Petrofac Limited (PFC) Earnings Call Transcript & Summary

Good morning. I'm pleased to welcome you to today's half year results presentation. I'm Sami Iskander, Group CEO, and I'm joined today by Afonso Reis Sousa, our CFO. We will both be happy to take any questions after the presentation. On screen, you can see our standard disclosure notice. Please read at your own leisure. Turning now to today's agenda. Firstly, I'll take you through an overview of our performance and importantly, our key focus areas for the remainder of 2022. Afonso will take you through the financials in detail. I'll then cover our operational performance and outlook. The results we announced this morning are in line with guidance set in our recent trading update. Group revenue of $1.2 billion reflects the maturity of our E&C portfolio and project delays. While revenue in our Asset Solutions business continues to be robust. Overall, EBIT reflects additional COVID-related project costs and some unfavorable commercial settlements in E&C. This was partly offset by strong results in both Asset Solutions and IES. Although backlog in E&C has marginally decreased since the year-end due to a lack of industry awards, a significant increase in bidding activity has put us firmly on the path to grow backlog for the full year. Our recent $200 million provisional awards in Algeria, while small, is evidence of our competitiveness and marks the beginning of a multiyear up-cycle. Supported by a strong commodity price environment and increased focus on energy security, the outlook for the industry is as attractive as we have seen it in many years. The work we have done over the last 18 months means we enter this important period in a strong position to capitalize on a healthy pipeline of opportunities, both in our traditional business and the new energies, particularly in offshore end. We reported net debt of $341 million, reflecting delays in resolving commercial settlements and the payment of the court penalty in relation to the concluded SFO investigation. Earlier this year, I described the renewed emphasis on our strategic priorities to rebalance, reshape and rebuild the company as we travel the journey to reach our medium-term ambition to return to a $4 billion to $5 billion revenue and deliver sector-leading margins. So where are we on this journey? The actions we took last year to secure long-term financing for the group, we're at the beginning of a process to put Petrofac on a firm financial footing for the future. Today, our priority for rebalancing is about retaining our capital discipline and reducing working capital through closing out commercial settlements on the legacy portfolio. We are making good progress, but these negotiations are taking longer than expected, meaning positive free cash flow will start to come through from 2023 as we travel towards our objective of having a net cash position. Reshaping entails building on work we have done to simplify our organization to enhance operational and functional excellence as we work towards completion of our legacy E&C portfolio. What does this really mean? In short, it's about delivering every project to a consistently high standard. Going forward, the comprehensive embedding of One Tech throughout the group will ensure consistent delivery and therefore, control of project costs, particularly as we grow the backlog with new projects. These efforts will ultimately support our ambition to return to delivering sector-leading margins in the medium term. Finally, on rebuild, positive engagement with customers gives us confidence that many of the opportunities we are bidding on will like the award in Algeria start to be awarded in the second half of the year. I have said before that with the supportive market dynamic we see, we believe this will mark the beginning of a multiyear up cycle. Our bidding pipeline is very active, and we are maintaining our bidding discipline. This is not about building backlog at any cost. It's about building profitable backlog by maintaining strict discipline, both in project selection and in our pricing approach. We are also focused on partnerships to deliver differentiated customer propositions and our recent collaboration with Hitachi is a good example of this. It strengthens our competitive position to capitalize on the high-growth HVDC offshore wind market. We are traveling the journey. The second half of 2022 is all about best-in-class delivery of existing projects for our clients and starting to rebuild the backlog. In 2023, we expect to see strong growth and good free cash flow generation. In 2024, unencumbered by the legacy backlog and as new projects move into margin recognition territory, we will reap the benefits of our work to reshape the business and drive efficiency. Before I hand over to Afonso, I really would like to take a moment to share a brief update on progress we are making on the environmental aspect of our ESG commitments. I mentioned at full year results that 85% of our emissions come from the upstream PM304 asset in Malaysia. As production has grown, improving the impact of our operations on this asset has been central to our decarbonization focus. We've made progress in 3 key areas: our flare reduction passports successfully reduced flaring intensity by 36% through the targeted execution of a well workover program to isolate a gas-producing zone. Secondly, by utilizing associated gas from the field, which would otherwise be flared, we have largely switched from diesel generation to gas power. And finally, continued effort to optimize logistics are further reducing our footprint. Together, this work has culminated in a 29% reduction in carbon intensity across the assets operations. Beyond IES, we continue to drive decarbonization objectives at both a project and team level to increase accountability and embed a culture focused on emissions reductions. For customers, all E&C tenders now incorporate a low-carbon offering. While in Asset Solutions as well as optimizing ongoing operations, our approach to late-life asset management and decommissioning will support customers' long-term decarbonization efforts. I'll talk more about this later. I'll 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. Over to you, Afonso.

