Is Petrofac Limited’s Upbeat Trading Statement A False Dawn?

Shares of oil services company Petrofac (LSE: PFC) have jumped by nearly 10% in early trading today after the company issued what seems to be an upbeat trading update. 

The company said this morning that the end of costly problems at its flagship gas project in the North Sea was in sight. However, the company is still booking an additional £30m on its North Sea Laggan-Tormore project, which is owned by French oil major Total. 

So far, losses stemming from the Laggan-Tormore project have hit $425m and severely damaged Petrofac’s reputation. The market seems to be relieved that an end to Petrofac’s troubles is in sight or is it?

Blame game

Petrofac’s management has blamed harsh operating conditions and strike threats by workers for the delays at Laggan-Tormore. But workers have laid the blame squarely with Petrofac’s management.

And it seems as if Petrofac’s management should shoulder the responsibility. The Laggan-Tormore project has been an enormous red herring for the company.

Initial cost estimates grossly underestimated the vast numbers of skilled workers needed to construct such a large complex, high level of specification gas plant in such testing weather conditions.  

Petrofac only hired 850 workers for the Laggan-Tormore project but since, this number has more than doubled to 2,000. The company has been forced to hire barges, hotels, and cruise ships to accommodate additional workers. 

Losses stemming from the Laggan-Tormore project have hit Petrofac’s shares hard over the past 12 months. Even after this morning’s gains, the company’s shares have fallen 23% year to date — excluding dividends.

At one point earlier this year, Petrofac’s shares had slumped by 50% over a 12-month period. 

Poor performance

Unfortunately, it’s not just the Laggan-Tormore project that has held Petrofac back.

The company has been struggling with its Integrated Energy Services division, which produces oil and gas, for some time.

The IES division was part of Petrofac’s plan to diversify. Putting capital into the oil & gas projects Petrofac was working on provided the potential for bigger gains, and higher risks.

However, the IES division has turned out to be nothing but a thorn in Petrofac’s side. Along with the Laggan-Tormore troubles, the group has also booked losses on its Greater Stella Area oil project in the North Sea. 

According to plan

Nevertheless, while IES struggles, the rest of Petrofac’s business appears to be performing according to plan. 

The group has booked $4.7bn worth of new business so far this year. And at the end of May, Petrofac’s order backlog stood at a record $20.5bn.

What’s more, Petrofac is now in the process of winding down its IES division. The company is focused on generating value from the existing IES project portfolio and reducing the capital intensity of this business. This should help minimize the number of mistakes in the future. 

Trust issues

Troubles at Petrofac’s IES division have torn the company’s reputation with shareholders to shreds over the past 12 months.

During the 12 months to April this year, Petrofac issued no fewer than three profit warnings. Management’s primary task will now be to prove that the company can be trusted once again and meet analysts’ forecasts. 

At present Petrofac is trading at a forward P/E of 15.2 and supports a trailing dividend yield of 4.4%.