Petrofac Regulatory News (PFC)

10 Mar 2008 07:01

Petrofac Limited10 March 2008 PETROFAC LIMITED FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 Petrofac Limited (Petrofac, the group or the Company), a leading internationalprovider of facilities solutions to the oil & gas production and processingindustry, today announces its results for the year ended 31 December 2007. FINANCIAL HIGHLIGHTS • Revenue of US$2,440.3 million (2006: US$1,863.9 million), up 30.9% • EBITDA(1) of US$301.3 million (2006: US$198.3 million), up 51.9% - Engineering & Construction EBITDA of US$173.9 million, up 36.6% - Operations Services EBITDA of US$51.2 million, up 55.6% - Energy Developments EBITDA of US$82.8 million, up 106.5% • Net profit(2) of US$188.7 million (2006: US$120.3 million), up 56.9% • Backlog(3) at 31 December 2007 of US$4,441 million (2006: US$4,173 million), up 6.4% • Return on capital employed(4) of 47.3% (2006: 45.7%) • Earnings per share (fully diluted) of 54.14 cents (2006: 34.87 cents), up 55.3% • Final dividend of 11.50 cents (5.71 pence(5)) per ordinary share taking dividends for the full year to 16.40 cents per ordinary share (8.15 pence), up 85.7% OUTLOOK For Petrofac, 2008 has started in the same vein as 2007 closed: with strongdemand for our services and a fine record of execution from our businesses andwe expect to deliver another year of good growth. The level of backlog in the Engineering & Construction division provides goodvisibility for current year revenue. We expect to announce further contractawards in the coming months which, together with a healthy bidding pipeline inour core markets, should underpin continued strong revenue growth in 2008 andbeyond with net profit margins being broadly maintained at recent levels. We expect to see further good growth in the Operations Services division. Wehave targeted net profit margins (on revenue excluding pass-through revenue(6))of 5% in the Operations Services division in the medium-term and we expect tomake further progress towards that target in 2008. 2008 should see significant activity within our Energy Developments division. Wewill undertake a further drilling programme in Permit PM304, offshore Malaysia,where we are actively reviewing options for the next phase of the field'sdevelopment. We now expect first gas from the Chergui development in Tunisiabefore the middle of the year. The development of the Don Area assets in theUKCS proceeds apace with a further drilling campaign commencing in the firsthalf of this year. The refurbishment programme for the proposed productionvessel and installation of subsea infrastructure is proceeding and we are ontrack to commence production in 2009. We continue to review further investmentopportunities and are hopeful of adding to the division's portfolio ofinvestments during the current year. Commenting on the results, Ayman Asfari, Group Chief Executive, said: "We are delighted with the performance of the group over the year and are verypleased to be able to report another strong set of financial results. We havedelivered strong revenue and net profit margin growth across all threedivisions. Operationally, we are performing well on our contract portfolio,including the new projects commenced during the year. Our Energy Developmentsoperational assets performed well and we made good progress with our assetsunder development, including the submission of final field development plans forthe Don Area assets. The demand for our services remains strong and given thestrength of our backlog, expected E&C contract awards and a healthy outlook interms of business development opportunities in our core markets, we are wellpositioned for continued strong growth over the medium term." Ends Notes to Editors Petrofac is a leading international provider of facilities solutions to the oil& gas production and processing industry, with a diverse customer portfolioincluding many of the world's leading integrated, independent and national oil &gas companies. Petrofac is quoted on the London Stock Exchange (symbol: PFC) andis a constituent of the FTSE 250 Index. Through its three divisions, Engineering & Construction, Operations Services andEnergy Developments, Petrofac designs and builds oil & gas facilities; operates,maintains or manages facilities and trains personnel; and, where return criteriaare met and service revenue synergies identified, co-invests with clients andpartners. Petrofac's range of services allows it to help meet its customers'needs across the life cycle of oil & gas assets. With more than 9,500 employees, Petrofac operates out of four strategicallylocated international centres, in Aberdeen, Sharjah, Woking and Mumbai and afurther 20 offices worldwide. The predominant focus of Petrofac's business is onthe UK Continental Shelf (UKCS), Africa, the Middle East, the Commonwealth ofIndependent States (CIS) and the Asia Pacific region. For additional information, please refer to the Petrofac website atwww.petrofac.com. For further information, please contact: Petrofac Limited +44 (0) 20 7811 4900Ayman Asfari, Group Chief ExecutiveKeith Roberts, Chief Financial OfficerJonathan Low, Head of Investor Relations Bell Pottinger Corporate & Financial +44 (0) 20 7861 3232Ann-marie WilkinsonOlly Scott (The attached is an extract from the group's Annual Report and Accounts for theyear ended 31 December 2007.) Chairman's statement Petrofac had another year of excellent performance in 2007. As a relativelyrecently listed Company, we continued to mature organisationally and to developour business. Revenue grew by 31% to US$2,440 million during the year and netprofits increased by 57% to US$188.7 million. Market overview Although our