Thank you, Sami, and good morning, everyone. The results we are reporting today for the period ending 30th of June 2022 are in line with the guidance we provided in our trading update in June. We reported group revenue of $1.2 billion, down 23% on the same period last year, reflecting the lower opening group backlog this year as well as progress delays in the E&C contract portfolio. On the other hand, this was partly offset by a strong performance in both Asset Solutions and in IES. Business Performance EBIT decreased to $2 million due to the lower revenue, cost overruns related to the pandemic and adverse commercial settlements in our E&C portfolio, which, as you know, is fairly mature. Net finance expenses increased to $43 million due to the higher interest costs associated with the refinancing that took place in November. And consequently, the business performance net loss for the first half was $35 million. The reported net loss was, in fact, $14 million for the group after taking account $21 million of credit for separately disclosed items or SDIs. SDI has consisted of a net impairment reversal of $21 million and a fair value remeasurement credit of $9 million, offset by a $9 million charge relating to cloud software implementation costs and other items. The net impairment reversal largely comprised the partial reversal of historical impairments taken on the PM304 asset due to the higher oil price environment. The cash impact of SDIs was marginally positive at $1 million. At a divisional level, E&C revenue in the first half fell 40% to $0.7 billion, reflecting the lingering effects of the pandemic that I've just described. The first half EBIT was a negative $44 million as a result of the immediate recognition of the additional COVID-related project costs as well as the adverse impact of operating leverage from lower revenue. Order intake in the period of approximately $200 million was largely made up of positive net variation orders. Backlog in E&C declined to $1.8 billion, but as Sami will come on to shortly, the outlook for awards in the second half of the year is very favorable. We expect backlog to be materially higher at year-end with a full year book-to-bill over 1x. Last week, we announced the provisional award of the T-Hub contract in Algeria. While relatively small, this was the first of the several contracts we expect to be awarded in this half of the year. A number of larger opportunities should be awarded over the course of the rest of the year, and we hope to secure our fair share of that. In Asset Solutions, the financial performance was robust with revenue of $0.5 billion, marginally lower than last year due to a slow start in some of the new awards. In new energies, the strong momentum that we saw in 2021 has accelerated this year, and we secured a series of early-stage awards. While still relatively small, New Energies revenue in the first half was double the revenue generated in the prior year period, which is indicative of the rate of growth we are observing in this sector. The EBIT margin in Asset Solutions for the first 6 months decreased to 6.5%, in line with the guidance given. The reduction from prior year was due to the contract portfolio mix with several high-margin contracts maturing over the course of the early part of '21. We remain on track to deliver the full year EBIT margin guidance of between 5% and 6% in Asset Solutions. Order intake was high with $0.9 billion of contract awards and extensions secured in the first half, representing a book-to-bill in Asset Solutions of 1.7x. The order intake included a record $0.6 billion of awards in the wells and decommissioning service line. Backlog at the end of June increased to $1.9 billion, supporting revenue growth in the second half. Moving on to our Integrated Energy Services division, which delivered strong financial performance in the first half with a significant increase in production compared to prior year and benefiting from higher oil prices. Net production in the first half was 553,000 barrels of oil equivalent, reflecting the additional production from the East Cendor development, which commenced production in June 2021 as well as the partial reinstatement of the main Cendor field production. The average realized oil price in the first half, taking account of hedging was $99 per barrel. EBITDA was $44 million, up significantly from prior year, reflecting higher revenue without a commensurate increase in costs. Turning to the balance sheet and working capital. DSO increased to 247 days in the period, principally due to an increase in trade receivables as a result of slower payments from clients and delayed commercial settlement processes in the E&C division. DPO reduced marginally due to a reduction in trade payables and accrued contract expenses in the E&C operating segment. This working capital position will unwind as we resolve commercial settlement, normalized collections from customers and secure advanced payments from new E&C project awards. However, due to the time taken to resolve commercial settlements, we now expect this unwinding to take place from early 2023, supporting positive free cash flow next year, but not contributing materially to free cash flow in 2022. Turning, therefore, to cash flow and liquidity. Free cash outflow in the period was $193 million, which resulted in net debt increasing to $341 million at the half year. This was largely driven by lower EBITDA, the working capital outflow and of course, the payment of the $104 million SFO court fine, partly offset by $98 million of divestment proceeds relating to the Greater Stella field and the Mexico operations. Interest paid of $38 million reflected the higher cost following the refinancing last year and CapEx of $22 million was in line with expectations. Gross liquidity stood at $511 million at 30th of June, comprising $430 million of cash and $81 million of undrawn revolving credit facility. Given the comments I just made around the timing of resolution of commercial settlements, we now expect free cash flow and liquidity to be broadly flat at the end of the year compared with the half year position and to improve gradually from 2023 as working capital unwinds. As of June 30, 2022, the group was in compliance with its banking covenants having reached agreement with its banks to exclude certain one-off costs related to COVID-19 from the covenant calculation. Looking towards the full year outlook. At a group level, revenue in the second half is expected to be broadly in line with the first half, but lower than prior year. The full year tax expense is expected to be lower than previously guided at $15 million to $25 million due to lower profits. CapEx guidance is maintained at between $50 million and $55 million. As I mentioned, free cash flow is expected to be broadly neutral in the second half and then become positive from 2023. E&C has $0.6 billion of revenue secured for the second half and is expected to deliver marginally positive EBIT following the recognition of cost overruns in the first half. Of course, the final EBIT result will be subject to the outcomes on commercial settlements resulted in the second half. We don't typically provide guidance on order intake. However, given the high levels of bidding activity and number of beds already submitted, we feel confident guiding to E&C backlog growth year-on-year. Asset Solutions has $0.5 billion of secured revenue for the second half and has continued to win work after the period end, supporting an increase in revenue in the second half. While the order intake is expected to be first half weighted, this division is also expected to deliver a book-to-bill above 1x for the full year in 2022. In IES, production in the second half is expected to increase further, taking the full year average to between 3,000 and 3,500 barrels of oil per day compared to the average of 2,900 barrels per day in the first half. Assuming an average price of $100 per barrel of oil for the unhedged portion of production for the remainder of the year, IES is expected to deliver full year EBITDA of between $90 million and $100 million, an upgrade from previous guidance. Overall, we are positive about the outlook for the second half with improved group performance and the commencement of a sustained period of backlog growth. With that, I'll hand you back to Sami.

