Petrofac Limited (PFC) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for Petrofac's full year results presentation. I'm Tareq Kawash, Petrofac's new Group Chief Executive. I'm very pleased to be joined by Afonso Reis Sousa, our Chief Financial Officer. On screen, you should see our standard disclosure notice. Please read it at your leisure. Turning to today's agenda. In a few moments, Afonso is going to take you through our detailed 2022 financial results. I'll then cover our operational performance, progress against Petrofac's strategy and future business outlook. We'll then have time for Q&A during which Afonso and I will be happy to take your queries. Before we move into the detail, most of you know that I assumed the role of Petrofac's Chief Executive at the start of April. I joined Petrofac from McDermott, where I've been for more than 20 years. More recently, I was Senior Vice President of its Global Onshore and Middle East Offshore business lines and a member of McDermott's Executive Committee. So I know Petrofac's markets and its customers very well and have also known Petrofac well. First, as a formidable competitor, but also as a joint venture partner. I always admired the drive of Petrofac's people, it's focused on delivery and its execution capability. The Petrofac leadership and management teams welcomed me in March to begin my handover from Sami Iskander. I want to thank Sami for ensuring continuity of leadership. I've always associated Petrofac with an entrepreneurial and client-focused culture. These are the foundations for its differentiation, alongside a strong track record of execution for clients in its core markets. I have already been able to visit our primary locations in the UAE and U.K., and there remains a strong project delivery and operations capability at the heart of this business that is capable of delivering outstanding results for our clients. I have also met with many of our key clients. The feedback has been very positive, and it is clear from these conversations that Petrofac's reputation within the industry remains strong. It is a company that clients trust with their most important projects, want to see succeed and want to work with. This is encouraging and is a good platform on which to build. I will share more on my early perspectives on the business later in the presentation. Like much of the services sector, Petrofac's E&C business continued to feel the lingering impact of project delays caused by the pandemic, unfavorable commercial settlements, together with slow investment in new capital projects. As we guided in December and April, this led to a disappointing set of financial results for 2022, demanding the continued patience of our stakeholders. Afonso will talk about this and the steps we're taking to ensure the financial strength of the business, such as unlocking working capital, balancing long-term value against near-term liquidity and securing advances from new awards. I want to take a brief moment to highlight the content on the right of the slide. The leadership team has made good progress in a number of areas, positioning the business for its rebuild. The closeout of 7 legacy contracts in 2022 helped draw a line under many projects of the past. These are positive step forward. Of course, we still have work to do, which we'll talk about later. The Asset Solutions business continued to grow and expand into new markets and win more decommissioning projects. We also saw strong performance in IES. Strategically, the team made progress with our reentry into the UAE, where we secured new work with ADNOC and continue to bid on a number of sizable future projects. In new energies, we continue to expand our offering into hydrogen, carbon capture, waste-to-value and offshore wind. Finally, the formation of the collaboration with Hitachi Energy last summer recently led to the award of Petrofac's largest-ever framework agreement. I look forward to talking more about that and our plans for the renewable sectors later. For now, I'll pass to Afonso.

