Petrofac Limited (PFC) Earnings Call Transcript & Summary

Good morning. I'm delighted to welcome you to today's full year results presentation. I'm Sami Iskander, Group CEO, and I'm joined today by Afonso, our CFO. We'll both be happy to take any questions after the presentation. Turning to today's agenda. Firstly, I'll give you my reflections on 2021, before I take you through the key highlights and importantly, our key focus areas for 2022. Afonso will take you through the financials. I'll then come back and cover our operational performance, including the progress we are making to achieve our medium-term growth ambitions and outlook. Reflecting on 2021. Despite the continued challenges of COVID, we made significant progress in several key areas. The conclusion of the legacy SFO investigation last autumn was a major catalyst for the company. It enabled us to complete a successful refinancing and marks the rebirth of a new Petrofac. The response from customers has been very encouraging as evidenced by our recent announcement that we have been reinstated by ADNOC and are free to compete in all upcoming tenders in Abu Dhabi, where there is a very strong pipeline of opportunities from 2023, particularly in gas where we have an excellent track record. We remain focused on positive dialogue in other markets from which we have been suspended. On the business side, we made progress resolving the majority of commercial positions on projects. Customers have increasingly taken a more pragmatic position to the challenges created by the pandemic. And I'm confident we'll bring the remaining commercial discussions to a positive conclusion. Progress made in 2021 culminated in a respectable financial performance demonstrating our continued ability to deliver in a challenging environment. We delivered $3.1 billion revenue in line with expectations and a net profit of $35 million. While backlog declined year-on-year, we did increase backlog in the second half with over 75% of the $2.2 billion order intake being secured in this period. Healthy investor appetite for our comprehensive refinancing program saw us raise $275 million in new equity and issue a $600 million bond, which provides a long-term capital structure, and we finished the year with a modest net debt position of $144 million. In 2021, I set out our strategic priorities to rebalance, reshape and rebuild the company as we travel the journey towards our medium-term ambition. Rebalance was about resolving the SFO and progressing outstanding commercial settlements and protecting the balance sheet and liquidity. Reshape meant simplifying the company for consistent execution and enhancing cost competitiveness. And rebuild was about rebuilding the backlog, pursuing growth opportunities in both core and new markets and pivoting towards new energies. In 2021, we made significant progress against these priorities. I've described the steps taken to rebalance the business with the conclusion of the SFO and successful refinancing. We also removed significant costs to rightsize the business and maintain competitiveness. We reshaped the business to hone our efficiency and assure execution through our 1tec technical excellence program and new value assurance process as well as strengthening our in-country organizations. Looking towards 2022, the priorities are the same, but the emphasis has changed. Rebalancing is about careful cash management as we travel the journey towards our medium-term ambition of having a net cash position. We are focused on reducing working capital and maintaining capital discipline. Reshaping entails comprehensive embedding of the 1tec organization to ensure functional excellence and consistent project delivery. These efforts will ultimately ensure we returned to delivering the sector-leading margins in the medium term. Finally, on rebuild, orders have been slow, and it takes time for the strong macro backdrop that we see today to translate into late cycle EPC opportunities. However, our positive engagement with customers and reentry to the UAE gives us confidence that we are soon to enter a multiyear period of high bidding activity that supports our ambition to return to being a $4 billion to $5 billion revenue business with over 20% coming from new energies. Finally, I would like to emphasize that throughout this journey, we are committed to maintaining our bidding discipline. We intend to build a quality backlog and are not prepared to compromise by accelerating new orders at the expense of margins. I'd like to spend a few moments on how sustainability is integrated into our strategy and drives business performance. Starting with our clear path to net zero by 2030. You'll see from the graph that 85% of our emissions come from the upstream PM304 asset in Malaysia. Last year, we undertook a successful project to reduce flaring by 1/3, and we are looking at opportunities to reduce emissions further. In the core business, the emissions reduction focuses is on improving energy efficiency, switching to renewable power sources and electrifying transport. For each of our projects, decarbonization objectives have been set at both the project and team lead level to increase accountability and embed the culture focused on emissions reduction. We are also eliminating single-use plastic, which has been implemented in all main offices and a significant reduction program is in place for all the project sites. We are also increasing offering low-carbon solutions to our EPC clients. As you can see from the graph, for a recent project submission, we offered a base case with a carbon footprint of 65,000 tonnes of CO2 and a low carbon offering that further reduces this amount by 20%. We optimized waste reduction through value engineering and optimal steel plate utilization, reducing waste and thus lowering the emissions by 4%. Secondly, we identified sources of steel with the lowest emissions impact that gave another 7% reduction. And lastly, along with our construction partner, we worked on an energy efficiency and emissions reduction plan that offered an option to decarbonize fabrication by almost 9%. We did this by increasing renewable power provision at site, improving energy efficiency equipment and through lightning upgrades. The work we are doing on our Scope 3 emissions baseline as we look to decarbonize our supply chain will support this growing area as we now aim to offer a low carbon option on all EPC tenders, which will support clients to meet their emissions objective, and we believe will be a source of competitive differentiation. On social, our in-country value proposition is a great example of how strong sustainability performance and doing the right thing is intrinsically linked to improved business performance. As you know by now, a core component of Petrofac best-in-class execution comes through our local delivery model. This local model and our focus on customer centricity mean that we match our customers' identity and have an unparalleled knowledge of the local supply chain in our core markets. This differentiation on our bids reduces risk and execution and lowers cost. Equally important, this provides a major benefit to the communities with which we work through stimulating productivity in local economies, enhancing the capabilities of local suppliers and upskilling local workforces by utilizing our local training centers. You can see this on the slide, the high proportion of local construction we use on projects as well as the value of our in-country expenditure. In 2021, we have maintained our leading in-country value position in our core markets with 54% local procurement spend. This position will serve us well as we look towards rebuilding the backlog. On governance, we have made exceptional progress on compliance, and I truly believe that we now have a best-in-class regime. In recent months, we have taken our clients through the improvements we have made and the feedback has been very positive. Our compliance regime comprises the best processes and technology, supported by both internal and external assurance. Most importantly, it is supported by the right culture, one that's transparent and open. The number of speak-up reports have been the focus, not just of our compliance team, but all senior management in the last 2 years. The data on the right of the slide demonstrates the positive step change we have made and our continuing focus on culture being central to a healthy compliance regime. I will now hand over to Afonso to take you through the financials in more detail before I give an overview of our operational performance and the outlook.

