Credit ratings agency Fitch has downgraded its assessment of North Sea operator Petrofac (LON: PFC) to a ‘B-‘ in the latest sign of financial trouble at the firm.
Fitch said its downgrade of Petrofac reflects “significant deterioration in the group’s liquidity position”.
Compared to sector peers Fitch rated Petrofac’s business profile as significantly weaker than Italian firm Saipem (BIT: SPM) and Aberdeen-headquartered Wood Group (LON: WG).
According to Fitch, a B- rating for a firm indicates a “material default risk is present, but a limited margin of safety remains”.
Petrofac share price trouble
Last week, Petrofac said it was assessing a range of measures to improve its balance sheet after shares crashed 65% in the last month.
The energy services giant said it is considering the sale of “non-core assets” as part of a wider review to return value to shareholders.
Petrofac could also look for investors to take non-controlling stakes in other parts of the business.
Cash flow concerns, including debt and delayed collections on legacy contracts, are among the main drivers of the share price tumble according to analysts.
© PetrofacIt follows announcements earlier this year about the firm’s ongoing challenges in obtaining performance guarantees from banks for major new awards secured this year.
Fitch said it expects “short-term liquidity pressures” for Petrofac, and said resolving the issue will “require urgent new measures to strengthen the balance sheet”.
In addition to challenges surrounding performance guarantees, Fitch listed other key ratings drivers for its downgrade including limited liquidity headroom and risks surrounding raising additional capital.
Fitch also said “revenue visibility” has weakened due to the heightened risk of cancellation of the recent new awards including a $600 million contract with Adnoc.
Solid overall market position
In its assessment, Fitch said Petrofac has a solid overall oil and gas engineering and construction (E&C) market position.
Fitch also said Petrofac has demonstrated expertise in sustainable (E&C) activities, which “firmly positions the group for the growth of this smaller but increasingly important sub-sector”.
In the first half of 20231, Fitch said Petrofac increased its order backlog to about $6.6 billion (£5.2bn), supported by about $3.4 billion (£2.7bn) of new awards in its E&C segment.
“The group’s deteriorating revenue visibility is solely driven by its current inability to secure performance guarantees,” Fitch said.
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