Petrofac Regulatory News (PFC)

16 Mar 2006 07:02

Petrofac Limited16 March 2006 16 MARCH 2006 PETROFAC LIMITED FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 Petrofac Limited (Petrofac, the group or the Company) is a leading internationalprovider of facilities solutions to the oil & gas production and processingindustry, providing project development, engineering, construction andfacilities operation, maintenance and training services to many of the world'sleading integrated, independent and national oil & gas companies. With astrategic focus on the UK Continental Shelf (UKCS), Middle East, Africa andFormer Soviet Union, Petrofac has 17 offices worldwide and employs approximately7,000 people. FINANCIAL HIGHLIGHTS* • Revenue of US$1,485 million (2004: US$952 million), up 56% • EBITDA(1) of US$115.6 million (2004: US$96.1 million), up 20% - Engineering & Construction EBITDA of US$63.5 million, up 52% - Operations Services EBITDA of US$27.5 million, up 30% - Resources EBITDA of US$32.6 million, unchanged • Net profit(2) of US$75.4 million (2004: US$46.1 million), up 64% • Backlog(3) at 31 December 2005 of US$3,244 million (2004: US$1,740 million), up 86% • Return on capital employed(4) of 32.5% (2004: 31.4%) • Earnings per share (fully diluted) of 22.41 cents (2004: 11.93 cents), up 88% • Final dividend of 1.87 cents (1.07 pence) per ordinary share * continuing operations. Commenting on the results, Ayman Asfari, Petrofac's Group Chief Executive, said: "I am delighted to be able to report a strong set of financial results thatreflect the position Petrofac has built in our key markets. We are well placedto address the execution challenges and resource constraints that accompany abuoyant market and, with the strength and breadth of our service offering andstrategic positioning, to capitalise on the many opportunities it offers.Against this backdrop, and with the significant increase in backlog, we are wellpositioned for continued growth during the current year and beyond." For further information, please contact: Petrofac Limited +44 (0) 20 7471 3500 Ayman Asfari, Group Chief Executive Keith Roberts, Chief Financial Officer Robin Caiger, Head of Investor Relations Bell Pottinger Corporate & Financial +44 (0) 20 7861 3232 Ben Woodford Geoff Callow Petrofac Limited Final results for the year ended 31 December 2005 (Note: all financial information set out herein reflects the group's continuingoperations, unless stated otherwise) Chairman's statement Introduction I am delighted to report on a year of significant achievements for Petrofac andto present the financial results for the year ended 31 December 2005. Theseresults demonstrate the growing position and reputation we are building in ourcore markets. Over the past year, we have increased revenue by 56% to US$1,485million and net profit by 64% to US$75.4 million. Market overview 2005 was characterised by high commodity prices with Brent oil averaging nearlyUS$55 per barrel (bbl) and Henry Hub Gas average price approaching US$9 permillion British thermal unit (mmbtu), respectively over 40% and 50% above 2004averages. Energy prices remained volatile as OPEC's surplus capacity averagedless than 2 million bbl per day for the third year running and a series ofunrelated factors caused disruption to energy supplies across the world. Our industry faces the challenge of meeting the world's increasing demand forenergy fuelled by good economic growth and from the still relatively low energyintensive economies of China and the Indian Sub-Continent. In addition, theindustry is struggling with rising rates of depletion of existing production,particularly as the "super-major" fields in the Middle East reach theirmaturity. These twin challenges will require a sustained period of increasedcapital investment in order to bring on more production every year. It will notbe easy to build a greater level of surplus capacity back into the world'ssystem but we and others are committed to this effort. As a company that designs, builds, operates and invests in oil & gasinfrastructure, Petrofac is very much involved in helping to resolve thesechallenges. While the increasing use of renewable energy sources and greaterenergy conservation will both help to bring the supply and demand for energyinto balance, there remains a pressing need to develop more oil & gas reservesevery year. We are working hard to help our clients meet this need and we enter2006 with a record backlog of approximately US$3.2 billion. We are well placedto take advantage of new opportunities as they arise over the coming year. Dividend The Board is recommending a final dividend of 1.87 cents per ordinary share withan equivalent of 1.07 pence per ordinary share being payable(5) which, ifapproved, will be paid on 31 May 2006 to eligible shareholders on the registerat 28 April 2006. The final dividend proposed for 2005 reflects the fact thatthe Company was listed for approximately three months of the 