Petrofac shifts down dividend but order book offers comfort

Petrofac cut its first half dividend by 42% as part of a new policy from the oil and gas services provider to slim the business as net profits slipped 4% amid ongoing low commodity prices.

The FTSE 250 company, which is being investigated by the Serious Fraud Office over alleged bribery and money laundering, is looking to reduce net debt and strengthen the balance sheet and move back towards a low capital intensity business model as the new lower oil-price environment prices weighs heavily on capital investment in the industry, impacting cash flows.

Revenues in the first six months of the year of $3.13bn were down almost 20% on the same period last year and below consensus of $3.5bn, but Petrofac won $2.7bn of new orders to create a contract backlog of $12.5bn as of 30 June, down from the $14.3bn at the end of the last year.

However, the order book excludes the framework agreement signed with Petroleum Development Oman in June until various projects are assigned and has since been swelled by the $1.0bn Duqm refinery project award in August 2017.

Earnings before interest, tax, depreciation and amortisation fell 11% to $323m but were much better than the City's consensus forecast of $294m, while net business profits dipped 4% to $158m, though profits before tax almost doubled to $109m due to lower exceptional charges so far this year.

Group net profit for the full year 2017 is expected to be weighted to the second half of the year, the company said.

The Integrated Energy Services arm, where sales shrank 37% in the first half and a net loss of $19m resulted from flat EBITDA at $37m, is expected to deliver EBITDA of $80-100m for the full year.

Management predict an improvement in operating performance for IES following the start-up of production at Chergui and the expected entry onto the Greater Stella Area development licence in the third quarter of the year.

Net debt was $1.0bn, up from $0.6bn over six months, said to be mainly due to working capital movements but is expected to reduce during the second half.

The interim dividend of 12.70 cents per share was cut from 22.00 cents at this time last year as the the dividend is 'rebased' as "part of a range of measures being taken to deliver a sustainable reduction in net debt", also including a focus on operational efficiencies, divesting non-core assets and reducing capital investment such that capex is expected to be $200-250m this year not the $300-350m initially planned.

Directors intend to target a dividend cover of between 2.0x and 3.0x business performance earnings, with a proposal that the interim payment each year will be approximately 33% of the prior year total dividend.

Chief executive Ayman Asfari felt the results were "solid" and said the new contract wins were "evidence of our continued competitiveness in challenging markets".

He added: "Tendering activity remains high, we are well placed on a number of bids and have a healthy order backlog. This positions us well for the second half of 2017."

"We also remain committed to our strategy of focusing on our core business, delivering organic growth and reducing capital intensity."

Shares in Petrofac were up 2.4% to 433.48p after an hour and a half of trading on Wednesday, having largely flatlined since May's announcement from the SFO.