Thank you, Tareq, and good morning, everyone. Welcome to our results presentation. Our results for the year ending 31st of December 2022, reflect the continuing challenges in the E&C portfolio, partly offset by strong performance in Asset Solutions and in IES as well. As a result of low levels of activity in E&C, the Group experienced an overall reduction of 14% in revenue to $2.6 billion. As we mentioned in the trading update earlier this month and also in December, the performance of E&C was affected by cost overruns in its portfolio of mature legacy contracts, which were in execution throughout the pandemic period. This resulted in a full year EBIT loss for the Group of $205 million. I'll discuss the divisional financial performance in more detail in a minute, but I just want to register that both Asset Solutions and IES continue to perform well and delivered healthy margins during 2022. Group backlog declined overall and stood at $3.4 billion at the end of the year. This was a direct result of the low level of industry awards and therefore, reduced backlog in the E&C sector. Asset Solutions, on the other hand, delivered another strong year of order intake, as we continue to expand operations both in its existing geographies and into new territories. The outlook for E&C is, however, very positive. In the first quarter of the current year, it secured its biggest ever framework contract, covering multiple offshore transmission platforms for the wind power sector for TenneT. This positive outlook at E&C is reflected in the Group pipeline of some $51 billion, which are scheduled for award by June of 2024. The majority of these opportunities are in our core regions of MENA, the U.K. and Europe, and within this, we remain well positioned on a number of near-term prospects, including $1.5 billion of contracts at preferred bidder stage, which we have referenced before. And I know Tareq will come back to these opportunities later. Net debt at 31st of December '22 was $3,349 million, predominantly reflecting the free cash outflow in the year driven by the payment of the SFO penalty as well as the delay in new awards. Let's now take a look at performance at the divisional level. As I said a moment ago, 2022 was a challenging year for E&C, reflective of a difficult commercial and operating environment. Given the low level of new contract awards in recent years, the portfolio is both small and primarily consists of mature contracts as opposed to a more balanced portfolio, which will normally comprised contracts at different stages of execution. The lingering impact of the pandemic continued to affect the portfolio, resulting in extended schedules and additional costs, which have not been compensated or certainly not fully compensated by clients. I should call out, in particular, the Thai Oil Clean Fuels project, where we experienced significant cost overruns during 2022. This is a uniquely complex project, and the contract has been onerous since 2021. We do however expect to recover a proportion of the incremental costs recognized, as discussions progress between us and our partners and the clients. In addition, and in order to accelerate the unwinding of working capital, we have taken a pragmatic view on commercial settlements, which has resulted in the recognition of adverse outcomes. Finally, as E&C operates below its minimum efficient scale, there was also an adverse impact from under recovery of overhead costs from the relatively small portfolio of active contracts. Having said that, we made good progress in closing out the legacy portfolio, having completed or substantially completed 7 contracts in '22 and with a further 5 scheduled to complete in 2023. Overall, E&C reported full year revenues of $1.3 billion. As a result of the factors I've just outlined, cost overruns across the portfolio, adverse settlements and subscale operations, E&C delivered an EBIT loss for the year of $299 million. Order intake in the year was lower than prior years' at $0.5 billion, comprising a new EPC contract in Algeria and net variation orders. This contrast with the outlook for 2023, where E&C has positioned itself for growth, in anticipation of the expected upcycle as Tareq will come to shortly. In Asset Solutions, the operational and financial performance has held up well over the past couple of years, with revenue growing 4% to $1.2 billion in 2022. The EBIT margin for the year was in line with guidance at 5.2% and the reduction from 2021 was due to the change in the mix of the contract portfolio with the completion of historic high-margin contracts as well as a higher proportion of pass-through revenue. Order intake was high with $1.4 billion of contract awards and extensions, representing a book-to-bill ratio of 1.2x. The growth in backlog was evident in each of its service lines. In new energies, a strong momentum we have gained over the last 2 years continued in 2022 and into 2023, with a series of early-stage awards and strategic alliances with technology providers. This leaves us well positioned over the medium term to secure EPC and other project work as customers progress to final investment decisions. Again, Tareq will cover this in greater detail later. Moving on to our Integrated Energy Services division; the financial performance in IES was bolstered by both high oil prices and increased production. Net production for the year was double that in 2021, reflecting a full year of production from the East Cendor development and the completion of other well workovers. The average realized oil price for the year, taking into account hedging, was 45% up on the prior year at $112 per barrel. EBITDA was $109 million, up significantly from prior year, reflecting the higher revenues generated without a commensurate increase in costs. At the same time as increasing production, improving the efficiency of our operations on this asset has been central to our decarbonization strategy, and in 2022, we delivered a reduction in emissions intensity of almost 50%, working with our flare reduction task force. Turning now to the balance sheet and working capital; working capital has traditionally been very low in Petrofac, and grew since 2019 as a result of the pandemic. Returning to a more typical working capital position represents a huge financial price for the Group. As we close out the legacy contracts and finalize the associated settlements and with the additional benefit of positive cash flows from new awards, we expect to revert to a neutral working capital position over the next 18 months. As you can see on the chart, the working capital balances grew up to the middle of 2022, and it has started to reverse since then. This is partly as a result of targeted efforts to close out settlements, including where appropriate, a pragmatic approach to the balance of long-term value versus near-term liquidity. Speaking of which, let's now look at the liquidity position in more detail. Free cash outflow for the year was $188 million, which resulted in net debt increasing to $349 million. This was largely driven by the reported EBITDA, as well as the payment of the SFO penalty, which is included within the other line on the table. These outflows were partly mitigated by the reduction in net working capital balances, as well as proceeds from previous divestments. Interest payments were materially higher in '22, as a result of the refinancing at the end of '21. Whilst liquidity has reduced versus the prior year, we maintained our liquidity position over the second half of 2022, despite the delay in new awards and cost overruns. This liquidity position has also been maintained over the first quarter of 2023. In the near term, as we build up the backlog, the Group is reliant on a small number of relatively high-value collections related to the closing out of legacy contracts and associated settlements, as well as advances on new awards. Details are set out in our financial statements. Finally, as you will have seen, last week, we signed an extension to our bank facilities for an additional 12 months. Looking now to the full year outlook; guidance for the year remains in line with the December '22 trading update. E&C has approximately $900 million of secured revenue for the year, of which about half relates to onerous contracts and therefore, will not contribute to EBIT margin. The dynamics I described earlier, that is the mature portfolio and the adverse operating leverage will continue to play out in '23. Furthermore, given our accounting policies, the new awards secured in '23 will not contribute to margins until next year. As a result, and as we said in December, we expect E&C to deliver small EBIT loss for this year. Asset Solutions is expected to continue to grow, with higher revenues driven by the backlog increase last year. The revenue secured for the year stands today at $1.2 billion. Asset Solutions margins are expected to remain healthy, albeit lower than 2022, due to the roll-off of the historically high margin work in the Middle East as well as an increased proportion of pass-through revenues. IES is also expected to deliver another robust performance in '23, even recognizing that production is expected to be slightly lower and oil prices are also trending lower. At $85 per barrel, EBITDA in IES is expected to be in the range of between 65 and $75 million, and as further guidance, a sustained $1 change in the price of oil equates to approximately $700,000 of EBITDA over the course of the year. From a Group perspective, we expect cash flow to be broadly neutral. However, there is upside potential depending on progress made in reducing our net working capital balances. Overall, the key focus areas of '23 are the conversion of pipeline into backlog, which Tareq will talk more about shortly as well as the release of working capital from the legacy portfolio. And with that, I will now hand you over back to Tareq.

