Petrofac - looking ahead the picture is rosy
Whether the world sees an immediate recovery in the oil price is largely academic to support services company Petrofac (LSE, PFC). Although a robust oil price certainly bodes well, it is not the be all and end all. And as long as the company’s clients remain active, Petrofac’s cash register will continue to tick over.
The International Energy Agency (IEA) has recently voiced its concerns over a possible imminent supply crunch whilst anticipating a turnaround in global demand in 2010. Indeed with number of oil project cancellations growing whilst demand is recovering, a dramatic re rating in the oil price awaits.
With this in mind, it is understandable why Petrofac’s clients remain as active as ever. And recently released results for the year to 31 December 2008 underscore this very fact. The group’s top line surged ahead by almost 40 percent coming in at US$3.33 billion whilst net profit jumped by over 40 percent to US$265 million.
As a reminder to Members, Petrofac comprises of 3 divisions: Engineering and Construction, Operating Services and Energy Development. Leading the way for Petrofac in 2008 was the group’s cash cow, the Engineering and Construction division. Here net profit surged ahead by almost 64 percent to over US$224 million.
Having written over US$2 billion worth of business, the division’s broad geographical remit is clearly paying dividends and looking ahead the division is set to benefit from further awards. With an order book which sat at US$2.4 billion at the close of 2008, the division has already managed to secure US$2.8 billion of new contract awards in key growth areas (Abu Dhabi and Saudi Arabia) in 2009.
Meanwhile the group’s Operating Services division posted a net profit of almost US$32 million, a jump of over 10 percent on 2007. Earnings benefited from a full year’s contribution from the Dubai Petroleum contract as well as strong growth in SPD, the division's well operations management business acquired in January 2007.
Finally the group’s Energy Developments also posted a healthy profit. Although, the division’s bottom line dropped by over 34 percent to US$21.9 million we are far from being concerned. Results bore the brunt of several non-recurring items and hence on an adjusted basis the net profit came in at US$38.5 million, a 25 percent increase on 2007 - more typical of Petrofac.
Looking ahead the picture is just as rosy. The division's estimate of proven reserves is 12.2 million barrels of oil and management are confident that both fields would generate a positive return even at today’s oil prices.
Petrofac finished the year with an order book of US$4 billion which although fractionally down on 2007, augurs well for earnings ahead. As at the end of the year the company’s bank balance was US$700 million which management will not be shy investing should the right opportunities surface. And while many are scrapping dividends Petrofac’s has increased by 55 percent .
From a valuation perspective, we believe that Petrofac is currently trading on an undemanding forward PE of below 9 times whilst offering an appealing yield of 5 percent.