customers range from national oil companies and major internationaloil companies through to smaller independent companies they all face similarchallenges; how to bring new oil & gas production on stream in the face ofincreasing rates of depletion in existing fields and growing world demand forenergy. As a consequence, demand for our services during the year has been verystrong and we expect this to continue for several years to come. 2007 was also a year in which our industry tried to reconsider the way it hastraditionally addressed the challenge of safety, following a number ofunfortunate incidents globally. Oil & gas production takes place in someextremely hazardous and remote locations and involves processes and systemswhich can interact in complex ways. With many plants worldwide operating beyondtheir original designed lives, a better approach to ensuring the integrity offacilities is required and I am pleased that Petrofac is playing its role inthis critical change. Safety is absolutely embedded within Petrofac's culture.It is our responsibility to ensure the safety of every one of our employees onevery project worldwide; a responsibility which we take extremely seriously. Our progress In this positive market environment, we have continued to record importantachievements which differentiate Petrofac from our mainstream competitors. Ourbusinesses have again worked with considerable skill, delivering outstandingfinancial results and working on some truly world class projects. They have alsocontinued to promote the service ethos which has always characterised ourbusiness; we strive to meet and then surpass our customers' expectations. InEnergy Developments we have an investment division that offers an increasinglyinteresting proposition to our customers. By co-investing alongside them onprojects where our core skills are deployed, we can manage risk better and helpbuild and operate complex infrastructure at lower cost. The rapid, sustained organic growth we have experienced in recent years is bothexciting and rewarding - but it is also challenging. We are conscious of theneed to put in place the best processes to keep pace with our expansion whilealso retaining the spirit of entrepreneurship that has driven our growth. We areevolving into a large Company but the entrepreneurship at the heart of ourbusiness remains vigorously intact. We have a highly-driven leadership teamsupported by skilled managers and engineers, many of whom have grown along withthe Company. Dividends The Board is recommending a final dividend of 11.50 cents per ordinary sharewith an equivalent of 5.71 pence per ordinary share which, if approved, will bepaid on 19 May to eligible shareholders on the register at 18 April 2008.Together with the interim dividend of 4.90 cents, equivalent to 2.44 pence, thisgives a total dividend for the year of 16.40 cents per ordinary share, anincrease of 86% compared to 2006. Corporate governance and social responsibility We have continued to improve the way in which we run the Company, in line withbest practice. Our internal oversight processes have deepened and we have addedBoard oversight of major risk issues through the formation of a new RiskCommittee. We have increased our reporting of corporate social responsibility (CSR) issues,both in this Report and also online, as stakeholders rightly demand moreinformation on how we impact the communities alongside which we operate. Some ofour operations are conducted in countries facing difficult and, often,deep-seated problems and we are committed to using our influence, limited thoughit may be in certain places, as a positive force helping to promote long-termand sustainable solutions. Our people The quality of our people is the single greatest factor behind our success. Ourstaff numbers rose from around 7,800 to 9,600(7) during 2007 as we continued toinvest in the talented, committed individuals who will keep us at the forefrontof our industry. I would like to put on record the Board's thanks to all those who through theirexperience, expertise and willingness to do their utmost on behalf of ourcustomers, have contributed so much to such an outstanding performance. The Board During the year your Board was expanded with the new appointments of Rijnhardvan Tets and Amjad Bseisu. They joined the Board following the 2007 AnnualGeneral Meeting. There were no other changes during the year. I extend the Board's thanks to our customers, shareholders, partners andsuppliers - as well as to our staff - for their continued support. Together, weface the future with confidence. Rodney ChaseChairman Group Chief Executive's review I am pleased to be able to report a strong set of financial results for the yearended 31 December 2007. 2007 2006 US$m US$mRevenue 2,440.3 1,863.9 up 30.9%EBITDA 301.3 198.3 up 51.9%EBITDA margin 12.3% 10.6%Net profit 188.7 120.3 up 56.9%Net margin 7.7% 6.5%Backlog 4,441 4,173 up 6.4% Group revenue increased by 30.9% to US$2,440.3 million (2006: US$1,863.9million) reflecting strong growth across all three divisions. EBITDA increasedby 51.9% to US$301.3 million (2006: US$198.3 million). Net profit increased by56.9% to US$188.7 million (2006: US$120.3 million), representing a net margin of7.7% (2006: 6.5%). At the close of 2007, the combined backlog of the Engineering& Construction and Operations Services divisions was US$4,441 million (2006:US$4,173 million). ENGINEERING & CONSTRUCTION 2007 2006 US$m US$mRevenue 1,414.9 1,081.3 up 30.9%EBITDA 173.9 127.3 up 36.6.