Thank you, Afonso. Now let's look at operational performance, starting with our ESG highlights. In 2022, the Group made good progress against each of its environmental, social and governance commitments. I'm committed to this agenda and ensuring Petrofac is positioning itself as a socially engaged and environmentally responsible business with an industry-leading governance regime. A significant percentage of our management incentives were linked to ESG performance, including the 3 following areas: firstly, in line with our goal to reach Net Zero in Scope 1 and Scope 2 emissions by 2030, our teams have significantly reduced emissions intensity across our operations. Secondly, the proportion of women in senior roles increased to 26%, bringing us in-sight of our 2025 diversity target. And finally, from a governance perspective, we continue to drive a best-in-class compliance culture, aligned to international benchmarks. We were pleased to see third-party recognition of our progress from MSCI. Having reviewed Petrofac's ESG risks and how these are managed relative to our peer group, they awarded us AA leadership status. Turning now to Group-wide health and safety performance. 2022 brought a sustained safety performance across our global operations. We continue to mitigate lost time injuries with our low incident rate remaining unchanged. I'm pleased to tell you that the severity of workplace injuries decreased, with the majority of incidents involving cuts, scrapes, trips and falls. While the chart demonstrates that we have performed significantly better than the industry average, my leadership team and I will focus on further reducing our recordable incident rate in pursuit of our aspiration to be the safest contractor. In support of this, the Group's HSE strategy was refreshed last year. Based on the 5 pillars you see on the left of the slide, the emphasis was to ensure the same uncompromising safety culture exists across the entire Group. Let's take a look at business unit operational performance. In E&C, across the mature portfolio, 7 contracts were completed or substantially completed last year. As Afonso described, many of these projects were impacted by the pandemic, both in terms of schedule and costs and settlements with clients. This was further compounded by the inflationary headwinds on newer projects. 5 of the 8 remaining projects will be completed this year. These are captured on the graphic on the right of the slide. Notwithstanding the Thai Oil contract, these projects stretch across well-known customer groups in Petrofac's core locations and represent a more balanced risk profile. While bumps are inevitable in every world, we are very much focused on closing them out quickly and safely. We're also working hard to build the backlog and as we do, we see the return of the portfolio effect. This will naturally reduce the risk profile in E&C, supported further by a disciplined and selective approach to bidding. Let's look at 2 of the E&C projects listed, starting with Thai Oil. The Thai Oil contract performance was highlighted in our December and April trading updates. But what makes this contract so unique? We are part of a joint venture supporting the improvement and expansion of a large 1960s refinery. This mega project is particularly complex. Let me explain; a large portion of the scope is brownfield EPC, which is more challenging than greenfield, because you need to factor in existing infrastructure and tie into existing process plant. In this instance, there are 1,400 interfaces to consider. This site is additionally complex, because the refinery continues to be operational, while our team works around it. Access is another challenge. The site lies between a forested mountain and the community of Sriracha. All these things considered, construction demands a carefully planned modular approach. The order we procure and fabricate in, the order of materials arriving, and the order in which we undertake work matters usually. Unfortunately, sourced materials used by the joint venture such as China, Italy and India were badly impacted by the pandemic, affecting sequential activities and causing significant delays. So what are we doing about it? While the cost implications have been disappointing, our team have done a great job despite these challenges. We continue to maintain strong relations with our partners and clients and have progressed the project in a way that will support us to recoup some of the time lost. Together, we have reworked elements of the execution strategy based on a new phase delivery, change subcontractors and work to get elements of the refinery onstream. Today, engineering is complete, materials have been delivered and final modules have been shipped, providing greater assurance on the critical path to completion. I look forward to visiting our Thai Oil project team soon. I'd like to talk now to one of the most recent contracts in E&C's portfolio. Having successfully delivered 2 previous projects for TenneT and then establish our partnership with Hitachi Energy last summer, TenneT selected us to provide joint grid integration and infrastructure for its 2 gigawatt program. Part of Europe's largest ever infrastructure award, this significant framework agreement is worth approximately EUR 13 billion to our partnership. The first platform agreement under the framework was awarded in April. The second is expected later in the year. Each is worth over $2 billion to the partnership. Our scope is to engineer, procure, construct and install onshore and offshore infrastructure for the landmark 2-gigawatt offshore wind program. The 6 project program will set a new standard for offshore wind, doubling connection capacity. But for service providers involved, it is unique for 3 additional reasons. First, it represents an all-new approach to contracting, enabling Petrofac and our partner, Hitachi to see exactly what's coming, plan ahead and secure new resources accordingly. Secondly, the program truly harnesses supply chain collaboration, enabling a Design One Build-Many approach. Finally, the contract involves a derisked price mechanism with cost-plus elements, adjustable elements as well as lumpsum. I