Thank you, Sami, and good morning, everyone. Our results for the period ending 31st of December 2021 reflect the resilient performance of the business despite the continued impact of the pandemic. COVID-19 continued to disrupt project schedules to increase project costs and to delay the award of new contracts. Combined with the lower opening backlog, this led to a 25% reduction in group revenue to $3.1 billion. Nevertheless, we remained profitable against this challenging backdrop with strong growth in Asset Solutions and also with the benefit of certain tax provision releases during the year. Business performance net profit decreased by 30% to $35 million. We had a number of separately disclosed items, which means that we reported a net loss for the year of $195 million. I will come to these later. Group backlog declined to $4 billion principally as a result of the low order intake in E&C as clients continued to maintain capital discipline and to delay the award of new contracts in response to the pandemic. Order intake was stronger in the second half, resulting in a 14% increase in the E&C backlog from the level reported at the interims. Following the recapitalization exercise in November, net debt at the year-end was $144 million, slightly lower than I guided in December due to strong cash collections at the year-end. So let's look at the results in a little more detail. At a group level, the decrease in revenue reflected a lower activity levels in E&C as well as low revenue in the IES segment due to the disposal of our Mexico assets at the end of 2020. This was partly offset by strong performance in our Asset Solutions business unit, which continued to grow throughout the downturn. Business Performance EBITDA declined to $104 million at group level with the strong performance in Asset Solutions being offset by both lower revenue and margins in E&C as well as a lower contribution from IES due to the Mexico disposal that I just mentioned. Group net profit margin was only marginally lower at 1.1%, thanks in good measure to an income tax credit of $40 million in the period, which was the result of the release of tax provisions following settlements with a number of tax authorities globally. Earnings per share decreased by approximately 1/3 $0.097 reflecting both the decrease in net profit and also a higher weighted average number of ordinary shares as a result of the capital raise in November. As I mentioned at the outset, we reported a full year net loss of $195 million. This was caused by separately disclosed items, which amounted to $230 million. They are shown on the screen. As you know, we took an important step forward last year, bringing the SFO investigation to a conclusion. And as a result, we were ordered to pay a penalty, including costs of approximately $106 million. This was recorded in the 2021 income statement and the payment was made in tranches in January and February of this year. We also incurred $10 million of associated legal and other costs. $28 million of costs related to the refinancing exercise in the last quarter of 2021 covering both the bond issuance as well as the other facilities, which we secured through this process. We also incurred noncash impairment charges of $60 million of which $58 million related to our investment in Block PM304 in Malaysia under our IES segment. The majority of the impairment relates to the write-off of deferred tax asset given the uncertainty over the extension of the production sharing contract beyond its current expiry in 2026. Moving on to divisional results. In E&C, as I mentioned before, financial performance was materially impacted by the COVID-19 pandemic, even as we continue to deliver for our clients across the portfolio. Revenue for the year was down 36% at $2 billion, driven by the lower opening backlog, pandemic-related project delays and the limited new order intake. We recognized full-life losses on a small number of contracts, which, as you know, need to be recognized in full at the point the contract becomes onerous. On the positive side, the COVID-related challenges on these projects are behind us, and we have addressed the remaining risks. So we do not expect to recognize further losses in the future. The combination of lower revenue and increased costs as well as the recently announced write-down of claims relating to 2 historical projects, reduced the profitability of the E&C division. But on the other hand, it benefited from $29 million of tax provision releases due to favorable tax settlements in certain jurisdictions. Overall, therefore, the E&C division delivered a small net profit of $8 million and net profit margin declined to 0.4% as shown on the chart. I remind you that we include all COVID-related costs in the business performance figures. In the current cost environment, it is worth mentioning the limited exposure of the E&C division to cost inflation due to the relative maturity of its portfolio. The procurement phase is largely complete and we have fixed unit rate contracts in place with our subcontractors for construction. Consequently, we do not expect inflation to present a headwind for margins in 2022. I should also point out that as the whole industry adapts to the new operating environment, clients have begun to show more flexibility in settling COVID-19 cost claims, and we have now resolved commercial positions on a large number of our contracts. As I mentioned earlier, there were relatively few new contract awards in our addressable markets. Nevertheless, E&C secured new orders of $1.2 billion in the year with 90% of that amount being awarded in the second half and Sami will cover in more detail later. E&C closed the year with a backlog of $2.4 billion. Given the current geopolitical environment, please note that less than 1% of that amount is in Russia, where we are close to completing the Sakhalin project. Our renamed Asset Solutions division delivered strong performance with significant growth in both revenue and margins. Revenue increased 19% to $1.1 billion with growth across all its service lines. The volume of work in new energies increased markedly in 2021, up from 2 projects to 16. These are predominantly pre-FEED and FEED studies as we continue to take on early-stage projects that we believe will position us well for subsequent EPC work. We continued to see good momentum in this area in early 2022. EPC activity in the asset development service line progressed well in '21, with particularly strong performance on several projects in the MENA region. Business performance net profit more than doubled to $86 million, with net margins increasing to 7.7%. This was a result of higher project margins, favorable operating leverage, higher income from associates and one-off tax provision releases. Excluding the