Tuesday 11 August 2020

Continuing to safely execute our projects and operations worldwide

On track to deliver US$125 million of cost savings in 2020 and up to US$200 million in 2021

Trading and awards materially impacted by COVID-19 and the sharp fall in oil and gas prices

Business performance net profit (1)(2) of US$21 million

Reported net loss (2) of US$78 million

New order intake (3) of US$1.0 billion year to date

Net debt (4) of US$29 million at 30 June 2020

Announcing net zero emissions target and 30% gender diversity target by 2030

Ayman Asfari, Petrofac’s Group Chief Executive, commented:

“Our first half results reflect the deterioration in market conditions triggered by the Covid-19 pandemic and subsequent decline in oil prices. In response, we are doing everything in our control to protect both the health and well-being of our people, suppliers and communities, as well as the long-term health of the business.

“These swift and decisive actions are structurally reducing costs, conserving cash and maintaining our competitiveness. At the same time, we have preserved core capability whilst continuing to invest in digitalisation and client relationships.

“Furthermore, our longer-term strategy has transformed Petrofac into a more resilient, capital light business with a strengthened balance sheet and a clear commitment to sustainability. I am confident that this strategy and our actions best position Petrofac for the recovery when it occurs. In the meantime, I want to thank all our people and suppliers for their hard-work, commitment and support in continuing to deliver best-in-class execution for our clients.”

Divisional highlights

Engineering & Construction (E&C)

Financial performance has been materially impacted by the COVID-19 pandemic, which has disrupted project schedules and increased costs. Furthermore, the decline in oil prices has resulted in a contraction in capital spending by clients in the period, resulting in delays in tender awards, the termination of our Dalma contracts and a tighter commercial environment. Despite these challenges, E&C has continued to safely deliver its projects and has taken swift action to reduce costs.

E&C financial results for the six months ended 30 June 2020:

Revenue down 28% to US$1.6 billion, driven by COVID-19 related project delays

Net margin down 4.4 ppts to 2.1%, largely reflecting COVID-19 related costs, project mix and the non-recurring Jazan commercial settlement

Net profit down 76% to US$35 million

US$4 billion of new order intake year to date, reflecting the decline in industry awards

Engineering & Production Services (EPS)

EPS’ financial performance has proved more resilient, benefitting from strong order intake. Robust project related activity was offset by a modest decline in operations, the COVID-19 related closure of our training centres and a lower contribution from associates. Furthermore, the expected year-on-year reduction in margins has been partly mitigated by overhead cost reductions.

EPS financial results for the six months ended 30 June 2020:

Revenue of US$426 million, down 5% on prior year

Net margin down 4.1 ppts to 4.0% driven primarily by a contraction in brownfield project contract margins and lower associate income (5)

Net profit down 53% to US$17 million (H1 2019 restated: US$36 million)

US$0.6 billion of awards year to date, representing a book-to-bill of 1.5x

Integrated Energy Services (IES)

Good underlying operational performance in IES and a material reduction in operating and other costs was more than offset by the decline in oil price in the period.

IES financial results for the six months ended 30 June 2020:

Revenue down 39% to US$61 million

Average realised price (6) down 46% to US$37/boe (H1 2019: US$69/boe)

Equity production up 10% to 1.1 mmboe (net)

Lower PEC tariff income and cost recovery

EBITDA down 51% to US$22 million (H1 2019 restated: US$45 million)

Lower revenue, largely driven by the decline in average realised oil price

Reduction in operating and other costs

Depreciation of the Mexican Peso

Net loss of US$10 million (H1 2019 restated: net loss US$6 million)

Lower depreciation, tax and minority interests

Exceptionals and certain re-measurements

The reported net loss of US$78 million (H1 2019: US$139 million net profit) was negatively impacted by exceptional items and certain re-measurements of US$99 million, of which approximately US$88 million were non-cash items:

A non-cash impairment charge of US$64 million (post-tax) following a review of the carrying amount of the investment in Block PM304 in Malaysia;

A loss of US$5 million (post-tax) recognised on early settlement of deferred consideration from Ithaca Energy in April 2020 and impairment of contingent consideration of US$9 million (post-tax), both relating to the sale of the Greater Stella Area in the UK;

A downward fair value adjustment of US$8 million (post-tax) due to uncertainty concerning the timing and outcome of migration of the Pánuco PEC to a PSC and consequently whether the contingent consideration pay out conditions will be achieved; and,

Other net exceptional items of US$13 million (post-tax), including Group reorganisation and redundancy costs and SFO related legal fees.

The carrying amount of the IES portfolio (7) decreased to US$0.3 billion at 30 June 2020 (31 December 2019: US$0.4 billion) reflecting asset disposals and impairment charges.

Net Cash and Liquidity

Net debt was US$29 million at 30 June 2020 (31 December 2019: US$15 million net cash), reflecting the anticipated reversal of temporary favourable working capital movements at the end of 2019. A free cash outflow of US$13 million (30 June 2019: US$123 million inflow) principally reflected the impact of lower EBITDA, negative working capital movements and a reduction in capital expenditure. Liquidity was approximately US$1.2 billion at 30 June 2020 (9) (31 December 2019: US$1.5 billion (10)) following the repayment and retirement of US$275 million of facilities during the period. Our leverage covenant was 0.5x (8) at the period end.

Sustainablity

Petrofac has also today announced a number of important targets as part of its evolving sustainability agenda, as a key tenet of its purpose to help clients meet the world’s evolving energy needs, and to work, collectively with industry, to achieve a more sustainable energy sector.

Sustainability is at the core of our strategy, underpinning best-in-class delivery, future growth and enhanced returns. The targets announced today include:

our ambition to reach Net Zero in Scope 1 and 2 emissions by 2030; and,

to further advance our diversity agenda, including 30% (11) of women in senior roles by 2030.

Outlook

We remain confident that the actions we have taken to strengthen the balance sheet, invest in our core capability and reduce structural costs will best position us for the recovery when it occurs. Whilst COVID-19 and low oil prices are continuing to disrupt business activity and delay project awards, there are early signs of improvements in the supply chain and Government related restrictions are easing.

Our focus is on rebuilding our order book, which was US$6.2 billion at 30 June 2020 (31 December 2019: US$7.4 billion). This provides near-term revenue visibility, with US$1.7 billion scheduled for execution in the second half of 2020.

We are committed to maintaining a strong balance sheet by exercising capital discipline. We remain on track to reduce overhead and project support costs by at least US$125 million in 2020 and by up to US$200 million in 2021. Cost reductions, a 40% reduction in capital investment and the suspension of dividend payments in 2020 will conserve at least an incremental US$200 million of cash flow this year. Group reorganisation and redundancy costs for the full year are expected to be approximately US$50 million.

The Group has a busy tendering pipeline with around US$46 billion of opportunities scheduled for award by the end of 2021. Whilst we are actively bidding on several large opportunities and are maintaining strict bidding discipline, we are prudently assuming that capital discipline by clients will delay the majority of awards until 2021.

Longer term, we expect to continue to benefit from a strong competitive position and a differentiated in-country value proposition in the Middle East where the cost of production is low. Furthermore, our growth in the renewables and low-carbon sectors has been underpinned by recent offshore wind and carbon capture & storage awards. This has the potential to deliver attractive growth as the energy transition evolves.