was very pleased to be in Berlin last week to celebrate the signing of the framework. It goes without saying, this is a landmark opportunity for Petrofac, which underpins the backlog growth expected over the coming years and sets us on a track to achieve our new energy ambitions. Turning to Asset Solutions; the business unit delivered a robust performance in 2022, growing revenue and delivering a healthy margin. Maintaining its core 40% U.K. market share and renewal rate of 80% for operations and maintenance contracts, Asset Solutions evidenced continued high standards of delivery. Internationally, clients increased their emphasis on late life asset strategies, looking to Petrofac to deploy the same high U.K. standards elsewhere in the world. In 2022, this supported geographic expansion in operations, projects, well engineering and decommissioning. For many clients, our ability to integrate these services across the asset lifecycle gave Petrofac an element of differentiation, and I expect this to be an ongoing theme. I've been particularly impressed by our ability to provide a one-stop shop for full decommissioning projects. I see a big opportunity here to provide this service as a strategic enabler for the energy transition. Looking forward, I'd like to focus on some of my early observations and the market outlook. So what do I see? I see a number of strengths, great people running a strong engine room, an impressive track record in MENA and the U.K. structural cost advantages through established engineering houses. I see a resilient and growing asset solutions business and a fantastic differentiation in well engineering and decommissioning. And finally, I see clear parallels between our capabilities and our customer needs in new and renewable energies. Of course, I also see clear opportunities to close out legacy contracts, to pursue high-quality backlog growth, bringing balance to our ageing portfolio to take a more selective approach to bidding and to release a significant working capital built up through the pandemic. I see a Group which is resolute in its efforts to capture these opportunities and turn the corner. Moving forward, 4 particular themes give me confidence for the future. First, all market data backed by ongoing customer dialogue points to an increase in CapEx spend between now and 2025 and beyond. This will be particularly prevalent in Petrofac's core MENA region. We have an extensive track record here with strong customer relationships and the prospect of a significant catch-up following a decade of underinvestment in the region. Secondly, offshore wind will play a crucial role in the transition to clean affordable energy, and we have been successfully delivering major projects in this sector for more than a decade now. Our collaboration with Hitachi Energy positions us to grow further in this space. Thirdly, I talked earlier about the opportunity to integrate services across late life asset management and decommissioning. As the energy transition progresses and the number of assets in mature basin heading towards decommissioning increases, we have the ability to combine our services in a way that reduces safety risk and environmental risk and lowers cost for our clients. We saw growth in the Gulf of Mexico and Australia in '22 and have already secured additional work in these regions in '23. And this will continue to support the fourth and final theme of the slide, further geographic expansion in Asset Solutions. In addition to the [ decomm ] piece, Asset Solutions has a fantastic opportunity to grow its initial footprint in Africa, where asset acquisition is a key customer theme, driving a need for outsourced services. Our bidding pipeline supports these themes. Let's take a look at it; our Group bidding pipeline sits at $51 billion over the next 14 months. In E&C, 59% of its $40 billion pipeline exists within our home markets, where Petrofac has an impressive track record. Our team is working hard to bring home the wins, and while delays are always frustrating, they are not unusual. I've worked in this industry for a long time, and this is a very positive pipeline that will underpin our recovery over the coming years. In Asset Solutions, I've talked about geographic growth, a portion of its $11 billion pipeline represents the opportunity to build on the foothold gained in Africa during 2021 and 2022 as customers invest in their assets. In regions like Africa, Asset Solutions is excellently placed to command good margins. Of the total pipeline, new energy scopes account for over $10 billion, a large portion of this is offshore wind. In the short term, I believe this sector will continue to underpin our new energies expansion. However, we have successfully undertaken various early engineering scopes in carbon capture, hydrogen and waste to value and continue to amass experience in these sectors. Earlier this week, we announced an exclusive partnership to deliver green methanol projects with OCI Global. I expect a portion of these opportunities to turn into projects in the medium term. So before we wrap up, let me summarize some of the key points from today's presentation. We are working resolutely to put the challenges of our legacy portfolio behind us, and we have a clear path forward. Our recovery will take time, but by unlocking the significant working capital built up during the pandemic, delivering near-term backlog growth, expanding further into new energies and new geographies and Asset Solutions, we will come out the other side stronger and ready to deliver our medium-term ambitions. We have an exceptional EPC and operational capability that is well positioned to deliver and support critical infrastructure for the world's leading resource holders. In an increasingly active market, we must, however, be selective and disciplined, as we grow our order book across all markets, to build a more balanced portfolio, return to sector-leading margins and free cash flow. Alongside the data we've discussed today that people at Petrofac give me the confidence for the future, their capability, customer focus and resolve, impress me. I'm excited to work together with them to deliver on the Group's potential.