Thank you, Afonso. Now let's look at operational performance, starting with health and safety. We've had a solid performance in the first half of the year with continued improvement in lost time injury frequency rates. As the data on the screen suggests, this continues to be significantly lower than the industry average, albeit with a mature project portfolio. However, there is still work to be done to meet our own aspiration to be the safest contractor. In support of this goal, we have refreshed our HSE strategy centered on 5 pillars. Transparency is central to each, and technology is supporting us to drive a step change. For example, every business unit's safety performance is now visible to all employees in real time via their mobile phones. A new observation app means every observation can be viewed by any employee. This is increasing both situational awareness and employee engagement. Increasingly, anyone who drives on Petrofac business, including me, is using our new driving app, replacing in-vehicle monitoring systems. This app means each driver can see their own performance versus their colleagues. As a result, I'm pleased to say we are already seeing a steady reduction in auto incidents. In E&C, as you can see on the right, our E&C portfolio is diverse in geography, sector and clients. The maturity of this portfolio means that procurement is substantially complete on the majority of projects, meaning we are less exposed to inflationary headwinds. However, many of these projects have been impacted by the pandemic, both in terms of schedule and cost and commercial settlements with clients. We have been managing these headwinds for some time now. And as communicated previously, we expect the impact to be short term. Looking beyond our legacy portfolio, I'm pleased with the progress we have made in our delivery capability. The reshaping pillar of our strategy continues to include greater emphasis on service quality for clients. We talk about One Tech, which is our technical backbone, housing all our technical functions. One Tech will drive long-term consistency and execution, reinforcing Petrofac reputation for reliable project delivery. In our Asset Solutions business, we delivered robust performance and continue to position for growth with a 1.7x book-to-bill in the period, maintaining our core 40% market share in the U.K. and a renewal rate of 80% for operations and maintenance contracts. We continue to evidence high standards of delivery and service quality. Internationally, clients have increased emphasis on late life and end-of-life asset strategies. The market-leading operations, projects, wells and decommissioning expertise we have gained in the mature and highly regulated U.K. market has supported our geographical expansion. In the first half, we saw contract awards in 3 continents, providing a solid base from which we will deepen the footprint of our reimbursable services. Finally, our ability to integrate services across the asset life cycle is increasing our differentiation and providing opportunity for pull-through services. This customer theme is particularly prevalent in the late-life operational space, where decommissioning is a key enabler for the energy transition. Major awards in the first half in Australia and the Gulf of Mexico are demonstrative of the increased desire for integrated delivery. We have the unique ability to provide a one-stop shop for full decommissioning projects, having not only the engineering and project management capabilities for the facilities, but also the extensive experience with plugging and abandoning of the wells. Our duty holder capability, which we pioneered in the U.K. also means that we can take full responsibility from a regulatory perspective as the operator of the infrastructure. Our integrated services offering minimizes safety and environment risk, reduces emissions and lower cost for our clients. This led to over $0.5 billion in order intake in the first half. A key enabler for the energy transition, the number of assets moving towards decommissioning will significantly rise in the coming years. Turning now to the outlook. I'll begin with our group bidding pipeline, which stands at a substantial $57 billion over the next 18 months. I'll make a few points about the pipeline. Whilst until now it has moved slower than we would have liked, the outlook for capital projects continues to improve, and bidding activity is now higher than it has been for many years. As I've mentioned already today, we are confident that many of