%EBITDA margin 12.3% 11.8%Net profit 137.1 95.4 up 43.7%Net margin 9.7% 8.8%Backlog 2,540 2,228 up 14.0% Results High levels of activity on the division's lump-sum EPC contracts, particularlyin the second half of the year, and strong growth in the division's reimbursableengineering business led to an increase in revenues of 30.9% to US$1,414.9million (2006: US$1,081.3 million). Net margin increased from 8.8% in 2006 to9.7% in 2007 due to the division's continued strength in execution performance.Revenue growth and continued net margin improvement resulted in a net profit ofUS$137.1 million, an increase of 43.7% from the prior year (2006: US$95.4million). The key contributors to revenue in the lump-sum EPC business were theHarweel project in Oman, the facilities upgrade project in Kuwait, theKarachaganak fourth train (part lump-sum, part reimbursable) and the Salam andHasdrubal gas plant projects that were awarded in late 2006. The strong growthin the division's reimbursable business was principally due to the award of theKarachaganak Phase III FEED study and the division's 50%(8) share of theBrownfield engineering business, which continued to grow in its core market ofthe UKCS and also achieved strong international growth. The principal divisionalprofit drivers were the projects referred to above, and additionally, theKashagan contracts. The Engineering & Construction division increased its numberof employees from approximately 2,700 at 31 December 2006 to approximately 3,800at 31 December 2007, with strong growth in the Woking and Sharjah offices andfrom the new Chennai office, which opened in April 2007. The division's backlog increased to US$2.5 billion at 31 December 2007 (31December 2006: US$2.2 billion) principally due to the In Salah gas compressionproject award, the Kashagan third oil train award and scope increases for otherexisting contracts. Review of operations Middle East and North Africa The award of the Salam and Hasdrubal gas plant contracts in late 2006 signifiedan increase in focus on the North Africa market for the EPC business. This trendhas continued into 2007 with the award of the In Salah gas compression projectin Algeria in late 2007 (see page 10). Over 60% of the division's revenue in2007 was generated from lump-sum EPC contracts in the Middle East and NorthAfrica. Key developments during the year were: •First gas was achieved on the Kauther gas plant in Oman in November, two months ahead of expectation; the plant is currently undergoing commissioning ahead of initial operation by the Operations Services division •Substantial progress was made on the Harweel cluster development project for Petroleum Development Oman (PDO), the division's largest project to date; the scope of the project has continued to grow, with variation orders received to address agreed changes to the technical specifications •In Egypt and Tunisia, the contracts awarded in late 2006 are progressing well with significant progress on engineering and procurement activities and early construction activities underway at the Salam and Hasdrubal gas plants •The facilities upgrade project for Kuwait Oil Company (KOC) is progressing well with completion expected around the middle of 2008 Commonwealth of Independent States The division continues to be heavily involved in the Kashagan and Karachaganakprogrammes, two of Kazakhstan's three multi-billion dollar multi-phasedevelopments. Developments during the year included: •As noted on page 10, the division was successful in securing further work on the Kashagan project during the year with the award of an engineering and procurement contract for the third oil processing train •On the Karachaganak development, the division made good progress on the engineering, procurement and construction management (EPCM) services for the fourth train (awarded in January 2007) and has delivered much of the scope for the Phase III development FEED study awarded in June 2007 (see page 10) •In Russia, with the proposed change in ownership of TNK-BP's interests in the Kovykta projects through RUSIA Petroleum and the East Siberian Gas Company, the division has commenced demobilisation from these projects and has redeployed personnel within the group where appropriate; the Russian market remains an opportunity for the medium to long-term •The division was successful in securing a FEED study for the Kharyaga development in late 2007 which maintains its presence in the Russian market A number of significant EPC and consultancy and engineering services contractswere secured during 2007 and in early 2008: Karachaganak fourth stabilisation and sweetening train, Kazakhstan In January 2007, the division was awarded contracts for the engineering,procurement, construction management and commissioning support for theKarachaganak fourth stabilisation and sweetening train. The contract, scheduledfor completion in mid 2009, will be executed on a part lump-sum and partreimbursable basis. El Gassi field, Algeria In February 2007, the division was awarded a contract by SonaHess, a jointventure of Sonatrach and Hess, to engineer, procure and manage the constructionand commissioning of new facilities on an existing production site at the ElGassi field in Algeria. Karachaganak Phase III FEED, Kazakhstan In June 2007, the division secured an award from Karachaganak PetroleumOperating BV (KPO) for a FEED study for Phase III of the development of theKarachaganak Processing Complex. The Phase III FEED, which is scheduled forcompletion in the second half of 2008, is being executed on a reimbursable basisinvolving more than 450 personnel and represents the division's largest FEEDstudy to date. The development will have a gas processing capacity of 4 billioncubic feet per day. The division is working alongside KPO, its partners and withNIPI Caspian Engineering and Research (CER). The division and CER will use ajointly