23rd Jun 2015 14:20
LONDON (Alliance News) - Oil services company Petrofac Ltd on Tuesday said its engineering, construction, operations and maintenance division has had a good start to the year and said its order backlog has hit a record level, even as it booked more costs on the Laggan-Tormore project, said profit will be heavily second half-weighted and as its net debt position ballooned in the first half of 2015.
Petrofac said construction activities at the Laggan-Tormore project, located north-west of the Shetland Islands, are "substantially complete" and the company is focusing on pre-commissioning work in order to hit its target to deliver first gas from the site in the third quarter of 2015.
But the FTSE 250-listed company said additional completion and pre-commissioning costs at the project are expected to lead to incremental pre-tax costs of around GBP30 million and it will recognise a deferred tax asset for tax losses on the project of around GBP20 million. Petrofac said the total loss on the Laggan-Tormore project since the start of 2015 is now around GBP140 million, or USD220 million.
Laggan-Tormore has been a thorn in Petrofac's side so far in 2015, with the group having said it expected to book a GBP130 million loss on the project this year due to weather-related delays, an issue with a sub-contractor, lower worker productivity and the requirement for more work than it had previously expected.
The company had booked a USD230 million loss on the project in its 2014 results and had said in its results that it did not expect to book any further losses over the remainder of the contract. However, as activity ramped up in March and April, it became clear that the project was going to require more work than it had previously expected, it said in April.
"These additional costs reflect our continuing firm intention to devote the necessary resources to the project," said Petrofac.
Petrofac said its net profit is to be "heavily weighted" to the second half of the year once the Laggan-Tormore project is producing gas. That will be particularly true for the company's onshore engineering and construction activities, where a number of projects are expected to reach their percentage of completion threshold for initial profit recognition in the second half.
Petrofac also said that, at the end of May, its net debt has increased to USD1.2 billion, up from USD700 million at the end of December, reflecting its ongoing investment in the Greater Stella Area project in the North Sea and its offshore installation vessel.
But the group said that since the start of this year, its engineering, construction, operations and management arm has secured further order intake of USD4.7 billion, including the USD900 million Yibal Khuff contract it won in Oman earlier this month. At the end of May, its order backlog had increased to USD20.5 billion, up from USD18.9 billion at the end of December 2014.
It added that the rest of its portfolio, beyond the Laggan-Tormore woes, is performing in line with its operational and financial expectations.
"Putting the challenges we have faced on Laggan-Tormore to one side, the rest of our portfolio continues to perform well. The group's backlog stands at record levels, giving us excellent revenue visibility for the rest of this year and beyond," said Chief Executive Ayman Asfari.
"Our pipeline of bidding opportunities remains attractive, and ongoing investment by our clients in large strategic projects in our core markets, together with our strong competitive position, should see us secure a number of further awards over the second half of the year," he added.
Shares in Petrofac were up 6.4% to 925.00 pence Tuesday afternoon, one of the best performers in the FTSE 250.
Analysts were positive on the trading update from Petrofac in spite of the Laggan-Tormore losses, the second-half weighting and its net debt increase, saying the order backlog the group has in place provides reasons to be optimistic on its outlook.
Berenberg said the further losses booked on Laggan-Tormore were within its estimated range and said that while a risk of further cost escalation does exist, the project is nearly complete, meaning the threat of more losses is limited.
The investment bank said Petrofac is one of few names in the oil services sector headed towards strong structural growth following a disappointing performance over the course of 2014 and in 2015 so far, a view based on its record order backlog, which it forecasts will result in a recovery for the company's earnings in 2016/17.
Nomura and Societe Generale both note the robust order backlog too, and SocGen says the net debt position is likely to peak in the first half of 2015. Combined with the end of Laggan-Tormore moving into sight, the French bank thinks Petrofac's problems will ease going forward.
By Joshua Warner; [email protected]; @JoshAlliance and Sam Unsted; [email protected]; @SamUAtAlliance
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