the opportunities we are bidding on will start to be awarded evenly over the second half of the year, and we expect strong growth in 2023 and beyond. E&C has a total 18-month pipeline of $45 billion, with $7 billion of bids already submitted and another $7 billion under tender. I'll break this pipeline down in a moment. The Asset Solutions pipeline is $12 billion over the next 18 months, with $4 billion scheduled for award by the end of 2022. While Asset Solutions order intake is expected to be first half weighted, the business is expected to deliver a book-to-bill greater than 1x for the full year. Let's look at the composition of the pipeline. In E&C, we have a good mix across our traditional markets in upstream, refining and petrochemicals and $7 billion in new energies around 70% of that relates to offshore wind. I'll go into more detail on this in the next slide. Outside of wind, we continue to see activity for feed and early-stage concept studies. Across project opportunities, we have applied a risk factor to the pipeline to reflect those plans are less mature and timing is uncertain. Geographically, D&C Pipeline has a good spread across our core regions. This includes the UAE, where our reinstatement to ADNOC commercial directory provides significant growth opportunities from 2023. We are also bidding on several refinery upgrade projects in Europe, building on our success last year with oil and refinery upgrade in Lithuania. In Asset Solutions, there are attractive near-term opportunities for all service lines. Over 70% of today's pipeline is from international market, which demonstrates our ongoing effort to diversify geographically. In new Energy Services, I mentioned we expect growth in the near term to be primarily driven by offshore wind, where we have a strong track record on HVDC and HVAC substations. In July, we announced a collaboration with Hitachi, a market leader in transmission, distribution and grid automation technology to provide joint grid integration and infrastructure to support this rapidly growing market. This strategic partnership significantly enhances our competitive position, particularly in the HVDC market, where there are few credible suppliers of this technology. The largest and most immediate opportunities are with our existing customer TenneT. We have a track record of successful delivery for TenneT. Many of you will remember the substantial BorWin3 offshore wind grid connection project where we handed over to our clients in 2019. More recently, we successfully delivered the alpha and beta HVAC platforms for the HKZ offshore grid connection. TenneT plans to connect 40 gigawatts of offshore wind infrastructure in Germany and the Netherlands by 2030. This will require 15 to 20 2 gigawatt substations, substantially larger than any HVDC project built to date, with a total estimated order volume of some EUR 30 billion. The first of these projects will be awarded next year. While TenneT plant project portfolio is particularly sizable, we see opportunities with other key transmission operators expanding with HVDC. Before we go to Q&A, I'd like to leave you with a few summary thoughts. We are on a journey. Our business today is transformed from the business of 12 or 18 months ago. We have some ways to go. However, in 2022, we have turned a corner. At this point, when we look to the future, it is with excitement for the opportunities we see. Momentum is returning to Petrofac and our bidding activity today gives us confidence for tomorrow. This continues to be a recovery year for E&C, but the challenges we face are short term. The market is turning and we have a strong position in sectors that are expected to see substantial investment. Our Asset Solutions business continues to perform well, both in its core market and internationally as we leverage our market-leading U.K. integrated services capability to support clients around the globe. IES has delivered strong financial performance and in line with our sustainability framework, we remain committed to reducing the carbon intensity of our operations. Overall, the outlook is positive. By adding high-quality, profitable work to our backlog in the second half of the year, we will lay the right foundations to accelerate our growth from 2023, restoring in the medium term, our position as a $4 billion to $5 billion business with a growing contribution from new energies and return to sector-leading margins and of course, a net cash position. With that, Afonso and I will be very happy to take your questions.