impact of these releases, the underlying net profit margin was 5.5%, which represents an increase of 1.2 percentage points on the prior year. Another strong year of order intake saw Asset Solutions secure $1 billion of awards and extensions, 10% more than in the previous year. This represents a book-to-bill of a little below 1x as revenue also grew in 2021. The phasing of the backlog gives us confidence that Asset Solutions will continue to grow its revenue in 2022. Moving on to Integrated Energy Services. As you are all aware, we exited Mexico at the end of 2020 and so these results reflect the performance of our sole remaining asset, which is our operating interest in Block PM304 offshore Malaysia. On a like-for-like basis, that is excluding Mexico from prior year numbers, revenue increased 19%, with higher oil prices more than compensating for lower production volumes. This lower production was the result of an unplanned outage in the main Cendor field but was partly mitigated by production from the East Cendor development, which came on stream in June. The higher revenue translated into a 40% increase in EBITDA to $21 million, again, on a like-for-like basis. It also reduced the business performance net loss of $5 million compared to $14 million in 2020. Because of the East Cendor field started producing partway through the year, the exit rate production of 2,900 barrels of oil per day was approximately 60% higher than the full year average. All figures are net production to Petrofac. We expect production to increase further in 2022 as the main Cendor field returns to production in the second half. Turning to the balance sheet and specifically to working capital. DSO increased to 230 days in the period, reflecting longer billing cycles in E&C as payment milestones were impacted by COVID-19 as well as slower client payments and lengthier commercial settlements. This was partly mitigated by an increase in DPO largely through an increase in trade payables. Having seen considerable progress in finalizing commercial settlements in recent months, we believe that this position represents a peak working capital position for the group, and we expect it to begin to reduce as commercial settlements are closed out and as new project awards are secured. Turning to the cash flow and liquidity position. Over the course of the year, we had a free cash outflow of $281 million at group level, due to a combination of lower EBITDA, $125 million of working capital outflows and other outflows of $138 million. These include the cash impact of separately disclosed items, expected credit loss provision releases and end of service benefit payments. CapEx increased to $53 million with approximately half of that relating to the development of the East Cendor field that I mentioned earlier. The free cash outflow was largely offset by net proceeds of the equity raise, resulting in a modest increase in net debt, which closed the year at $144 million. We ended the year with liquidity of $705 million, which included $620 million of cash of which $305 million was held in joint operations. We are in compliance with our financial covenants as at 31st of December 2021. Looking ahead to 2022, we are targeting to be broadly neutral in terms of free cash flow this year. We paid the court penalty of $106 million in January and February. We also have high interest costs, including almost $60 million for the bond and the margins in our current E&C portfolio have been impacted by the COVID disruption, as I have described. Nevertheless, we expect this to be offset by an improvement in our working capital position based on commercial settlements on existing projects and later in the year, especially cash advances on new awards. We also expect cash flow to benefit from collections of divestment proceeds. For example, we recently accelerated the receipt of the deferred consideration that we were due to collect in '22 and '23 in relation to the disposal of the Greater Stella field. We are also expecting to reach a conclusion on the dispute over the Mexico divestment consideration during the course of this year. Finally, sustained higher oil prices would result in higher free cash flow from our PM304 asset in IES. Our transition to an asset-light business model is now substantially complete and our run-rate CapEx for the group is expected to be between $20 million and $30 million from 2023 onwards. This could increase in later years if we are successful in extending the PM304 license, but no commitments have been made at this stage. We expect this asset-light business model to be cash flow generative as we return to growth, driving attractive shareholder returns. Looking towards the full year outlook. Overall, group revenue will decline in 2022, reflecting the lower opening backlog. However, we expect backlog to grow during the course of the year, marking the start of a strong recovery on the road to our medium-term ambition. E&C had $1.3 billion of backlog scheduled for execution in 2022. Given the expectation that new orders will be weighted to the second half, we do not expect new awards to contribute materially to revenue until 2023. I'd like to flag that we are shifting our margin guidance from the net profit level to the EBIT level. This is in line with broader market practice, and we believe it reflects our operating performance more transparently. We expect E&C's EBIT margin in 2022 to be at least 2.5%. In Asset Solutions, we have $0.9 billion of backlog scheduled for execution in 2022, and we expect the EBIT margin to be between 5% and 6%. In IES, average net production is expected to be between 3,000 and 3,500 barrels of oil per day. At a $70 oil price, which is the price used in our business planning, IES was expected to generate between $40 and $50 of EBITDA per barrel. Current oil prices would result in higher figures. This brings me to the end of my slides. But before I hand back to Sami, I would like to summarize a few takeaways. First, the steps taken in 2021 to recapitalize and refinance the balance sheet provide us with a long-term capital structure with no near-term maturities. Second, our Asset Solutions business has proved extremely resilient through the cycle, delivering increased revenues and profits in 2021. Third, we have a relatively mature portfolio of projects in our E&C division with very little inflation risk. We have largely overcome the challenges posed by the pandemic, and we are making progress on closing out commercial settlements. This provides a solid foundation from which we can pursue growth and reach our medium-term ambition of returning to a revenue level of between $4 billion and $5 billion with an asset-light business model, delivering superior returns to our shareholders. With that, I will hand you back to Sami.