developed capability to increase long-term Kazakh development and Kazakhcontent. Kashagan third oil train, Kazakhstan In late 2007, following on from the initial engineering and procurement andconstruction management contracts for the Kashagan onshore facilities, thedivision secured a US$185 million lump-sum project for the engineering andprocurement of a new Tranche 3 oil treatment plant. In Salah gas development, Algeria In December 2007, the division announced the award of a US$600 million lump-sumEPC contract with In Salah Gas, an association between Sonatrach, BP andStatoilHydro. The project includes the design and installation of additionalfield compression facilities at three of the northern fields of REG, TEG andKrechba, in order to maintain plateau production rates of 9 billion cubic metresper year beyond 2009. OPERATIONS SERVICES 2007 2006 US$m US$mRevenue 911.0 729.2 up 24.9%EBITDA 51.2 32.9 up 55.6%EBITDA margin 5.6% 4.5%Net profit 28.9 18.1 up 59.7%Underlying net margin* 4.7% 3.6%Backlog 1,901 1,945 down 2.3% Results Revenue for the Operations Services division increased by 24.9% to US$911.0million (2006: US$729.2 million). Revenue excluding "pass-through" revenueincreased by 34.8% reflecting the commencement of the Dubai Petroleum contract,the acquisition of SPD, new business in Petrofac Training and Brownfieldengineering, particularly in international markets, and a strong Sterling to USdollar exchange rate(9). Net profit increased by 59.7% to US$28.9 million (2006:US$18.1 million), representing a net margin on revenue excluding pass-throughrevenue of 4.2% (2006: 3.6%). The underlying net margin*, adjusted to eliminateamortisation and finance costs relating to acquisition intangibles and deferredconsideration, increased to 4.7% (2006: 3.6%) due principally to thecontribution from the Dubai Petroleum contract and the acquisition of SPD. Operations Services' employee numbers grew from approximately 4,900 at 31December 2006 to over 5,500 at 31 December 2007, due principally to thecommencement of the Dubai Petroleum contract, where approximately 600 staff wererecruited from the previous operator. The division's backlog was US$1.9 billion at 31 December 2007 (2006: US$1.9billion). Review of operations The Operations Services division achieved strong growth in 2007, due principallyto the commencement of the facilities and well operations management contractwith Dubai Petroleum, international growth in the Training and Brownfieldengineering businesses and the acquisition of SPD. Facilities Management delivered good operational performance across itsportfolio of UKCS and international contracts; however, following a six monthperiod of transition, the highlight of the year was assumption of full turnkeyresponsibility for the operation of Dubai Petroleum's offshore oil & gasfacilities in April 2007. The new contract is the division's largestinternational contract to date and is proceeding positively and in line withexpectations. The financial returns on the Dubai Petroleum contract and themajority of Facilities Management's operations management contracts are linkedto operational performance through KPI mechanisms. In January 2007, the division acquired a majority interest in SPD, a specialistprovider of well operations services, in particular well project management,well engineering optimisation, well engineering studies and consultancyservices. SPD's core operations are in Africa and Europe and for national andinternational oil companies in the Middle East, including the provision ofservices for the Dubai Petroleum contract. The Brownfield engineering andTraining businesses have continued to grow in their core market of the UKCS,where the market remains buoyant, but the strongest growth has been generated ininternational markets, often in relation to existing projects and/or withexisting customers of other parts of the group. Both Brownfield engineering andTraining have been successful in delivering services to Dubai Petroleumfollowing the commencement of the facilities management contract. Furthermore,in early 2008, the group announced that Petrofac Training and Dubai Petroleumare to make a joint investment in the Dubai Petroleum Training Centre. Thecentre will provide a wide range of safety training to the energy andconstruction industries, with technical courses planned for the future. Thecentre is currently expected to open later in 2008. In addition to thedevelopment of the training centre, Petrofac Training will provide DubaiPetroleum with a managed training solution for its staff and contractors. Energy Developments 2007 2006 US$m US$mRevenue 132.8 62.1 up 113.8%EBITDA 82.8 40.1 up 106.5%EBITDA margin 62.3% 64.6%Net profit 33.4 14.4 up 131.9%Net margin 25.1% 23.1% Results Divisional revenue and net profit more than doubled from the previous year toUS$132.8 million (2006: US$62.1 million) and US$33.4 million (2006: US$14.4million) respectively, due predominantly to a full year contribution from theCendor field (2006 - 4 months) including the cost oil recovery period to the endof March 2007. The net profit includes an impairment provision of US$8.7 millionagainst the division's investment in Permit NT/P68 and the recognition of a nettax asset of US$11.3 million in relation to the trigger of a ring fence tradeallowing UKCS pre-trading expenditure to be recognised as a deferred tax assetand the recognition of a net tax asset in relation to NT/P68 expenditure. Review of operations The highlight of the year for the Energy Developments' division was theperformance of the Cendor field which drove strong growth in the division'srevenue and profits. Good progress was made in the development of the