This question comes from the line of William Turner from Goldman Sachs.

I have a couple of questions. My first question is on your guidance for marginally positive EBIT in E&C in the second half of the year. Could you walk us through a little bit on what the assumptions behind that are? And what are the potential kind of risks or upside risks to that upset risk through that guidance? And then also kind of related to this, is this guidance based on any assumption of orders that you've won recently?

Thank you, Will. I'll ask Afonso to answer the question. But maybe let me give a little bit of color, very high-level color on both points. First, we have, as you know, a very mature portfolio. And a mature portfolio, just by virtue of what it is, does not have -- on the positive does not have or is not impacted very much by inflation. On the negative, there isn't a lot of commercial leverage with our customers. And because we haven't treating one work, if you think of the portfolio effect for a number of years, that leverage is less. Our customers have taken -- I don't want to say extreme, but yes, I guess, extreme position with regards to recognized COVID cost increases. And we have, in some cases, not been able to pass those on, which meant that we needed to recognize them, which really led to the sort of the adverse commercial settlements that unfortunately, we have seen. We settled those in H1 to the best of our abilities. So those are behind us essentially. I don't want to stand here. I think Afonso will back me up here. I mean I'm not going to say there is no uncertainty. Clearly, that's not the case. The uncertainty obviously exists as long as these projects are still with us. Many of them will end in the -- we'll finish, I guess, in the second half of the year. However, the best of our abilities, we've accounted for the issues that have impacted us in H1, and therefore, we see a different H2. Afonso will take you maybe a little bit through -- a bit more detail. On your second point, yes, indeed, we are looking into a step change -- we believe or we're hoping and expecting a step change in order intake, but we have not accounted for the -- and I guess you're talking about the cash advances coming in the side of Christmas. I mean it takes time for all these things to materialize. We're not really building this into our forecast for H2. Maybe that's a bit conservative. But I mean, from just seeing how the cycle goes, we're not building those cash advances in. But maybe Afonso you can add a bit more color to the point.

Sure. I think you've touched on the key highlights, but the way we looked at it, clearly, where we are, the rest of 2022 and really 2023 is going to be based on the existing portfolio of projects because the -- as Sami just pointed out, the order of business for the new order intake is that, first, obviously, you get the backlog, then you get the cash, then you start recognizing the revenue and eventually, you'll recognize the profits with a lag. So there is nothing in the new orders this year that's going to contribute to profits this year and really for most of '23. So to your question about how that guidance is made up, it's really based on the performance of the existing portfolio and very little be contributed from new orders. The existing portfolio is being quite mature -- we have a number of projects coming to completion between now and the end of this year and in one case, into Q1 of '23. As a result, we think the risk is largely behind us. And in addition, we took incremental costs in the second quarter, as you know. Those costs represent the best view that we have of the cost to complete. And what we had to do given the maturity of the portfolio is that we recognize those costs immediately because the portfolio is 90-something percent complete and applying our value what waiting we've taken some percent of the costs immediately. So never say never, but we think we've taken account the risks, what we're guiding to is our best view of how things will work out in the second half. Now, there are settlements of course. And as we said, we now expect, as we did before, to reach the commercial settlements during the second half, even though we don't think the cash flow will come in until '23. But in reaching those commercial settlements, there could always be some risk. But nevertheless, our history is that what we recognize typically has been conservative as we're required to do in the accounting standards. We have not typically reversed many of our commercial settlements, and that applies to the current portfolio as well. So with that caveat, albeit a relatively -- mild caveat, we don't -- that's how we approach the second half guidance.