Thank you, Afonso. Now let's look at operational performance, starting with health and safety. We had a solid performance in 2021 with a lost time injury frequency rate significantly lower than the industry average albeit with a reduction in people hours worked within a mature project portfolio. However, there is still work to do to meet our own aspiration to be the safest contractor. Energized under new safety leadership, we are creating a cultural shift in both employee behavior and engagement, supported by an increased use in digital tools, including real-time HSE dashboards and applications to promote and reinforce the right health and safety behaviors. In E&C, we continue to deliver strong operational performance despite COVID's continued challenge. As you can see on the left, our E&C portfolio is diverse in geography, sector and clients. It is also relatively mature, so are less exposed to inflationary headwinds as procurement is substantially complete, and we have fixed prices in place on the construction side. Our reshaping has included greater emphasis on service quality for clients. We have introduced a regular cadence of project performance review that not only enhance project delivery, but also brings us closer to our customers. Our reimbursable business, which has recently been renamed Asset Solutions to better reflect its wide service offering delivered a strong performance in 2021. As you can see from the left-hand graphs, our reimbursable contracts remained resilient as offshore personnel numbers recover to pre-COVID levels. Our backlog for small to medium projects has almost tripled in the past 3 years as we develop a highly credible track record in this space in the U.K. and internationally. Our renewal rate is more than 80% for our operations and maintenance contracts, which is evidence of our high standards of delivery and service quality. We apply the same rigor to measuring service quality across this portfolio where the high proportion of reimbursable contracts insulates us well from the inflationary headwinds. Now a little over half of our backlog is in the U.K. as we have been successfully diversifying internationally by exporting our core competencies. The portfolio is well balanced across operations, projects and wells and decommissioning. Overall, new orders in 2021 remain low as our customers continue to exercise capital discipline. This resulted in a group order intake of $2.2 billion. Nonetheless, Asset Solutions had another strong year of order intake with $1 billion, which was its highest year of order intake since 2016. E&C had an order intake of $1.2 billion, with 90% coming in the second half of the year and comprising awards in Lithuania, Libya and Oman. Consistent with our strategy, we exercised strict bidding discipline on each of these projects. So let's look ahead to the outlook for 2022. Starting with the macro picture. Oil prices have increased significantly and are now at the level that enables clients to move forward with projects after several years of chronic underinvestment. The nature of EPC projects is that they come late in the cycle. While we must still exercise patience for the next wave of awards to move forward, I believe that later in 2022, will mark the beginning of a multiyear up cycle for our industry. Demand for energy is increasing. And with the major international oil companies focused on cash preservation and decarbonization, much of the oil and gas supply gap will be met by national oil companies, particularly in the MENA region, where we have a differentiated position. Whatever your view is on long-term commodity prices, the MENA region has the lowest cost of production and these markets are set to endure the longest. In new energies, we see exceptional growth across our target sectors. In offshore wind, the installed capacity in Europe is set to grow fourfold between 2020 and 2030. In carbon capture and storage, the amount of carbon capture is expected to go from 40 million tonnes per annum in 2020 to over 1 billion tonnes per annum by 2030. Global production of hydrogen is expected to go from 7 million tonnes per annum in 2020 to over 125 million tonnes per annum in 2030. We are quickly developing positions in each of these sectors and while they are relatively nascent today, they have the potential to fuel our long-term growth. Turning now to our group bidding pipeline, which stands at a substantial $37 billion for 2022. As you might expect, we have prudently excluded Russia from this pipeline. I'll make a few points about the pipeline. Firstly, it's growing. When I spoke with you in April last year, E&C had a pipeline of $14 billion. This is now $30 billion scheduled for award in 2022, with further growth