to the unrecoverable COVID-19-related cost increases, which were partly mitigated by management actions to reduce costs and by the tax provision releases. These releases are expected to contribute around $25 million to $30 million to E&C's bottom line in 2021. In contrast, EPS is forecast to grow both revenue and profitability in the year, benefiting from robust order intake and good cost discipline. Full year revenue is expected to be higher than last year at approximately $1.1 billion, significantly higher than 2020, as I say. EPS will also benefit from tax provision releases, which will lift net margins up by approximately 2 percentage points. Absent the impact of these tax provision releases, EPS is expected to deliver net margins in line with the previous guidance of 5% to 6%. In our Integrated Energy Services division, the start of production from the East Cendor field in June and the higher oil price means that both revenue and EBITDA will be higher in the second half of the year. Overall, and as expected, IES is in line to report a small net loss for the year due to a higher depreciation charge linked to increase in the volumes. Turning to backlog. Given the stronger order intake in the second half, we expect to end the year with a higher backlog than our last reported position in June. E&C has secured new orders of $1.1 billion, comprising EPC contract in Oman, Libya and Lithuania, as well as positive net variation orders. The E&C bidding pipeline remained strong with $32 billion of projects scheduled for award by the end of 2022. EPS has secured $0.9 billion of awards and extensions in the year-to-date and remains on track to deliver a book-to-bill ratio above 1x. EPS is delivering on its strategy to achieve growth in small- to medium-sized EPC projects internationally with notable wins in Bahrain and Malaysia. We have seen strong momentum in new energies with a number of new concept and FEED studies across hydrogen, carbon capture and storage, waste-to-value as well as offshore wind, as well as a number of strategic partnerships with developers and technology providers. We have a new energies pipeline of $7 billion, and we'll continue to invest in our new energies team in 2020 in order to capitalize on this market opportunity. Finally, turning to our financial position. We completed the comprehensive refinancing of the group in Q4, including raising equity, terming out our short-term maturities in the capital markets and repaying the COVID corporate financing facility ahead of schedule. Our year-end net debt is expected to be broadly flat versus the Q3 figure of $0.2 billion, and gross liquidity is expected to be around $0.6 billion. So to conclude, we have continued to deliver for our clients in difficult circumstances in 2021. We closed the SFO chapter and we refinanced the group. While challenges will persist in 2022, we are confident about the prospects of Petrofac as we capitalize on our strong positions in attractive and growing markets and accelerate our progress in new energies. We have a cost-competitive model, strong client relationships, and we are facing a healthy pipeline of opportunities scheduled for award in 2022, which will allow us to rebuild our backlog and deliver on our medium-term growth strategy. With that, I'll hand over to Bettina, who will manage the line for questions.

[Operator Instructions] Our first question today comes from Mick Pickup of Barclays.

A couple of questions, if I may. Firstly, you don't mention conversations you're having with the areas where you're restricted from bidding. I wonder if [indiscernible] based on how you're feeling about that. And secondly, I wonder if you have done any work in quantifying the COVID costs into this year, and how are conversations going with clients about recovering some of that?

Thank you, Mick. Look, clearly, we are very focused on reentering all the markets from which we're currently excluded. Those conversations are ongoing. We have been engaged with all of our clients from the moment that the SFO investigation was resolved or in fact, even before it was resolved when it was publicly announced that we were in the process of resolving it. The -- we have every confidence that we will be back in those markets in due course. What I don't want to get drawn into is to guessing exactly the precise timing of it because it's dependent on actions by third parties. But we're certainly confident that we will be back in those markets. And I should mention that we had an extension already in a contract in Iraq in the last couple of months. The -- in terms of quantifying the specific costs of COVID-19, I haven't got those exact figures to hand. But I would point to the second part of your question, Mick, we are being prudent in our recognition of the cost recovery. We recognize these difficult circumstances for clients as well as for ourselves. So we're being prudent in the variation orders we're recognizing, which is resulting in that sort of headwind that we're facing in terms of cost increases and mitigate it now. We'll see as we go through to close out those contracts where we end up, but we're maintaining our traditional prudent approach.

Just one more. I'm just looking at your EPS backlog for next year now on the touch and obviously, that growth engine for a couple of years. What are you thinking about EPS into next year?

I think we've got about $0.7 billion of revenue secured for next year. I think that's really in line with where we would expect to be at this point in the cycle. I think EPS does tend to have a lot of renewals and extensions in here and a lot of contracts that are sort of short term bid to win cycles. So this is not out of kilter with our historical position. We did maintain or we are maintaining a onetime book-to-bill in the context of growing revenue. So that's actually quite a positive new story there.