Great. And when you are bidding on projects at the moment, actually there's already $7 billion bids submitted and the further $7 billion tendering currently. Has there been any changes in the kind of contract or terms on these orders? Obviously, we're now in a much smaller kind of high inflationary world, and it feels like the operational environment has become more challenging. So have customers accepted great contingencies in the most recent bids? And has there been any scope to have any kind of pass-through mechanisms possibly included? I know how most of them are usually done at a fixed price.

Yes. Well, I mean, there's a lot of questions in that question. And it's very hard to give you an answer that characterizes all customers. But I think you are right, at least let's start from some customers, particularly we've talked about the customers and offshore wins and maybe some of our more long-term customers well, ADNOC in particular, who are thinking sort of how to capitalize on or how to move the industry quicker through -- in the case of TenneT framework agreements in the case of ADNOC, some sort of negotiation as opposed to a bidding process. There is an element, obviously, of a reimbursable element that has to be accepted by them and us. So there is -- I can't give you a number because it's different for each, but there is an element. And if we're going to move beyond bidding, and it is being discussed not by all customers but by some in sort of multiyear programs to get projects on faster, there will be an element of a reimbursable element and, of course, on some elements as well. But this is not for all customers. I think the traditional building is exactly the traditional bidding we've been seeing for many, many, many years. And I think our approach to lump sum turnkey is not dissimilar in many cases. But I think on inflation, in particular, and you've heard me speak about why I think our approach is different around how much detailed engineering we do upfront, and therefore, be able to place orders quickly, the type of procurement engine we have, the increase we do in the coated portion of tenders. But as well, I mean, I'd like to maybe add a few more things. If I look at some of the numbers and we look at this -- I look at this more than weekly or several times a week. If we look at some of the indices we've been seeing, and I'll pick up on sort of scrap steel, for example, that was trading at roughly $350 per metric ton prior to the war, went up to $700 is done very similar to where it was pre-war. So there is a bit of cooling off. Nickel was $22,000. Now it's at $23,000, went up to $48,000 by the way, in the middle. We are seeing delays in manufacturing, and we call that, I don't know, 2 months or something like 2 months or over a 12-month calendar delays in transport and cost increase in transport. So I mean just to give you -- I mean, we have very good visibility or understanding of it, and we build that into our lump-sum turnkey contracts. And as you rightly pointed out, some customers are moving to different contracting mechanisms, particularly those that are trying to build sort of a multiyear program with us and other contractors, I'm sure. I hope that answers. I'll give you a bit of color and answer to your question.

No, that's very interesting. And then on the working capital, obviously, the guidance here has changed so not expecting to unwind until 2023. Could you just walk us through a little bit on why that's changed? And what's been the variables which resulted in this kind of lower recovery in working capital?

Yes. So perhaps the way to think about it is if you could think of the commercial positions migrating first from being open to being closed, which is to say from an assess variation order to being an agreed variation order. And then from that to being cashed out or being received. What has changed in our assessment is, as we reassess the timing of resolution, we remain confident that we are in the process as these projects come to maturity to close out those open positions to migrate those ABAs or a significant proportion of the ABAs from assessed 2 agreed. But given the timing, as we're now beginning of August, we just don't have the same degree of confidence that they will actually be settled within the year. So it means the progress will be made, but the actual receipt of the funds will not take place until 2023. So that's really the assessment that's changed.

Yes. Okay. That's fair. And then I guess a final question if I'm allowed. You've discussed a lot more about the offshore. I feel like you've discussed a lot more than in recent quarters on the offshore wind opportunity. How much of the current $14 billion of orders that you've bid on and are tendering is relating to the offshore wind? And then when you look across the kind of markets that you play in, have you seen a particular step-up in activity there? Or has there been another one of the core markets where you're seeing the activity improve most?