in '23 pipeline. With high commodity prices and an increasing emphasis on energy security, I am confident that a large proportion of these projects will start to move forward. The Asset Solutions pipeline has grown from $6 billion to $7 billion, and we expect new opportunities to continue to be added given the strong macro environment and shorter cycle nature of these contracts. Secondly, our approach to building our backlog is not about backlog at all costs. It's about profitable backlog. We are maintaining strict discipline, both in project selection and in our bidding. We are mindful of inflationary forces and they're being reflected in our tendering today. Lastly, the pipeline has not been updated for opportunities in the UAE, having only been reinstated last week. This is a major market for us, where we have a strong track record and differentiated value proposition. While there are limited material opportunities this year, 2022, this will add more than $10 billion to the pipeline in 2023, and we are confident that we will secure our share. In terms of pipeline phasing, as I referenced earlier, E&C processes are still moving slower than we would like, but there are signs the market is unlocking. Awards are expected to be weighted to the second half, probably more Q4 and we are mindful of the risk that some of these may slip into 2023. Nonetheless, I believe that 2022 will be the tipping point for our industry, and I am confident in our competitive position. 2022 will be a recovery year for E&C. However, by adding high-quality, profitable work to our backlog in '22, we will lay the right foundation to deliver accelerated growth from 2023 and beyond. Conversely, in Asset Solutions, the phasing of opportunities is more evenly spread through the year, and opportunities are coming to the market much more quickly. Taking a closer look at the diversity within our pipeline. E&C, we have a good mix across our traditional markets in upstream, refining and petrochemicals and a growing proportion in new energies, which I'll cover in more detail shortly. This is currently standing at 18%. The pipeline has a good mix across our core MENA geographies in Algeria, Kuwait, Oman and others, and a significant pipeline in Europe, which comprises a large component of the new energies opportunities. The E&C pipeline once again excludes opportunities in Russia, and it also continues to exclude opportunities in Saudi Arabia and Iraq. However, as I just mentioned, going forward, it will include opportunities in the UAE. Asset Solutions has a healthy pipeline to support the continued successful development of this business. I'm pleased with the progress we have made in recent years to diversify the pipeline away from the U.K. with over 70% of today's pipeline from international markets. Consequently, this pipeline should continue to support a more attractive margin profile for Asset Solutions than you would expect from a more U.K.-focused reimbursable business. We are also seeing a growing number of opportunities in decommissioning. Our new energies pipeline comprises $6.8 billion of the total $37 billion, up for award in 2022. 26% of this relates to offshore wind, where the opportunities are the most mature and have the highest chance of being awarded on schedule. Outside of wind, we are seeing a lot of activity for FEED and early-stage concept studies. We are strengthening our position in these sectors through forming alliances with key technology providers focused on these segments, which is unlocking a significant number of opportunities. In summary, we made progress in 2021. Following resolution of the SFO investigation and the operational and financial actions we have taken, we have a strong platform in place. Clearly, we are on a journey. We've already come a long way and navigated some big challenges. Now the market is turning, and we have a strong position in the most attractive markets that are expected to see the highest and most sustained period of growth. We have a clear sight to our destination and articulated what this looks like through our medium-term performance framework, $4 billion to $5 billion of revenue with a growing contribution from new energies and a return to sector-leading margins and a net cash position. This is a very attractive destination. One that will create a lot of value along the way. I want to be clear, the recovery won't happen overnight, but I am confident that we will make significant further progress in 2022, which should see us begin to rebuild our backlog with high-quality projects. We will retain our focus and our discipline and keep driving forward on this journey. With that, Afonso and I will be very happy to take your questions. Thank you.