division'sportfolio during 2007, as discussed below. Analysis of the division's oil & gasreserve entitlements is presented for the first time on page 73. Developed assets Cendor PM304, Malaysia The division has a 30% interest, as operator, in the Cendor field in BlockPM304, offshore Peninsular Malaysia. The other partners to the ProductionSharing Contract are: Petronas; PetroVietnam; and Kuwait Foreign PetroleumExploration Company (KUFPEC). The Cendor field averaged production ofapproximately 14,300 barrels per day and has produced over 6.3 million barrelsof oil since first oil in September 2006. A five well drilling programme, fundedfrom existing cash flow, commenced in October 2007 and is expected to sustainCendor peak production for longer than originally planned and to developadditional reserves. This further appraisal activity and the performance of thefield to date has resulted in the group increasing its estimate of grossultimate recovery of proven reserves from 24.6 million to 30.2 million barrelsduring the year. Towards the end of 2008, the division will undertake a furtherfive well drilling programme within Block PM304 to appraise near fielddevelopment opportunities. Ohanet, Algeria The division, in joint venture with BHP Billiton (as joint venture operator),Japan Ohanet Oil & Gas Co, and Woodside Energy (Algeria), has invested in excessof US$100 million for a 10% share in a Risk Service Contract (RSC) withSonatrach, Algeria's national oil company. The US$1 billion Ohanet developmentis located in the Illizi province of Algeria, southeast of Algiers and close tothe Libyan border. Petrofac's Engineering & Construction division carried outthe EPC contract for the gas processing facilities in joint venture with ABBLummus. The group's Operations Services division was also responsible for partof the on-site commissioning works. First gas for export began flowing in late2003. The Ohanet gas plant continued to perform well in 2007. Overall productionwas higher than in 2006 at an average of approximately 16.4 million cubic metresper day (m3/d) (2006: 14.6 m3/d) of gas for export, approximately 25,430 bpd(2006: 24,240 bpd) of condensate and approximately 2,110 tonnes per day (2006:2,770 tonnes per day) of liquefied petroleum gas (a combined oil equivalent of153,500 bpd; 2006: 138,500 bpd). On average, the group earned its share of themonthly liquids production by the 8th day of the month (2006: 11th), reflectingthe higher prevailing oil price in 2007. It is expected that the division willearn its defined return by November 2011, at which point the contract willterminate. KPC refinery, Kyrgyzstan The division owns a 50% share in the Kyrgyz Petroleum Company (KPC) which isengaged in the refining of crude oil and the marketing of oil products from theKPC refinery. The Operations Services division operates the refinery on behalfof the joint venture partners on a reimbursable basis. During 2007, the refineryproduced an average of approximately 2,508 bpd (2006: 1,700 bpd) of principallygasoline, diesel and fuel oil. Assets under development Chergui field, Tunisia In February 2007, the division completed its acquisition of a 45% operatinginterest in the Chergui concession, for a consideration of approximately US$31million from Entreprise Tunisienne d'Activites Petrolieres (ETAP), the Tunisiannational oil company, which holds the remaining 55% interest. Under the terms ofthe agreement, in addition to the US$31m consideration, Petrofac agreed to sharecosts to complete the central production facilities, pipeline to shore andassociated infrastructure. The construction of the facilities and pipeline is substantially complete, withfirst gas due to flow in the first half of 2008. Plateau rates are expected tobe maintained for around four years with a further eight years of productionbeyond that. Produced gas is to be sold to the national gas company, SocieteTunisienne d'Electricite et Gaz (STEG), under the gas pricing formula fixed byexisting law, in which the price of gas is linked to FOB Med (free on boardMediterranean) fuel oil prices. Don Southwest and West Don, UKCS In January 2008, the division announced that it had signed an agreement, asoperator, on behalf of itself and its co-venturers(10), with Sea ProductionLimited, a wholly owned subsidiary of Northern Offshore Limited, for theprovision of the Northern Producer floating production facility. The NorthernProducer will receive and process production from the Don Southwest and West Donfields in the North Sea, before offtake via offshore tanker or nearbyinfrastructure. The Northern Producer has a capacity of 55,000 barrels of oil per day andassociated gas, water injection and export processing facilities. Modificationswill be carried out in 2008 to extend the life of the vessel. The vessel will bedeployed between West Don and Don Southwest, with first oil expected in 2009. Final field development programmes for both fields have been submitted to theDepartment of Business Enterprise & Regulatory Reform. Approval is expected tobe received during the first half of 2008. The division's estimate of grossrecoverable proven reserves for the Don Area developments is 26.4 millionbarrels, while its gross estimate of proven and probable reserves is 50.9million barrels. The Energy Developments division has contracted a semi-submersible drilling rigfor a seven well drilling programme on the Don Southwest and West Don fields(see note 29 to the financial statements for details of the leasing commitment).It is expected that the rig will come on contract towards the end of the firsthalf of 2008 and complete the programme by the end of the first quarter of 2009. The division acquired an additional 