Petrofac (LON: PFC) is “examining a range of strategic and financial options” 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, and for investors to take non-controlling stakes in other parts of the business.
Since the start of November, Petrofac has seen shares plunge 64.58%, from 48 pence on November 6, to 17 pence as of Monday morning (Dec 4 7.59am).
However, shares increased by nearly 30% on Monday on the back of the news to 21.50 pence (12.55pm).
Petrofac, which employs 8,500 people worldwide, said today it will not meet its cash flow targets for 2023, as it has failed to secure advance payments on contracts and to settle payments on legacy deals.
Part of the issue is contract financing – with reduced appetite from banks to hand out “standard” performance guarantees for Engineering, Procurement and Construction (EPC) contracts. The firm said it is in talks with creditors and clients of new contracts.
Cash flow concerns
Analysts have pointed to cash flow concerns, including debt and delayed collections on legacy contracts, among the main drivers.
During its half-year results in August, Petrofac said it expected cash flow to be broadly neutral in 2023, based on advance payments on contracts and making legacy collections, but said today it “no longer expects to meet the guidance”.
Petrofac doesn’t expect to reach these advance payments before year-end, despite efforts on that front and “unwinding historical working capital”.
During its half-year results in August, Petrofac’s debt stood at $584m (up from $349m) while delayed payments for legacy contracts in Engineering and Construction (E&C) constrained cash.
The issue saw cash outflows of $225m in H1, while Petrofac has also been facing the contract financing issue.
The firm has a healthy order book, but Hargreaves Lansdown and Panmure Gordon both pointed to cash flow as a main issue affecting Petrofac.
Review of options
Petrofac said the board is looking at options for “materially strengthening the Company’s balance sheet, securing bank guarantees and improving short-term liquidity”.
It said a key aim is to protect the interests of shareholders, creditors and employees.
These options include the sale of non-core assets, and Petrofac said it is “actively engaged” with financial investors to take a non-controlling position “in certain other components of the business portfolio”.
Management said these deals, as part of the overall plan, would result in “a material improvement on the balance sheet”.
The board said it has been working to “unwind working capital, collect receipts on ongoing and new contracts and to unlock long-outstanding commercial settlements”.
London-listed Petrofac is also exploring potential new financial options.
The update comes ahead of Petrofac issuing another pre-close trading update on December 20.
CEO Tareq Kawash said: “Petrofac’s underlying business is robust with material growth in our backlog from approximately US$5.5 billion in new awards in new and traditional energy this year.
“This demonstrates our competitive strength and long-term potential. To deliver on this, we are working hard to address short-term liquidity challenges and strengthen the financial position of the Group.
“I am grateful for the continued efforts of our people, and the support of our clients and other stakeholders, as we work to deliver a positive future for Petrofac.”
The firm also unveiled Aiden de Brunner as new non-executive director, with 20 years of board, management, investment and financial advisory experience.
Petrofac said he will spend a “significant portion” of his time supporting the board as it pivots to execution of new contracts won in 2023, including driving engagement with financial providers and investors.
Chairman René Médori said: “The Board is fully focused on reviewing a range of strategic and financial options with the objectives of strengthening the Group’s balance sheet and protecting the interests of all our stakeholders.
“The appointment of Aidan de Brunner reinforces the skills and experience of the Board in support of these efforts.”