• Group Revenue: $1.2 billion in the first half, broadly in line with the same period last year.

• EBIT Loss: $106 million in the first half.

• Free Cash Outflow: $36 million, including $17 million of interest payments.

• Net Debt: $622 million at the half year.

• Order Intake (Asset Solutions): $0.9 billion in the first half, with a book-to-bill ratio of 1.4 times.

• Group Backlog: $8 billion at June 2024.

• Pipeline of Opportunities: $53 billion of contracts due for award over the coming 18 months.

• Warning! GuruFocus has detected 7 Warning Signs with POFCF.

Release Date: September 30, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Petrofac Ltd (POFCF) has reached an in-principle agreement with key stakeholders for a comprehensive financial restructuring, which will strengthen the balance sheet and improve liquidity.

• The company secured significant new award intake in asset solutions, with strong order intake of $0.9 billion in the first half of the year and over $1 billion year-to-date.

• The Thai Oil Clean Fuels project is progressing well in its construction phases.

• Petrofac Ltd (POFCF) has a robust pipeline of opportunities, with $53 billion of contracts due for award over the next 18 months.

• The asset solutions division has maintained good momentum in new awards, including contracts with Turkmengas, GE Petrol, 1Gas, and BP.

Negative Points

• The company reported a first-half EBIT loss of $106 million, reflecting lower levels of activity and unrecovered costs in the E&C legacy portfolio.

• Free cash outflow was $36 million in the first six months, and net debt increased to $622 million.

• The financial performance was constrained by the ongoing difficulties in securing guarantees and closing out commercial settlements in the E&C division.

• The restructuring process is complex and involves significant risks, including the need for interconditional agreements from multiple stakeholders and shareholder approval.

• The company's financial position has led to some contracts dragging longer than expected, impacting operational efficiency.

Q & A Highlights

Q: Given the financial challenges in securing funding, have you noticed any shifts in customer discussions around your pipeline market share or how customers perceive the group? A: The markets we operate in remain robust. We have engaged with key clients who have significant opportunities and large CapEx spends. We are well-positioned to rebuild our backlog once the restructuring process is complete. Our asset solutions business, which doesn't require guarantees, has booked over $1 billion to date and is on track to meet target bookings by year-end. (Tareq Kawash, CEO)

Q: Can you provide an update on the cost dynamics, particularly labor content, and any operational overruns due to restructuring efforts? A: Legacy contracts are being closed out and are not impacted by inflationary events. The new backlog is performing well without significant inflation or labor cost impacts. Restructuring costs are being managed centrally and not affecting specific contracts. Some contracts are dragging longer due to funding and liquidity positions, but we aim to conclude them quickly. (Tareq Kawash, CEO; Afonso Reis E Sousa, CFO)

Q: What is the overall amount of financing you are looking to cover in the restructuring process? A: We are looking for approximately $100 million to cover the restructure, down from the previously mentioned EUR400 million. In terms of liquidity, we expect funding to be in line with previous disclosures, around $200 million of funding and $100 million of credit support. (Afonso Reis E Sousa, CFO)

Q: Can you provide an update on the TenneT offshore wind contracts? A: The TenneT framework agreement includes six platforms in partnership with Hitachi. Two platforms are currently in execution and progressing well. Four more platforms are expected to be called off in the next couple of years. We do not foresee any changes to the framework principles. (Tareq Kawash, CEO)

Q: Are there any expectations of sales of noncore assets within the restructuring? A: The key noncore asset is the PM304 asset in Malaysia. We have received offers and expect to make a decision in Q4. We also have a 10% stake in the JSD6000 vessel, which is operational and leased, but we do not plan to keep it long-term. (Afonso Reis E Sousa, CFO)

Q: Can you provide an update on the Thai Oil project and the expected completion timeline? A: The Thai Oil project is in the construction phase. We achieved interim milestones and continue discussions for a settlement with the customer. The project is not expected to be completed by 2025, and discussions include compensation and schedule adjustments. (Tareq Kawash, CEO)

Q: What potential risks are there from not funding the joint operations? A: Our partners are aware of our financial position and the need for restructuring. The consequences are manageable for a period as this is seen as a temporary issue that will be resolved post-restructuring. (Afonso Reis E Sousa, CFO)

Q: Can you assure ordinary shareholders that they will not be sacrificed in the restructure? A: The restructuring will involve equitization of debt and raising new equity, both of which will be dilutive to shareholders. However, all shareholders will be treated equally in terms of dilution. (Afonso Reis E Sousa, CFO)

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.