Yes. Maybe let me take this, Will. I mean, first, let me talk about the wind opportunity with Hitachi because this indeed is extremely exciting. And really, we can't see each other on video, but this is really exciting. And this is focused on one customer, which is TenneT. And TenneT has come to the market and formed -- I mean I'm not speaking out of school here, I mean they formed or they've asked to form 3 consortiums or whatever the word is. to address a 40-gigawatt program over the coming 8 years. So this is one of the ones that I spoke about, a framework agreement, sort of a negotiation into this. And this is about between the 3 groups, if you wish; Hitachi and 2 others. This is about, I don't know, close to 22 gigawatts of projects. These are very large projects. I'm going to say not $2 billion level, but you're already talking about $1.5 billion to $2 billion each. They're very, very large. So I think there is a -- with one customer, and this is really targeting Germany and Holland in particular. But we're seeing the start of talk around this in the U.K. as well and in 1 or 2 other European countries. So no, I'm very excited about the offshore wind HVDC opportunity. It's not hundreds of projects, but certainly, with TenneT, we're seeing 20 and it's easy to say that probably over the coming year or 2 as other customers and other regulators become as mature as what we're seeing in Germany and Holland that this market will increase. The HVAC, while I'm on it, the HVAC is a massive market, probably 4x, 5x -- well, actually, 5x plus the size of the HVDC market, but it's highly competitive. And that's why I'm really very excited, and it's not just offshore. I'm excited about offshore, about the DC because this is where there is a significant amount of engineering and there's a big price per project. In our current backlog of the -- and you probably have noticed that we have moved the new energies contribution from $11 billion to $7 billion. This is only because it has shrunk. But outside wind, we have put a higher risk factor on some of the hydrogen projects, some of the CCS projects waste-to-value projects because of the maturity of the -- not just the customers. The raising of capital, et cetera, et cetera. So it's a higher risk factor that has gone from $11 billion to $7 billion. But in that $7 billion, 70% of it is in wind. But as I said, particularly with TenneT, this is going to be a framework agreement to be negotiated as we move forward with the high all percentage of reimbursable as part of it.

I'm not sure whether your question included on how much of the $7 billion of TenneT we've got currently outstanding bids are in the wind sector. I think it is not in that because as we guided earlier in the year, the wind is a 2023 play, not a 2022 play. There are no bids that were expecting to be awarded this year in the wind sector.

The next question comes from the line of James Thompson from JPMorgan.

First question would be, in recent times, I think the bid pipeline has been sort of steadily increasing as the kind of market backdrop recovers. And clearly, you've been stepping up in tenders. But through that process, generally speaking, I would say the kind of expectations on the award flow has been sort of creeping to the right. Clearly, in this update, that changes, you're sort of pulling forward or accelerating the potential scope awards. So Sami, I was just wondering if you could give some more color on why that is? Is it as you drive sort of a bit of a stabilization in kind of raw materials? What is it that's driving that? Is it the kind of confidence you've got on discussions around your technical proposals? Could you repay to give some color on why the acceleration now?

Yes, James, morning, and thank you for the question. I'm going to try very hard not to put a news around my neck in this answer. But yes, I am quite excited about our H2 prospects, if I may call it this way. I don't think this is necessarily the stabilization of commodity of raw materials and what not. I think what we are seeing and have seen is a desire by many customers responding to energy security concerns, production concerns, et cetera, et cetera. By the way, new energies and traditional energies, but we're really seeing this response coming through. I think early in the year or yes, very early in the year, it was more around plans and there were big plans in pipelines and what not. These plans have over the year got translated into invitations for tender, and then there were real bids and then bids have been submitted, and there are commercial discussions, clarification discussions ongoing. So I don't want to give more specific color other than to say that there's a -- I'm not going to say that all $7 billion, by the way, will be awarded. I mean that's unlikely, but a significant amount of it will be awarded in 2022. And of course, in my view, we've put in countries where I feel Petrofac is differentiated because of our knowledge of the supply chain because of our ability to manage across interfaces of the top most 30, 40 different subcontractors. So I'm quite hopeful that some of these awards and in some of these awards were down to the last 2. As you can imagine, the bids have been submitted. There has been the usual culling, if I can call it that. So I think we're in a good position. And maybe one on lighter side, things can't move to the right over time. At some point, the right has to arrive. So I guess I'm -- confident is not the right word. I'm worried but I'm looking for confidence that we will grow our backlog in H2, that we'll grow our backlog significantly. I'm not going to define significantly, by the way, but significantly in H2. And I expect 2023 to be another very good year. And why, yes, I see it's not just people are going out for quotations and ITBs. These ITBs have become real bids. Some of them have become framework agreements or discussions on framework agreements and there's real work at the end of it. It's a very long answer to -- without trying to be very specific, but I hope [indiscernible].