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But why stop at asset sales?
Let me quote PFC again - PFC is "actively engaged in discussions with financial investors to take a non-controlling position in certain other components of the business portfolio".
Petrofac's business portfolio is HUGE.
Petrofac has 65 subsidiaries, FULLY owned (100% ownership) by Petrofac.
They also have various associates, joint agreements and joint operations at various stake owned by Petrofac.
Whilst none of these subsidiaries are up for sale, Petrofac has stated that investors could obtain a non-controlling stake (up to 49%) in one or some of this.
There's plenty of other options too, to bolster the balance sheet.
- With $8b backlog, the RFC could be increased in a restructuring from $162m to over $300m (with both term loans being paid)
- Ofcourse as you say an equity raise, but only see this happening with other methods (i.e asset sale)
PaulCurtis,
It's clear you have an agenda here.
But if as you state that there is going to be an equity rise, why aren't the bonds trading at 100? Let me tell you why.
Petrofac has 2 non-core assets to it's name which it can sell. The JSD6000 (10% of SPV) and the Malaysia PM304 operated field. Both these assets are secured against the bond.
If Petrofac were to sell these assets as per their 4th Dec update ("Management is considering the sale of non-core assets"), this would mean that majority of the bondholders would have to agree to this. That means a haircut for bondholders as these assets are actually secured against the bond.
Now let's look at finances. Yes, as it stands Petrofac requires around $400-450m in liquidity. They currently have around $75-100m (ofcourse a minimum $75m is always required due to the RFC liquidity covenant). They also have $100m tied up in collateral for the Tennet guarantee (short term). They also have approximately $200m tied up in legacy contracts, with 40-60% of this coming available in Q1/24. At the very short term, considering the above, Petrofac requires around $120-150m in ADDITIONAL liquidity for performance guarantees on future contracts (and to release the $100m tied in collateral).
Now the JSD6000 (10% SPV) was valued at $54-58m (independent brokers' estimate). Since this valuation, the JSD6000 has been contracted to Saipem on a very long contract. This increases the value of this vessel due to the income stream from contracting this vessel. At worst case estimate, I'd give this (10% SPV) a value of $65m currently.
PM304 is valued at $173m at the end of last year. Today, production from this asset is exactly the same as last year. There would have been depreciation and depletion of reserves ofcourse. Again, at worst case, a 30% discount to this asset prices it at approximately $120m.
So in terms of asset sale, Petrofac has around $185m to dispose of. Now I appreciate that "instantly" selling these assets is almost impossible unless a significantly low priced fire sale. But the assets are there.
Typically profit on EPC contracts are 5-8%.
But any sort of variation (additional work requested by the client that is not part of the main scope) to the contract can range from 20-30%. For EPC projects, it's the variations that provide more of a margin to the contractor.
So there's only 5-8% margin for error. But on a $1400m contract (Tennet) that's $70-110m margin. You need to have really messed with procurement or design to not make any profit.
Nevermind. Found the document.
In the bond offering document, the bonds are secured against the Malaysia asset also.
Which means bondholders would have to come to an agreement for PFC to sell this asset. (As an example of bondholders agreeing to break the terms).
With 8b backlog, there's room to not only extend the RCF, but to increase it too.
Do you have access to the bond terms or prospectus document? Would be good to know what terms were agreed with regards to the bond.
I don't believe that the amount required is significant. Considering that they have approximately $200m tied up in legacy contracts, $100m tied up in collateral for guarantees, and potential for asset sales.
I'm not dismissing equity raise either (via existing shareholders or new investors taking non-controlling positions).
But in all of this, bondholders would also need to agree to break the terms agreed also.
Also, reading the below, any sort of money raised via financial investors would be a "non-controlling" stake, which is positive for shareholders.
"Management is considering the sale of non-core assets, and is actively engaged in discussions with financial investors to take a non-controlling position in certain other components of the business portfolio. As part of an overall plan, these transactions would result in a material improvement on the balance sheet."
