Petrofac Limited (PFC) Earnings Call Transcript & Summary

Good morning, and welcome to Petrofac's half year results presentation. Our call today is being hosted by James Boothroyd, Head of Investor Relations; Tareq Kawash, Group Chief Executive; and Afonso Reis Sousa, Chief Financial Officer. I will now hand over to James to begin the presentation. Please go ahead.

Thank you, and good morning, everybody. Thank you for joining us today. I'm James Boothroyd, Head of Investor Relations. Our call today is being hosted by Tareq Kawash, as you just heard, and Afonso Reis Sousa and includes a Q&A session. In a moment, I'll hand over to Tareq. But first, I would like to point out that we have uploaded materials to the results section of our website including the interim financial statements and a presentation deck, which you can read through alongside this call. However, we would not be walking through the slides in sequential order. I would also like to remind everyone that today's briefing and some of the questions your answers may contain forward-looking statements. These statements reflect management's current views and involve risks and uncertainties. Please refer to Slide 2 of the presentation for more information and the disclaimer. I would now like to hand you over to Tareq Kawash. Tareq, over to you.

Thank you, James. Good morning, everyone. I'm Tareq Kawash, Petrofac's Group Chief Executive; I'm joined by Afonso Reis Sousa, our Chief Financial Officer. Before I hand over to Afonso to take you through our interim 2024 financial results, I will make some opening remarks on our performance in the first half of '24. And later, we'll then have time for some Q&A. As you all know, the first half of 2024 was set against the backdrop of a restructuring process to strengthen Petrofac's financial position and enable us to deliver on our strategy. You will have seen that on Friday evening, we announced that we have reached an in-principle agreement with certain of our key stakeholders on the framework for a comprehensive financial restructure. The financial restructure will strengthen our balance sheet and provide a capital structure and improvement in liquidity, which will support the group in executing our order backlog -- our order book and capturing future growth opportunities. It will also ensure performance security requirements are met for all Petrofac's existing backlog and provide a runway for subsequent gradual improvement in access to guarantees for new EPC contracts on normal commercial terms. We have made -- we have more work to do to finalize the arrangements, but this in-principle agreement is an important step forward. I'm grateful to all of our strakeholders for the support that they have shown to the business during this period. As you will appreciate, at this stage, there is not too much detail -- sorry, at this stage, there is not too much more that we can say on the restructuring beyond the details given in the announcement. We are working hard to announce a lockup agreement with final terms in the coming weeks. The court process is then expected to take approximately 2 months from the lockup agreement. Now let's move on to the results. The financial results for the first half of 2024 reflects the constraints within which the business has been operating. However, we have also made some important progress and closing out legacy contracts at E&C and securing significant new award intake in Asset Solutions. The challenges have been felt most keenly in our E&C division, reflecting the ongoing difficulties in securing guarantees and efforts closing out commercial settlements. However, after a record year of backlog in 2023, the initial phases of those contracts are progressing well, including those for which guarantees are not yet secured. With respect to the Thai Oil Clean Fuels project, progress continues to be made on the construction phases of the project. In Asset Solutions, we have delivered strong order intake of $0.9 billion in the first half of the year and over $1 billion for the year-to-date. These included an operations contract from Turkmengas in Turkmenistan, technical services contract for GEPetrol in Equatorial Guinea, a 2-year brownfield EPC extension with ONEgas in the U.K. North Sea and also an important maintenance and engineering contract extension with bp in the Gulf of Mexico. Well done to the Asset Solutions team for maintaining good momentum in new awards after a strong year in 2023. The IES continued to perform well with production lower than the first half of 2023, but in line with expectations. I will now hand over to Afonso to provide more details on the group's financial performance. Afonso?