[Operator Instructions] We'll take our first question from Christian Hinderaker at Goldman Sachs.

I wanted to start maybe with the working capital position, I think, $436 million on the balance sheet at year-end. Obviously, cash very much in focus at the minute. Just interested in actions taken since December and indeed, what you can do in the months ahead with regard to cash collection, and how we should think about that composition across the different working capital lines?

Thanks for joining and thank you for the question. I think what you have seen is the working capital position that we built up over the last 3 years really since the pandemic started, starting to reverse in the second half of 2022, with a slightly lower working capital, particularly in E&C. And I think what we've guided is that we're expecting that to unwind fully, and I think this is in line with previous guidance of '23 and '24. And we are working extremely hard to accelerate that. The vast majority of this working capital isn't disputed. It has to do with reaching the invoicing milestones and you asked about the journey sort of migrating from work-in-progress into receivables and then into cash. And in addition to that, of course, there are some elements which require agreement with clients where they had to do with final settlements on this mature portfolio we've talked so much about. And so we're engaged with those clients to accelerate those discussions and get to conclusion and bring that resolution and visibility. I think we've also guided that we're taking a pragmatic approach in relation to those resolutions. And in other words, trading some potential value for the acceleration of the unwinding of the working capital. And I think in our guidance about the cash flow for the year, we've made reference to that. We don't want to be overly optimistic. But also we want to be transparent about the potential for some upside there, if we bring in those accelerated reductions in the net balances.