[Operator Instructions] We do have a question from Guillaume Delaby from Societe Generale.

Yes. So let's put ourselves in the future, in the medium term, 2025, 2026. So my question, Sami, is the following: in 2026, if or 2027, if you need to sum up in 2 or 3 words or one sentence, what is exactly the [ resonate ] of Petrofac, which definition would you provide us.

Well, Guillaume, thank you very much, to be honest, it's a really good question. [indiscernible] the Petrofac in 25, 26 or 27, it's a bit of a stretch here, but let me try. I think -- I mean I really reflect that, and obviously, I'm colored by where we've come from. I want to be leading an organization that is contributing to providing the energy that we as a society needs. I want to be leading an organization that at least, I will start with the financial is producing the type of returns that our investors expect, that I expect and our investors expect. I'd like to be leading an organization that's reflective in its diversity of the markets we operate in. And I'd like to be leading an organization that is contributing from a technology perspective as well, and I'm really projecting now a few years out, but contributing from a technology perspective in finding the right solutions that will, a, provide unlock at least or provide value for our customers but provide a competitive and differentiated position for Petrofac. I'll stop here. I mean, I could go on, but I hope that gives you a little color on type of organization I'd like to be leading maybe a few years out away from just 4% to 5%, 6% to 8%, 20% and so on.

[Operator Instructions] The next question comes from the line of James Thompson from JPMorgan.

I mean, Sami, first of all, could you maybe just talk us a little bit through kind of the competitive conditions at the moment? Clearly, you're in a position where you want to rebuilding backlog. I'm sure your competitors are well aware of that. But we're obviously in a sort of much more in a positive commodity price backdrop. So I wondered if you could maybe just flesh out the sort of view in terms of building backlog perhaps without feeding margin and actually delivering those as you said, sector-leading margins as you head into the medium term. And then just secondly, in terms of the recovery, obviously, you've been talking about $4 billion to $5 billion of revenue over the medium term. During this process, that's been without the UAE historically, so how should we think about it? Should we just think about this as it's -- you're going to get there faster because of the UAE or actually you could reenter because -- or actually, you could take it above that level?