Our next question comes from James Thompson of JPMorgan.

Just following on a little bit from Mick's part there. I just wondered if you could maybe talk us a little bit through on the ground, I suppose, from a sort of COVID perspective. Are you seeing kind of any signs that it's getting easier from a sort of supply chain perspective, moving people in and out and off location, things like that? Or could you give us a sort of flavor of just how things are progressing actually in the operations in E&C?

Well, look, yes, things did ease up, of course. As we progress through the cycle, we had quite a lot of activity ourselves in terms of engaging with our workforce and providing vaccination drives and all that sort of thing. But I think the jury is a little bit out at the moment on the Omicron variant. I don't think any of us know exactly how that's going to play out. It's not something that we have seen an impact of yet, but I think we're all sort of, as we approach Christmas, I think we're all waiting and seeing what will happen. In terms of the impact, look, it's what you would expect. There's a delay in project progress, which also reduced our revenues. And there has been, as I said in previous answers, some increase in costs, and we've been prudent about recognizing the corresponding compensation from clients.

Okay. And separately, I mean, it looks like your win rate particularly has been sort of back to normal, if you like, in the second half of this year, which is obviously pretty promising and good to see if that can kind of continue in terms of your ambitions to rebuild the backlog. I mean maybe could you help just sort of pierce into how we should think about this kind of $40 billion pipeline in 2022? I mean, obviously, the recent track record has been they continue slipping. But maybe you could sort of help us understand kind of what's in the first half, basically, or potentially what's sort of on the agenda for the first quarter, that would be great.

Sure. Look, I think in terms of our win rate, it is, as you say, back to a normal level. But it's a thin yes. So it's difficult to draw any strong conclusions from that. We have had historically in our E&C division a win rate of around 25%, somewhere between 20% and 30%. We certainly, the way we are bidding, we -- and it does seem that our pricing and our ability to be competitive are in place. And therefore, we expect to revert back to a normal win rate over a period of time. We do have, as you say, a very strong pipeline, $32 billion in E&C. We have $8 billion in EPS. And that is a consistent story with -- if you remember, 2, 3 months ago, when we were raising equity, that is indeed the same pipeline. I mean there's obviously some movement around the edges or some projects that have come in, or some projects that either have been awarded or have slipped into 2023, but that's really around the edges. We still have a $10 billion of pipeline in our core markets. So we're very bullish about the prospects for new wins in 2022 and as I say, having rebalanced and reshaped the company to now rebuild through building the backlog. You asked also about the timing of awards within 2022, James. But it's a little bit difficult to predict. I think it's probably not going to be Q1. I think there were a couple of things late of Q1 that have slipped a little bit. That's not a pattern. It's just each project has its own specific reasons. So I suspect it will be towards the middle of the year. But let me come back to you in March when we do the full year results, and we'll be able to give a bit more guidance on that.

Okay. I appreciate your comments. Just finally for me, just on the new energies side of things. Just would be good to understand how you plan to kind of maybe increase the win rate there in next year. What is it you think Petrofac needs to do to, I guess, sort of more firmly establish itself within some of these customers and some of these project areas? What can we expect[indiscernible] in deceleration next year?

Yes, we're doing quite a lot, and we're very excited about it. We've made a conscious decision to focus on 4 specific areas rather than sort of trying to cover the entire field. So we're focusing on wind. We're focusing on carbon capture and storage, waste-to-value and hydrogen. I think the nearer term, sort of the 2022 and certainly possibly into '23, we'll be focused on wind with about 5 tenders going on in the wind space, where, as you know, we've got already a 10-year track record of both bidding, winning and executing these projects. So in the more medium term, so towards the end of '22 and into '23, you'll see the other things, the other projects coming in. So for '22, what you will see is the front-end engineering design around hydrogen, around carbon capture and storage and waste-to-value, but turning into EPC only in the sort of '23, '24 period of time. We are positioning ourselves. We have a series of strategic partnerships. We have increased the number of FEED projects that we're executing from, I think, a couple to around 15, don't quote me on the exact number, but around 15. We're currently executing mainly in Europe, but beyond that. So there's quite a lot of activity going on, but you should think of it as outside of wind as being primarily on the engineering side to start with and only really pulling through into EPC opportunities in '23 and beyond. I should also just mention that we're backing this up as well with continued investment in that new energy services team, which as you know sits within EPS. So there'll probably be a slight market impact in EPS next year as we continue to invest in that team to support that, what we think is a fantastic opportunity for us.