2.0% unitised interest in the West Don fieldin August 2007 in exchange for its 29% interest in Block 9/28a, containing theCrawford field. Following an agreement in March 2007 on the unitisation of thefield with the owners of neighbouring Blocks 211/13b and 211/18a (First Oil,Valiant, Nippon and Stratic) and with the additional interest acquired from theCrawford asset swap referred to above, the division now owns a 27.70% operatedinterest in the West Don field. The division has a 60% operated interest in theDon Southwest field. Permit NT/P68, Australia Energy Developments entered into a farm-in arrangement with MEO AustraliaLimited (MEO) in June 2007. Under the terms of the farm-in, the division isfunding 25% (subject to a cap) of the Heron-2 and Heron-3 wells in return for a10% interest in the Permit. The division also acquired an option to secure aninterest in any LNG or methanol project that result from this investment. The Heron-2 well was drilled in late 2007. Open-hole production testing of theElang/Plover formation was conducted and while it was confirmed that the HeronNorth Plover sands did not contribute to the recorded flow due to blockages inthe well immediately above the Heron North Plover formation, the Elang sands didflow gas to surface at a rate of approximately 6 million standard cubic feet perday (mmscfd). While logs suggest that significant hydrocarbons are present, the productiontesting of the Epenarra Darwin formation only managed to produce minor flows ofhydrocarbons to the surface. The joint venture is presently reviewing theHeron-2 well, 3D seismic and inversion data to support drilling of the Heron-3appraisal well in late 2008 or early 2009. Due to the continuing uncertaintiessurrounding the commercial outcome of this project, an impairment provision ofUS$8.7 million has been made against this asset at 31 December 2007. MEO commenced drilling a sole risk well at the nearby Blackwood Prospect (inPermit NT/P68) in early 2008. The division has an option to participate in theprospect after the well has been drilled, albeit at a substantial premium. In addition to the prospects noted above, the division reviewed, and continuesto review, a range of upstream and energy infrastructure opportunities. Ayman AsfariGroup Chief Executive Chief Financial Officer's review 2007 2006 US$m US$mRevenue 2,440.3 1,863.9 up 30.9%Operating profit(11) 248.5 169.5 up 46.6%Operating margin 10.2% 9.1%EBITDA 301.3 198.3 up 51.9%EBITDA margin 12.3% 10.6%Net profit 188.7 120.3 up 56.9%Net margin 7.7% 6.5%Backlog 4,441 4,173 up 6.4% Group revenue increased by 30.9% to US$2,440.3 million (2006: US$1,863.9million) reflecting strong growth across all three divisions. Although therevenue from the Energy Developments division more than doubled due to thecontribution from the Cendor field, the increase was principally driven by theEngineering & Construction and Operations Services divisions which contributed95% of the group's revenue. The revenue increase in the Engineering &Construction division was as a result of high levels of activity on lump-sum EPCcontracts, including those awarded in late 2006, and a significant increase inmanhours in the division's reimbursable engineering business. Growth in theOperations Services division was primarily due to international growththroughout the division, including the commencement of the Dubai Petroleumcontract and the acquisition of SPD Group. Operating profit increased by 46.6% to US$248.5 million (2006: US$169.5million), with all three divisions showing significant growth in operatingprofit. Operating margins increased to 10.2% (2006: 9.1%), reflecting continuedimprovement in operating margins in the Engineering & Construction division, asignificant improvement in the Operations Services division, primarily due tothe commencement of the Dubai Petroleum contract, and a greater proportion ofthe group's operating profit coming from the high operating margins earned inthe Energy Developments division due principally to the full year contributionfrom the Cendor field. As a result of strong growth and good operational performance across alldivisions, net profit increased from US$120.3 million in the prior year toUS$188.7 million for the year ended 31 December 2007, an increase of 56.9%. Thenet margin increased 1.2 percentage points to 7.7% (2006: 6.5%), broadly in linewith the increase in the group's operating margin. EBITDA increased from US$198.3 million to US$301.3 million, representing anEBITDA margin of 12.3% (2006: 10.6%). The increase in the group EBITDA marginwas due to the net impact of increased margins in Engineering & Construction andOperations Services due to strong operational performance and an increase in theproportion of 2007 EBITDA contribution to the overall group by the higher marginearning Energy Developments division, driven by a full year contribution fromCendor. Despite a 36.6% increase in EBITDA in the Engineering & Construction division,its share of group EBITDA decreased due to the very strong performance from therest of the group. The Energy Developments division contributed a greaterproportion of the group's EBITDA in 2007 due to a full year contribution fromCendor. The Operations Services division marginally increased its contributionto the group EBITDA due principally to the commencement of the Dubai Petroleumcontract and the acquisition of SPD. As a percentage of EBITDA, excluding theeffect of consolidation and elimination adjustments, Engineering & Constructionaccounted for 56.5% (2006: 63.6%) of group EBITDA, Operations Services 16.6%(2006: 16.4%) and Energy Developments 26.9% (2006: 20.0%). The combined backlog of the Engineering & Construction and