Petrofac (LON: PFC) will take a $110m write-down for 2023 on contract agreement issues, it has warned, as the group continues to address cash flow concerns.
The financial hit for its powerful Engineering and Construction (E&C) division will come as part of a wider $180m group loss, the energy services giant said in a trading update.
Petrofac reported high backlog – of $8bn for the year – and unveiled a new $1.4bn contract with Dutch transmission firm TenneT, which saw shares jump more than 30% in early trading on Wednesday.
However analysts highlighted that, while the backlog and contract wins appear to be a positive, it masks the problem of the weaker balance sheet and struggles to secure guarantees – without which new contracts can’t be executed.
The $180m group loss will include a $12m “bad debt” provision for its Asset Solutions segment, Petrofac said.
The update, which comes amid investor concerns around cash flow and profitability, said revenues are to be in line with guidance at around $2.5bn.
Petrofac said it expects to hit positive free cash flow in the second half of the year – but that will be offset by an increase in collateral – more than $100m – required for contract guarantees.
Net debt is expected to be “modestly higher” than at its interim results – which then stood at $584m.
“Good progress” has been made in reaching contractual settlements in the second half of the year, with around $180m collected to date, however, due to delays in securing guarantees, the group “no longer expects” to collect advance payments of new contracts before year-end.
A second contract has been announced with Dutch transmission firm TenneT today, with Petrofac’s portion worth around $1.4bn, as part of a wider previously agreed $14bn multi-year framework agreement.
Additional projects are expected to be awarded via six-month intervals.
A performance guarantee – a key issue being asked about in terms of cash flows – has been secured for the first contract with Tennet awarded in March, while another guarantee is expected to be secured with Adnoc for the Habshan refinery complex which Petrofac won a $700m deal on in July.
The “near-term focus” is on strengthening the balance sheet, Petrofac said. It has previously outlined plans to sell off non-core parts of the business, but did not elaborate on those plans in the update.
Integrated Energy Services (IES) and Asset Solutions are in line with guidance, before a one-off “bad debt provision” in Asset Solutions of around $12m.
Petrofac pointed to “exceptional new order intake” across E&C and Asset Solutions totalling $6.8bn in the year to date, while order backlog is expected to be $8bn at end of year.
Potential awards in the next 18 months total $62bn, it said, including further TenneT projects as part of its framework ageeement.
CEO Tareq Kawash said: “Our focus on rebuilding the backlog and unwinding historic working capital has resulted in tangible progress against our organic plan to strengthen the Group’s financial position.
“To further accelerate progress, my near-term priority, and that of our Board and leadership, remains on improving liquidity and materially strengthening the Group’s balance sheet, to deliver on our long-term potential.
“We are completing contracts in the legacy portfolio as planned, we continue to deliver well in the initial phases of the contracts awarded in 2023, and, as a result of excellent order intake, we enter 2024 with a high-quality backlog in both traditional and renewable energy of approximately US$8 billion.
“This provides us with good revenue visibility and demonstrates the continued confidence customers have in Petrofac’s delivery.”
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