Thank you, Tareq, and good morning, everyone. Whilst much of the focus from our stakeholders is on the progress of the financial restructuring, I will give you a brief rundown on the first half performance. There's also some more detailed financial information, as James mentioned in the presentation that's available on our website as well as in the financial statements themselves, of course. The financial performance in the first half reflected the portfolio rotation in both the E&C and the Asset Solutions divisions with certain material contracts coming to completion and the new contracts awarded in 2023 and in the early part of 2024 starting to ramp up. Group revenue of $1.2 billion in the first half was broadly in line with the same period last year. Revenues were higher in the E&C division, reflecting the initial impact from new contracts that were awarded in 2023. However, the portfolio rotation in Asset Solutions resulted in lower revenues for previous year -- first half of the previous year due to the contract mix across the service lines and the timing of the start of the new contracts. IES revenues reflected the lower net production compared to the previous year as had been anticipated, and it was also affected by a lower oil price. We reported a first half EBIT loss of $106 million, reflecting the contract portfolio transition I've just talked about, due to lower levels of activity in the early stages of the new contracts awarded in '23, reflecting also the impact of further unrecovered costs in certain of the E&C legacy portfolio as well as the adverse operating leverage. Turning now to the balance sheet and liquidity. In the first 6 months of the year, free cash outflow was $36 million, which includes $17 million of interest payments. As you know, we have since stopped making interest payments with the agreement of our creditors pending the implementation of the financial restructure. And as you also know, we have been managing our operational cash flows carefully in order to maintain liquidity throughout the period. We've been matching our collections and payments the special focus on collecting some of the historical working capital that had built up during COVID. As a result of this cash flow management, net debt at the half year was only marginally higher than at year-end at $622 million. We continue to manage our group's payment obligations under our borrowing facilities as well as other contractual obligations with the support of our creditors. Backlog remained broadly flat since the year-end, albeit Asset Solutions secured new order intake of $0.9 billion, a book-to-bill ratio of 1.4x in the first half. And as Tareq has pointed out, we announced that we've reached an in-principle agreement with certain of our key stakeholders for the framework for a comprehensive financial restructuring. As you'll be aware and as we have communicated before, this is a hugely complex process with interconditional agreements required from multiple stakeholders as well as shareholder approval and the court process to implement. Not without risks, and we've been transparent about those in our announcements and disclosures. Nevertheless, Friday's announcement represents a significant step forward, and the Board and management are absolutely focused on progressing and including the financial restructuring. And with that, I will now hand you back to Tareq.

Yes. Thank you, Afonso. As we have made clear, the outlook for the business is predicated on successful completion of the financial restructuring, which is a key focus over the coming weeks and months. The group's backlog at June 2024 was $8 billion, and our pipeline of opportunities is large at $53 billion of contracts due for award over the coming 18 months. With the supportive client space and strong position in our core markets following completion of the financial restructure, I remain confident that we can rebuild backlog and take advantage of the robust fundamentals of the markets we operate in. I'd like to thank all our people around the world for their ongoing and relentless focus on delivering safely and effectively for our customers at this important time. I would also like to note again our gratitude for the continued support from all our stakeholders as we work to deliver a more positive future for Petrofac. With that, we'll open for Q&A.

[Operator Instructions] I will take our first question from Christian Hinderaker from Goldman Sachs.

I'd like to start maybe with the pipeline that you mentioned, I think, $44 billion in E&C. Just curious, given the -- well, some financial challenges in terms of securing funding, have you had any shifts that you've noticed in terms of customer discussions around that pipeline market share loss, how customers are perceiving the group given the financial dynamics.

Yes. Thank you, Christian, for your question. I mean the markets we operate in remain robust, as I said. We operate essentially in 3 markets, the OpEx market, which is the Asset Solutions business, the energy transition business, which is primarily offshore wind and in the E&C market, which is currently mainly dominated by Middle East and North Africa. As we announced earlier in the -- as part of the restructuring process, we've engaged very -- we've engaged with our key clients. I mean I've spent a lot of time with our key clients over the last few months. Those clients have a significant number of opportunities that they're bringing to market. They have a large CapEx spend. And we are very well positioned for -- to rebuild the backlog with those key clients once the restructuring process is complete. We are -- have been able to be quite differentiated in the markets that we -- the type of projects we go after, and we've been quite selective, and I feel quite confident that projects that we have or we're pursuing are projects that we can deliver on. So as I said, I still remain confident that we can rebuild our backlog once the restructure is complete. And in the interim, we are getting support from those key clients on our existing backlog going forward. The last thing I would add, I mean, is really on Asset Solutions. It's a business that doesn't require guarantees. And as I said earlier in prepared remarks, we booked over $1 billion to date, and we're in a good position to reach our target bookings for Asset Solutions by the end of this year.