Operations Servicesdivisions increased from approximately US$4.2 billion at 31 December 2006 toUS$4.4 billion at 31 December 2007. A significant proportion of the OperationsServices division's backlog is denominated in Sterling and therefore benefitedfrom the slight depreciation of the US dollar against Sterling from thebeginning to the end of 2007. On a constant currency basis, group backlogincreased 5.0% compared to 31 December 2006. The group's reporting currency is US dollars. During 2007, although there wasonly a slight change in the year-end US dollar/Sterling exchange rates, therewas a significant depreciation of the US dollar against Sterling for much of theyear, and there was therefore a significant impact on the reported results ofthe group's UK trading activities, principally within the Operations Servicesdivision. The impact on the results of the Operations Services division isdiscussed in end note 9. The table below sets out the average and year endexchange rates for the US dollar and Sterling for the years ended 31 December2007 and 2006 as used by the group for financial reporting purposes. 2007 2006 US$/SterlingAverage rate for the year 2.01 1.85Year end rate 1.99 1.96 Interest Net interest receivable for the year was US$9.7 million (2006: US$2.1 million),due principally to the group's higher average cash balances during 2007. Taxation An analysis of the income tax charge is set out in note 6 to the financialstatements. The income tax charge as a percentage of profit before tax in 2007was 26.9% (2006: 29.9%). The decrease in the effective tax rate compared to theprior year is due principally to: •A decrease in the effective tax rate for the Engineering & Construction division due to a higher proportion of its profits being earned in lower tax jurisdictions •A decrease in the effective tax rate for the Energy Developments division due to the trigger of a ring fence trade allowing UKCS pre-trading expenditure to be recognised as a deferred tax asset and the recognition of a net tax asset in relation to NT/P68 expenditure Earnings per share Fully diluted earnings per share increased from 34.87 cents per share in 2006 to54.14 cents in 2007, an increase of 55.3%, reflecting the group's significantincrease in profitability in 2007. Operating cash flow and liquidity Cash generated from operations was US$370.8 million compared with US$328.6million in 2006, representing 123.1% of EBITDA (2006: 165.7%). The increase innet cash inflows was as a result of increased operating profit and a reductionin net working capital utilisation during the year. The movement in net workingcapital arose principally from timing differences at the year end in respect ofthe customer billing and supplier payment positions on long-term engineering andconstruction contracts. Gearing ratio 2007 2006 US$ million (unless otherwise stated) Interest-bearing loans and 110.1 117.2borrowings (A)Cash and short term deposits 581.6 457.8(B)Net cash/(debt) (C = B - A) 471.5 340.6Total net assets (D) 486.0 324.9Gross gearing ratio (A/D) 22.7% 36.1%Net gearing ratio (C/D) Net cash position Net cash position The group maintained a broadly comparable level of interest-bearing loans andborrowings at US$110.1 million (2006: US$117.2 million) on an increased equitybase, resulting in a decrease in the group's gross gearing ratio to 22.7% at 31December 2007 (2006: 36.1%). The group's total gross borrowings before associated debt acquisition costs atthe end of 2007 were US$112.4 million (2006: US$119.0 million), of which 39.3%was denominated in US dollars (2006: 38.1%), 55.3% was denominated in Sterling(2006: 56.0%) with the majority of the balance, 5.3%, denominated in KuwaitiDinars (2006: 5.9%). As detailed in note 31 to the financial statements, the group maintained abalanced borrowing profile with 25.3% of borrowings maturing within one year,54.5% maturing between one and five years and the remaining 20.2% maturing inmore than five years (2006: 22.3%, 40.6% and 37.1% respectively). The decreasein the average duration of borrowings reflects the existing repayment terms ofgroup's facilities with the Royal Bank of Scotland/Halifax Bank of Scotland. Theborrowings repayable within one year include US$22.2 million of bank overdraftsand revolving credit facilities (representing 19.7% of total gross borrowings,see note 24 to the financial statements), which are expected to be renewedduring 2008 in the normal course of business (2006: US$20.4 million and 17.2% oftotal gross borrowings). The group's policy is to hedge between 60% and 80% of interest arising onfloating rate interest bearing loans and borrowings. At 31 December 2007, 69.1%of the group's floating rate interest-bearing loans and borrowings were hedged(2006: 64.8%). During the year the group has introduced a policy of hedging upto 75% of its direct exposure to movements in the market price of oil on aproject-by-project basis. An analysis of the derivative instruments used by thegroup to hedge this exposure is contained in note 31 to the financialstatements. With the exception of Petrofac International Ltd, which undertakes the majorityof Petrofac's lump-sum EPC contracts and which, under its existing bankingcovenants, is restricted from making cash payments to Petrofac Limited in excessof 70% of its net profit in any one year, none of the Company's subsidiaries aresubject to any material restrictions on their ability to transfer funds in theform of cash dividends, loans or advances to the Company. Capital expenditure Capital expenditure on property, plant and equipment during the year wasUS$117.2 million (2006: US$59.4 million). The principal elements of capitalexpenditure were: •construction of the new