Also,
"Possibly a D4E as well." is a ridiculous statement at this stage.
PFC have at least 3-6 months before such drastic measures are considered.
Even if PFC were to breach covenants in the upcoming months, banks will waiver this. They have a good relationship and support for PFC. That's considering that such a covenant (liquidity) did not exist until PFC's last restructuring.
Paul,
Just a quick one for you.
What do you think would happen if PFC were to announce an asset sale, but also a dilutive offering of say 20% discount to Fridays close of 27p? (Which would be the target price Kepler has stated).
Pokerchips,
My point exactly.
Sorry didn't post well. Was meant to say PFC would NOT have appointed Aidan or advisors if a straight dilution was the case
PFC already had enough directors with significant knowledge (over the years) of finance and even contacts to certain markets. These additional appointments would not have been necessary if the options were straight forward.
Just a reminder to all regarding appointments by PFC.
https://www.google.com/amp/s/www.consultancy.uk/news/amp/36140/petrofac-hires-moelis-and-teneo-to-advise-financial-restructuring
https://news.bloomberglaw.com/mergers-and-acquisitions/petrofac-bondholders-pick-advisers-as-firm-seeks-to-raise-cash
If a straight forward dilution is the solution, these advisors (not Aidan as Non-Executive) would have been appointed.
The final result to financing will potentially be a combined result of asset sale, bond terms amended, RCF amendments, and even a raise. Definitely not a D4E at this stage.
Not as simple as everyone seems to think, and with Petrofac keeping things very close to their chest on the financing options, it's not something that anyone will know until RNS is announced. Including shorters.
It's not a doom and gloom as some state on here, nor will it be rose tinted glasses recovery.
Place your bets.
ADNOC is looking to award two contracts this month:
- The Upper Zakum expansion
- An oil pipeline project
Petrofac has put bids in for both. Will be interesting for share price if either of these comes through.
Upper Zakum seems too big for Petrofac at the moment with liquidity issues. But Petrofac are experts (could even say best in the field) for pipeline projects as well as central processing facility.
Time will tell.
GLA.
I estimate PFC's liquidity is currently around $100-150m.
With this, the company has up to 2 months (without any further advance payments or legacy project closures) before they default on the covenant. Let's also not forget that there has been no mention of PFC breaching the EBITDA convenant. So expect 2023 EBITDA to come in line with guidance.
Therefore, there is no imminent requirement for an RNS to land on finance say.. tomorrow.
It does seem however that PFC have this under control. For example, they took a decision to REDUCE liqudity themselves on 20th December by OVER $100m by using this money as collateral.
My opinion is, if they can just use that much money as collateral, liquidity for ongoing operations was never really a concern. But growth in the business is not manageable with current liqudity, with any future contract wins at risk of not being able to secure guarantees and therefore, ultimately losing the contract.
PFC are able to speak to finance providers (banks) to potentially waiver the covenants. This is stated in their last annual accounts stating the following which supports PFC to secure any waivers:
- Lenders are very supportive of PFC with multiple extensions or amendments to borrowing facility
- Outlook on pipeline, and their current very strong backlog
- Positive cashflow in H2/23 (although offset by collateral, but not important, still positive cashflow).
Given the situation PFC are in, PFC require the following to strengthen balance sheet:
- Waivers on covenants with RCF and term loans (mainly liquidity covenant - the EBITDA covenant is not tested until YE24).
- Asset sales (potentially up to $100-120m+ with sale of IES as well as pipelay vessel)
- Closure of legacy projects in January/February
- Investor taking a stake and/or JV (this will ultimately dilute shareholders by approx 20%)
The order of the above, and the quantity raised, all depends on various scenarios (i.e. high value legacy contract settlements, etc.), so not possible to predict or know by anybody.
There is also D4E with significant dilution to shareholders, but this would only be considered as a last solution to save the company in extremely distressed times. As it stands, PFC is not extremely distressed for reasons meantioned above, so for now, this can be ruled out.
