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Summary

  • Petrofac's first half profits fell 44% to $136 million.
  • As anticipated, ECOM orders remained strong.
  • With the scaling back of growth for the IES division, I am currently neutral on the stock.

Today, Petrofac (OTCPK:POFCY)(PFC.L) reported first half net profits fell 44% to $136 million, as the completion of several large onshore projects in 2013 led to lower activity levels. The company expects revenue and profits will be significantly weighted towards the second half of the year, due to the phasing of project deliveries. Thus, management still believes that it would be able to meet its profit guidance of between $580 million to $600 million for the full year.

Petrofac also reported strong order backlog growth of 35% to $20.3 billion. Engineering, Construction, Operations & Maintenance (ECOM) order intake for the first half of 2014 had been $7.2 billion, compared to $4.3 billion last year. Major ECOM orders include the $1.7 billion contract to develop the Mina Abdulla refinery in Kuwait, the Khazzan central processing facility in Oman and the development of parts of the Reggane Project in Algeria. Petrofac had also won contracts for offshore contracts, including the EnQuest operations and maintenance contract in the UK North Sea, and the BorWin3 offshore wind farm grid connection in the North Sea to connect to the German national grid.

My January article on Petrofac presented a bullish case for investing in the company because of its strong medium term growth prospects, despite the recent project delays. Since then, management had lowered its guidance for net profit to between $580 million and $600 million. The company has also scaled back its plans for its Integrated Energy Services (IES) division, which offers to take on some production risk in exchange for securing service contracts. Prior to the announcement, growth in profitability from the IES division had been paramount to meeting its 2015 medium term earnings target of $862 million. With the reduced contribution from IES, the medium term earnings growth should be much lower than previously expected. Although, the strong backlog of orders would partly offset the impact of a smaller contribution from IES, Petrofac would find it more difficult to deliver the earnings growth it had promised. I am currently neutral on the stock.

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Source: Update: Petrofac Earnings