Maybe secondly, if we can discuss the cost overruns within E&C and in particular, obviously, the Thai Oil Clean Fuels contract, I think, $160 million of overruns in total, with $48 million in the 2021 period. Just looking at the project completion stage, and I think you talked about this a little bit earlier on the call, now 78% complete and 2 years left, in terms of the forecast completion. Just eager to understand whether these cost adjustments that you've announced are likely to substantially reduce the risks on the remaining processes, or whether there could be further project difficulties in that contract, that mean there could be some further cost issues?

Yes. Look, it is absolutely a unique and complex contract, and I think Tareq spent some time just now in the video there, I hope you were all able to see it, because we had some difficulties watching at our end, but hopefully, you didn't, spent a little bit of time explaining some of the characteristics of that contract and he's going out there quite shortly, and I'm sure he will have some views on that. But in terms of the history and the costs that we've recognized, I think it's a combination of both increased costs and some pre-investment in trying to protect the schedule of that contract for the benefit of our clients. And at the same time, we've also taken a relatively prudent view on how much of those costs were likely to recover from the client. We are in those discussions, but they've not matured to a level where we felt it was appropriate to take a recognition of the incremental revenue, which is to say that there is some potential upside from -- as we've resolved the -- as we reach the agreement with the clients and potential upside to the recovery of past costs and as well as future acceleration costs. And so if you -- in terms of risks, it is a bit more balanced at the moment because -- it is a lumpsum contract. We cannot pretend that there aren't risks in every lumpsum contract. It is the inherent nature of them, and you'll never hear us say that there are no risks. But those risks are also balanced at the moment because of our prudent recognition by some potential upsides. So never say never, but we do feel that the risk profile of that contract is now relatively balanced. And the final thing, of course is, there is nothing we know that we haven't made public. So your state of knowledge is aligned to ours at this point.

And maybe I can just add just a couple of comments. And Thai Oil obviously is a -- will be a priority of mine going forward. I've only been in the seat for a few weeks, but we've already engaged with the joint venture partners and I plan to visit the site pretty soon. This is a big project. It's a complex 3-way joint venture. So it ticks all the difficult boxes. But the team has made good progress. We did get to some settlement last year with the owner, and we are working to reengage with the owner, with the client over the coming few months to address the acceleration costs and what's required to complete the job. So this is a high priority on my agenda as well.

And again, also the color earlier on it, very much appreciated. Just finally then, I guess, new energies, I think, 24% or close to $10 billion of your E&C pipeline through June 2024. There was some comment on it in the call, but interested in the makeup of those orders, whether you're able to elaborate on whether there are regional concentrations and how to think about the broader decision-making process of customers in new energy markets relative to the state oil majors, for example, in your core business?

Maybe I can take that question. So I mean new energies is a big focus of ours. It's a growth area and as we announced last week, we signed the TenneT contract, that's the offshore wind contract. That makes a big portion of our new energies backlog, as well as our revenues over the next 2 years. I mean this is the largest -- the project -- the contract we signed is the largest frame of agreement ever signed by Petrofac and these are 6 different platforms that will be released over a 6-month period. So we're really excited about that. We have a fantastic relationship with Hitachi. But that's not the only thing we're doing in new energies. I mean we are engaged with clients on waste-to-value projects. We have a lot of studies and feeds going on there, carbon capture, hydrogen and other spaces. We announced last week -- or earlier this week, we announced a partnership with OCI on their green methanol program. And as we work with these clients towards FID, I expect these will become projects in the next 2 to 3 years going forward. But we're well positioned. We are strengthening our team there and picking up a number of -- quite a bit of work in that space.

We'll move on to our next question from James Thompson at JPMorgan.

Couple of questions really. Firstly, in terms of the 10 awards, I'm interested to see that only 25% or so of the award is lumpsum. I mean, I think that's sort of pretty major derisking for the project. Does that format of sort of 25% lumpsum continue through the life of each of these 6 projects, or does it sort of change as you kind of get more experienced to try to understand the risk profile of the overall frame agreement?

