Petrofac boosted by Goldman upgrade to 'buy'

It said the upgrade was driven by Petrofac’s geographic exposure, which is predominantly geared to the Middle East and by the current backlog for 2017, which stands at 87%. In addition, it pointed to scope for additional contract awards driven by the Middle East.

The bank also highlighted the potential for free cash flow improvement from 2017. GS said it expects capex to start falling from 2017, which would lead to a FCF yield of about 10%/14% in 2017/18.

“Given the low level of contracts awards year-to-date, we believe that any meaningful contract (over $500mn) is likely to be taken positively by the market, particularly as one of the key areas on which investors focus for E&C companies is contract awards.”

“Petrofac management has mentioned that it will focus on reducing its capital intensity as well as investments within the Integrated Energy Services segment: should the company succeed in doing so, and at the same time reduce its net debt, this is also likely to be taken positively.”

Goldman Sachs said key downside risks include a low level of contract awards, execution problems on projects leading to lower margins than anticipated, and deteriorating levels of net debt.

At 0915 BST, Petrofac shares were up 4% to 848.50p.