Worst case for PFC should all above fail is that future contracts are lost and growth stunted. The SP does not reflect that, so i'll be patient to see this through.
GLA.
Multiple job postings by Petrofac over the past 24 hours in 2 areas:
Sriracha, Thailand:
Multiple postings for commissioning engineers. Thai Oil project is in coming into commissioning stages. This legacy project is definitely on track for closure by Q3/24 if commissioning starts Q1/24.
Shajah, UAE:
Multiple job postings for their ME office. These jobs are for recently won contracts with ADNOC, or potentially even anticipated contract wins with ADNOC.
Future is looking bright at Petrofac, with significant number of talents being recruited.
So.. to secure guarantees, PFC have had to use $100m as collateral.
This is the reason for low liquidity.
So PFC only has to raise around $100-150m from asset sales/investors taking stake to continue with performance guarantees for new contracts.
A LOT LESS than what was reported in media.
The thing that shorters, analysts, rating agencies etc. don't know is how much liquidity does PFC really have at Year end.
The required cash injection becomes clear once known. Could be as little as $50-100m, or as much as $450m.
This will be revealed on Wednesday.
Backlog:
Just some things to note from the latest update:
Petrofac has reported order intake of approximately $5.5b. This includes for $600m in contract wins that were NOT reported by RNS since June 2023 results.
Estimated backlog at year end approximately at $7b.
Liquidity:
At half year, liquidity was reported as $253m. It was also reported that cash outflow by 30th June is -$225m, with expected reversal in cash flow by year end.
Clearly with delays to advance payments, this reversal has not happened with overall cash outflow to be reported as negative. However, progress was made in closing legacy contracts (5/8 targeted for closure by year end). Assuming 3 of these legacy contracts are closed, cashflow is expected to be neutal or positive for H2.
Furthermore, the fact that the financial covenant was not breached at end of Nov, this also provides some evidence of cashflow.
Expected liquidity at year end: $250-350m
Expected cash outflow at year end worst case: Approximately -$150m
From what's out in the market, the only concern is short term liquidity (as has been reported multiple times). This is mainly due to $252m of RCF/term loans maturing in Q4/24. This means to stay above the financial covenant of the bond, as well as pay off the debt (or to renegotiate on good terms), Petrofac requires approximately $100-150m of cash from somewhere (worst case).
With asset sale of IES for ~$60-70m, Petrofac needs around $40-90m (worst case) from:
- Advance payments from clients/contracts ASAP
- Rights issue
- etc.
Best case is asset sale of IES (or no asset sale), and finances are all covered for with advance payments by Q1/24.
Looking from the outside, future looks bleak, but in reality, Petrofac has time (~3-6 months), to sort finances out.
ALL IMO.
The latest RNS says it all:
Most likely scenario: liquidity maintained by collection of receipts. Liquidity and balance sheet improved by sale of non-core assets. Further improved by investors taking non-controlling stake in some of other components of portfolio.
But at what price?:
For the non-core asset sale - is this a fire sale?
For investors to take non-controlling stake - what's the impact to equity, bondholders, shareholders, etc.?
Least likely scenario: Should the above fail, D4E or rights issue with significant impact to shareholders.
Take your chances. Whilst there's significantly "doom and gloom" around here, Petrofac did not breach covenant in November. The next covenant test is 31st December.
Some things to consider for this test:
- It's Christmas period with a lot of holidays. No payments are likely going to be made to Petrofac.
- At the same time, Petrofac is likely going to have minimal expenses during this month with minimal outgoings.
Personally, covenant is likely not breached this month either. The real test is January.
I see significant upside here in the days to 20th December and following 20th December.
The deal is legal. If it falls through, it's valid in international law for MAST to claim penalties worth x% of the deal.
Over the past couple days, the spread has been extremely wide on low volume to shake those who don't have the guts to hold.
I'll be holding until the end of this malarky thanks.