office building in Sharjah of US$22.0 million •financial completion of the acquisition of the Chergui gas field in Tunisia, and associated EPC costs, totalling US$54.1 million •capital expenditure on PM304 principally in relation to the drilling programme of US$11.5 million Other capital expenditure included office furniture and equipment and plant andequipment to support the growth in the Engineering & Construction and OperationsServices divisions. Capital expenditure on intangible oil & gas assets during the year was US$49.7million (2006: US$12.9 million) which was principally in respect ofpre-development expenditure on the Energy Developments' Don Area assets ofUS$32.7 million and US$15.9 million on the division's NT/P68 investment,offshore Australia. The accumulated expenditure in relation to the Don Areaassets was transferred from intangible oil & gas assets to oil & gas assetswithin property, plant and equipment following sanction of the development inlate 2007. Shareholders' funds Total equity at 31 December 2007 was US$486.0 million (2006: US$324.9 million).The main elements of the increase were the increase in retained earnings for theyear of US$149.9 million, the favourable movement in the group's fair value ofderivatives of US$41.7 million, less the net gain on the maturity of cash flowhedges recognised in the income statement of US$22.2 million and an increase inthe cost of treasury shares held by the Company in relation to employee sharescheme awards of US$21.7 million. Return on capital employed (ROCE) The group maintained a high return on capital employed for the year ended 31December 2007 of 47.3% (2006: 45.7%). Dividends The Company proposes a final dividend of 11.50 cents per share for the yearended 31 December 2007 (2006: 6.43 cents), which, if approved, will be paid toshareholders on 19 May 2008 provided they were on the register on 18 April 2008.Shareholders who have not elected to receive dividends in US dollars willreceive a Sterling equivalent of 5.71 pence per share. Given the strong cashgeneration of the business, the Board took the decision during the year toincrease the percentage of earnings to distribute by way of dividend toapproximately 30% of full year post tax profits (previously 25%). Keith RobertsChief Financial Officer End notes: (1) EBITDA means earnings before interest, tax, depreciation, amortisationand is calculated as profit from continuing operations before tax and financecosts adjusted to add back charges for depreciation, amortisation and impairmentcharges (as set out in note 3 to the financial statements). (2) Net profit (for the group) means profit for the year attributable toPetrofac Limited shareholders. (3) Backlog consists of the estimated revenue attributable to theuncompleted portion of lump-sum engineering, procurement and constructioncontracts and variation orders plus, with regard to engineering services andfacilities management contracts, the estimated revenue attributable to thelesser of the remaining term of the contract and, in the case of life of fieldfacilities management contracts, five years. To the extent work advances onthese contracts, revenue is recognised and removed from the backlog. Wherecontracts extend beyond five years, the backlog relating thereto is added to thebacklog on a rolling monthly basis. Backlog includes only the revenueattributable to signed contracts for which all pre-conditions to entry have beenmet and only the proportionate share of joint venture contracts that isattributable to Petrofac. Backlog does not include any revenue expected to arisefrom contracts where the client has no commitment to draw upon services fromPetrofac. Backlog is not an audited measure. Other companies in the oil & gasindustry may calculate these measures differently. (4) Return on capital employed is defined as the ratio of earnings beforeinterest, income tax and amortisation (i.e. operating profit plus goodwill andother amortisation and impairment charges) (EBITA) and average capital employed,being average total assets employed less average total current liabilities. (5) The group reports its financial results in US dollars and, accordingly,will declare any dividends in US dollars together with a Sterling equivalent.Unless shareholders have made valid elections to the contrary, they will receiveany dividends payable in Sterling. Conversion of the 2007 final dividend from USdollars into Sterling is based upon an exchange rate of US$2.0146:£1, being theBank of England Sterling spot rate as at midday on 7 March 2008. (6) Pass-through revenue refers to the revenue recognised from low orzero-margin third-party procurement services provided to customers. (7) Includes agency and contract staff but excludes employees of jointventures. (8) Revenues and profits of the Brownfield engineering business are splitequally between the Engineering & Construction and Operations Servicesdivisions. (9) The majority of the Operations Services division's revenues aredenominated in Sterling. The average US dollar to Sterling exchange rate for2007 was 2.01 compared to 1.85 in 2006. Eight percentage points of the growth inrevenue, excluding pass-through revenue, in Operations Services is attributableto the movement in the US dollar to Sterling exchange rate. (10) he division's partners on the West Don field are: First Oil (19.28%),Valiant Petroleum (17.27%), Stratic Energy (17.25%) and Nippon Oil Exploration &Production (18.50%). The division's partner on the Don Southwest field isValiant Petroleum (40%). (11) Operating profit means profit from operations before tax and financecosts. This information is provided by RNS The company news service from the London Stock Exchange