Yes. Thank you, James. You're right the TenneT framework agreement and the individual platform contract and the set for each of the projects are not a sort of full lumpsum turnkey type contract. And the philosophies you like behind it was to portion risk, to some extent to the people best able to manage it. And because these are extremely long contracts, both in execution and actually if you think about the 6 platform program, the last one of those won't be awarded for another 2.5 years or so. You're talking about approval, and they will pick the best part of the decade to deliver. And so the approach has been that we, as a contractor should take the risk of the things that we can control. So our own engineering costs and so on, and the quantities that we estimate for certain activities, but that certain exogenous risks like commodity prices and so on, will be retained by the client. And then there will be a third category of risk, which is a combination of sort of price and quantity risk, where we, as a contract have an ability to control the quantities and so we can take the quantity risk, but the client would take the price risk associated with that. So for example, fabrication manhours and that sort of thing. So that has been the principle behind it. And it does apply, as you say, across the entire framework agreement for each of the platform contracts.

Okay. And so the frame you announced or you described there, is how it should -- we should think about for Petrofac and -- Petrofac and Hitachi. So you will be sort of 25% lumpsum in your specific parts of delivery. Is that right?

Correct. We've not made any comments around the part of the contract that is being executed by Hitachi, and it would not be appropriate for us to do so.

Okay. And then maybe just thinking about the bids that have been submitted and obviously the preferred bit of bids that have been around for some time now. Maybe Tareq, you could talk a little bit about your discussions there and confidence or otherwise in actually getting some of these over the line in the relatively near term. It's obviously been quite a long process to this point?

Maybe I can make a comment there. I've talked or visited the -- all our major clients over the last couple of months, and including the clients on the projects where we are the preferred bidder status. And we are still preferred -- just to confirm we're still the preferred bidder on all those projects. And based on my recent discussions and the team's discussions on there, I think we have a high degree of confidence that these will be converted to awards this year. So our teams are engaged with those clients, and we expect those projects -- those awards to convert -- those projects to convert to awards in the near term.

Okay. Maybe a final one for me. Obviously, you've extended the banking facilities quite recently, but it's only a 12-month extension. So I guess you're going to start thinking about it again in the not too distant future. I mean just with that in mind, I mean, maybe you could talk a little bit about how you're sort of thinking about how [indiscernible] would like to sort of finance the business going forward and the building blocks there in terms of cash receipts and how that can help you to sort of get a longer tenure into some of those facilities, that would be helpful.

I'm very happy to do that, James, and thank you for giving me the opportunity to clarify or maybe reiterate what we've said. This business is essentially a capital-light business, and we've made an active decision to return to a capital light model. We have divested primarily most of the assets, in fact, of the IES, the old capital-intensive principal investments business that we created 10 years ago. We left just the one asset there. We have, therefore, the stated ambition of returning to a net cash position in the relatively near term. And a lot of that, as you can see, if you just compare our net debt with our working capital position, you can see that primarily it's funding power, our working capital position. So as we unwind that working capital, you should therefore see the deleveraging trajectory reaching its net cash objective and a reduced reliance on bank debt. Now there is all going to be some funding required. We carry some cash on the balance sheet which we need to fund, and the natural place for us to fund ourselves is in the capital markets. And the reason for that is, and this is part of why we're trying to reduce the reliance and amortize and pay down the bank debt is, as we grow the backlog going forward, particularly in the Middle East, we're going to rely very heavily on the bank's balance sheet to provide the guarantees, the performance guarantees, the advanced payment guarantees, the bid bonds, the retention guarantees and so on, that are required, that are sort of the oxygen of the contracting industry. And because we rely on those bank's balance sheets for that provision, we want to not rely on the bank's balance sheet for funding, which then dovetails with what you're seeing, which is a gradual reduction in exit from the banking market as a source of funds.

We'll now move on to our next question from Mark Wilson at Jefferies.

The first one is, can we just clarify the difference in the EBIT result of $205 million today versus what you guided as a $150 million, $170 million result just last month.