Can I ask maybe just a follow-up on the operations? I mean, in terms of the cost dynamics, I guess, particularly labor content. How trends are in that side of the business? And then also on the cost side and whether there's been any sort of operational overruns as a function of the sort of restructuring efforts in terms of projects? I know you mentioned Thai Oil fuel contract, but whether there's been any other further inflationary-led cost ramps on projects, would be great to know.

Yes, thanks for the question. So as Afonso said, we have kind of legacy contracts, which we're working hard to close out, and those are really pending contractual and commercial settlements and are not really impacted by any inflationary type events. So those are -- we're working hard to close out. We made progress on those, and we continue to do that. On the new backlog, those -- the new backlog is performing well. And I would say that we don't see any big movements in inflation or any cost of labor that has impact on those -- on the new backlog. So those -- the new backlog is performing well going forward. With regards to the cost of the restructuring -- maybe Afonso, you could cover that one.

Yes. Look, clearly, there is a significant amount of costs that we are incurring as part of the restructure and we will disclose those in full at the end of it, but the -- that's being funded from the center. It's not affecting contracts specifically. And then on operations, I think it's fair to say that the longer this goes and our funding position and liquidity position, it does mean that some contracts are dragging for a bit longer than we would have liked them. And hopefully, now we can move to conclude them as quickly as possible.

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

My first question is just to ask on the -- just to understand the cash calls on the business. As I understood it, it looks like there's just over $200 million of maturing bonds or debt by the end of October. And you speak to $400 million of performance guarantees that you're looking to cover and then -- but you highlight $100 million specifically within that. So I just wonder what is the overall amount of financing you would be looking to cover in this process? That's my first question.

Yes. I think -- thank you for the opportunity to also clarify perhaps if he wasn't completely clear. The $400 million referred to as a figure we mentioned before. back in May when we published our full year accounts. What we have done, and it's described in some detail in also on Friday is that we have worked with our clients to find alternative ways of securing the performance of those contracts without requiring that level of guarantees. And so part of that revised restructuring plan, we are looking only for approximately $100 million to cover the restructure. In terms of liquidity of hard funding, not guarantees, but hard funding. I think what we said is we're expecting the funding to be in line with what was previously disclosed. If you recall, that was up $200 million of funding and $100 million of credit support. So that sort of level of amounts that you should be expecting.

Okay. And then could I move on to the TenneT offshore wind contracts. These are probably the largest -- most visible of the award you won last year. Could you give us -- first off, on the ground, what is happening with the first of those, Ijmuiden Ver Alpha? And then whether the second is moving forward and specifically, and then if there's any change to the overall expectation of the client within a framework of 6 because there has been a lot of changes to the overall offshore wind market in the time since they were announced. So that would be interesting to know.

Thanks for your question. You're right. The TenneT framework agreement is a key part of our backlog. I mean just to remind everyone, it's a -- the announcement we made regarding TenneT was a framework of 6 platforms in partnership with Hitachi. Two of those platforms are currently in backlog, and they're in execution. These are design one, build many, so they called up the first one over a year ago, and then the second one. And we continue to progress well on those contracts. And we are obviously very much engaged with TenneT and our partner, Hitachi on the execution of those contracts. There are 4 more platforms to be called off as part of the framework agreement, and we expect those to be called off in the next couple of years, in line with the arrangements of the framework agreement. There is -- in terms of timing, the -- as part of the framework, there is some flexibility on timing of 1 TenneT called off those platforms. But currently, we don't foresee any changes to the principles of the framework. That's what we signed up to last year.

Okay. And if I may just ask a final one. Just is there any expectation of sales of noncore assets within the restructuring still planned? And as a last point, I'm just wondering any progress on the Saudi bidder status. Has there been any move on that? And those are my questions.