Yes. I was scared of that second question. I was thinking about it this morning, by the way. Let me start here, I'll Afonso ask maybe to, to help me a little bit to the second. But I think I truly believe we're entering a multiyear period, I mean, I don't know what you want to call it a super cycle, multiyear growth after sort of many years of whatever you call it, drought, lack of investment, all these things. So in a sense, when I look at Petrofac, I mean, and I'll be totally honest with you, I mean, we tried very, very hard last year to build our backlog. And yes, we had some success, some limited success. But clearly, the market was competitive to the point that was -- there's a bit of dislocation between us targeting 6% to 8% and able to bid. As I look forward, I think -- and I'm not here to talk about any of our competitors. But I feel that we are in the right time of the cycle. Probably we are well positioned. I have the same maybe not -- and what is the word I'm looking for, not apprehension, but same desire to land this first contract as you have to see me land the first contract. But I do feel that the market is turning and our -- the discussions I'm having with customers today is about, more about the ability to deliver and deliver quickly by the way. But ability to deliver, do you have the resources? Do you have the people? How fast can you ramp up? And this is coming from a number of fronts. I'm not going to tell you all of them, but that was my discussion with ADNOC. That is my discussion with the likes of Sonatrach, that is our discussions with Kuwait now, which has come to the forefront. So I do feel that -- I mean, we've done a little bit of our homework and traveled the journey we've traveled on. Clearly, this is luck or whatever, but the timing is right. And I think the timing was not right even 3, 4 months ago in the type of sort of -- in the type of aggressiveness in the market. It was certainly not tying to something that would lead us to 6% to 8%. And I feel firmly, and it is a balance, by the way, but we feel firmly myself and Afonso that strict bidding discipline today will pay off. It does require you to be a little bit patient with us, please, but it will pay off. On the second part of your question, I'll ask Afonso to give you a bit of a hand. These are early days. I mean we've been working on this for a while, as you can imagine, but these are early days. I would like to think, and I don't want to be tied to an answer, and I hope Afonso will agree with me, but I would think this will give us the opportunity to be more selective as opposed to accelerating or changing the numbers. But maybe -- and we haven't rehearsed this. So Afonso, try not to disagree, please.

Absolutely right. James, when Sami set out our strategy at the beginning of last year to rebalance, reshape and rebuild and as he's reiterated today in his presentation, we always anticipated a return to those core markets over that period of time. So while this gives us more optionality and more opportunities to -- and an increase in the pipeline, particularly from '23 onwards, as we said. I don't think we would be adjusting our guidance or our performance framework for the medium-term because it was meant to encompass that return over that fullness of time.

Okay. Okay. And Afonso maybe to stick with you. Clearly, a lot of time and effort has been put into claim settlements, et cetera, over the last year or so, AVOs are [ on the up ]. Could you maybe talk a little bit more about maybe the magnitude of the working capital tailwind you think could be possible in 2022 as a number of these contracts do finish?

Yes. I think it's probably worth just mentioning that while the AVO balance may gone up. In fact, we did resolve a number of some 40% of the outstanding amounts at the beginning of the year. They have been replaced with new ones as part of the COVID environment that we find ourselves in. So there has been a significant churn in those and progress made as you recognize. And I think we've made that clear that particularly in the last few months, as people adapt to the new environment and not -- helped also by the current outlook. We are finding that those resolutions are coming through, and we're settling most -- not most, we're settling a large proportion of our outstanding claims. Then in terms of the working capital, clearly, we have a relatively limited number of projects in hand as we turn into regrowing the backlog. We also have some headwinds that we mentioned, we've got high interest costs, particularly on the bond. We've also had the payment of the SFO fine in the first part of the year. But nevertheless, we're standing by the guidance that over the course of the year, we're targeting to be broadly neutral, which is to say that the working capital reversal will offset those headwinds, and therefore, we'll end up in broadly neutral and broadly flat net debt to the year.

[Operator Instructions] The next question comes from the line of Mark Wilson from Jefferies.

Afonso, I was wondering if you could give us the E&C backlog breakdown for -- what you have for 2023 and beyond, is the first question. And then given the weighting to the second half of E&C awards and the phasing of how that revenue falls, sort of quantum would you think you'd have to win overall E&C this year to grow E&C revenues in 2023?