Yes. And Mark, I appreciate, we have not made life easy for you. So my apologies. It is a relatively straightforward answer. When there's been no change to the position that we announced 2 weeks ago. In other words, the position of the Group as at the end of December '22 is as we guided. What has changed is, when we made the announcement, we thought it was appropriate to tell the market that we had a prior year adjustment, necessarily what we ended up with, was the -- it was very much a draft figure, and we guided to $90 million of the prior year adjustment. In fact, when the audit work was completed, that figure reduced to $48 million, and what you're seeing is that, that delta that we had thought was going to be allocated to '21 was, in fact, retained in '22, and that accounts for the difference in the headline number. But what we guided about the incremental costs of $150 million to $160 million hitting the bottom line have very much come in at the top end admittedly, but within that figure.

Got it. Okay. Understood. And second point, clearly, a lot of focus on this Thai fields project, and thank you for the clarity and discussions. I will say it says 78% complete, but it sounded like by value, but I thought the commentary suggested that a low construction on site has really yet to begin. You spoke about modules coming in and supply from India and China. Is that a fair reflection on where the physical progress over the next 2 years is? There's a lot of construction on site still to go.

There is a lot of construction sites still to go. The modules -- the last of the modules have been shipped now. So there has been a huge amount of progress in fabricating testing and shipping those modules from the points of origin. But the amount of work at site mustn't be underestimated, because each of those modules needs to be brought in, transported, installed, linked, commissioned and so on and so forth. So the 78% completion is net of the value of work done that's indeed the accounting result. It reflects partly also the fact that a lot of the value in procurement and so on has already been expended. So those 2 figures, I appreciate, may not look obvious in comparison that they do reflect accurately the value of what's done to date, but also still with a very significant amount of work to do in construction at site over the next 2 years.

Just to clarify on construction. The construction is in full force. So I mean, even though the modules have been delivered and I think some of the last module is being delivered. We have a significant workforce on site, that's been offsite for a while -- that's putting these, installing a number of modules and hooking them up and working on the rest of the plant. So the construction is in full force. We have awarded all the subcontracts and working with our joint venture partners, work through all that and bring this to completion. So there's a really significant amount of construction already executed.

Okay. And then the last one for me is on the market outlook. You spoke to still being preferred bidder on all the projects that we spoke of before. Can we just confirm that's $1.5 billion of work you are a preferred bidder on. And then regarding the markets out there, and I speak to 2 specific geographies, if I may, Tareq, could I ask where you feel you stand in terms of that bidding pipeline in Abu Dhabi? And also, could you give a comment on where you think you are in Saudi Arabia and a possible return to work there?

So on your first question regarding the preferred bidder status, I think I can confirm that we are still preferred bidder on those contracts and the value is roughly what you mentioned, $1.5 billion. In terms of the other activities in E&C and bidding, I mean, obviously, we are back bidding in Abu Dhabi for ADNOC. We have a number of live tenders that have already gone in, and with the sort of proposals we're working on. ADNOC has recently -- has been slow over the last couple of years in taking projects to FID. We see that accelerating in '23 and '24. And we are -- I think we're well positioned to pick up our fair share work in Abu Dhabi. On Saudi Arabia, I mean, in Saudi, I mean, just to give you a bit of background, I've worked personally a lot in Saudi Arabia -- in my previous company, we had a large amount of work for Saudi Aramco. I still have a residence permit there. So I did visit Saudi Arabia early on, when I joined Petrofac and have already engaged with the stakeholders there, and a dialogue has begun. And I'm confident we'll move into the right direction. But at this point, its early days, and I don't want to give any details on timeline, but this is a priority for me, and we're working through this in 2023.

We'll take our next question from Kevin Roger of Kepler Cheuvreux.

Yes. I would ask 2, if I may, please. The first one is maybe to get a bit more details on your current feeling regarding your equity position. You have currently something like $100 million of equity. You have one of your peers that recently decided to initiate a capital increase operation, because they said that they needed to reassure clients in a way to build a contract to be able to face the upcoming wave of investments. So I was wondering if you can give us a bit of sense of how you think about your current equity position? And the second question is coming back on the offshore wind project that you secured and will secure, I was wondering if you can provide us a bit more color on how we should think about the marginality -- margin that you expect to generate? Would it be fair to assume that because you have quite a good proportion of the contract on the [indiscernible], we could assume that the margin could even be bigger, as you are doing the engineering, scheduling, et cetera, or if there is something on the downside?