2005 financial yearand is approximately half the level that would have been declared had Petrofacbeen listed for the whole of the 2005 financial year, having taken account ofthe intention to pay two thirds of the full year dividend as a final dividend. Our people As a provider of facilities solutions to the oil & gas production and processingindustry, the Company's greatest resource is its people. This has been anexceptional year, both for the Company's business performance and its corporatedevelopment and, on behalf of the Board, I would like to thank all of ouremployees for the tremendous way they have responded to the challenges of 2005. I look forward with confidence to another challenging and exciting year ahead. Rodney Chase Chairman Group Chief Executive's review INTRODUCTION 2005 was an exciting and eventful year for Petrofac and one in whichconsiderable progress was made towards our goal of becoming the leadingfacilities solutions provider to the oil & gas industry. During the year, wesecured a number of large and strategically important projects, extended thescope and duration of contracts with some of our core customers and, in October,completed Petrofac's Initial Public Offering (IPO) on the London Stock Exchange.By working in partnership with the owners of oil & gas reserves andinfrastructure, providing innovative and cost-efficient project development,engineering, construction and facilities operation, maintenance and trainingservices, we aim to create value across all aspects of an asset's development. I am pleased to be able to report a strong set of financial results for the yearended 31 December 2005. 2005 2004 US$m US$mRevenue 1,485.5 951.5 up 56.1%EBITDA 115.6 96.1 up 20.3%Net profit 75.4 46.1 up 63.6%Backlog 3,244 1,740 up 86.4% Group revenue increased by 56.1% to US$1,485.5 million (2004: US$951.5 million)reflecting significant growth in our Engineering & Construction and OperationsServices divisions. EBITDA increased by 20.3% to US$115.6 million (2004: US$96.1million). Net profit increased by 63.6% to US$75.4 million (2004: US$46.1million). At the close of 2005, the combined backlog of the Engineering &Construction and Operations Services divisions was US$3,244 million (2004:US$1,740 million), representing a year on year increase of 86.4%. We have sought to ensure that our Engineering & Construction business ispositioned where there are significant medium and long-term investmentprogrammes, in particular the Middle East, Former Soviet Union and Africa. Thescale of the hydrocarbon resources in these areas is substantial and there isconsiderable commitment on the part of both the international and national oilcompanies to develop these assets. Through positioning at an early stage inthese developments and executing to the highest standard, there are goodprospects for sustained growth and, with the operational expenditure that shouldfollow, the opportunity to provide operations management and support andtraining services. Our Operations Services business has performed well this year with considerableactivity in its core market of the UKCS. Our longstanding presence in the UK hasdemonstrated our operations services and training capability in a verydiscerning and demanding market. We have successfully expanded into Kuwait, Iranand Sudan, and look forward to continuing this growth by leveraging theinternational network of our Engineering & Construction and Resources divisions. A key area of focus across much of our business is the need to increase the useof local resources and improve the technical skills of national workforces,thereby ensuring our clients achieve their local content goals. In this regard,Petrofac has two key differentiators - we have considerable experience ofworking with the leading local subcontractors in our core markets and we have aleading presence and focus on providing health, safety and operational trainingservices. With a diverse mix of nationalities and cultures within our ownbusiness, we are well placed to deliver international competence to our clientswith local capability. Our Resources business made a strong contribution to the financial performanceof the group and its existing investments and projects under developmentcontinued to meet our expectations. Notwithstanding the level of competition forasset investments, we are confident that our strong service platform willcontinue to provide attractive and differentiated investment opportunitieswhere, alongside our partners, we are able to leverage our engineering andoperational skills and unlock an enhanced return. Overall, Petrofac has had another successful year. In acknowledging theseachievements, I would like to extend my thanks to all of our employees for theirdedication, hard work and commitment. We enter the current year with a recordbacklog and I am confident that our strategy will deliver sustainable growth invalue in 2006 and beyond. OUTLOOK After an extended period of relative under-investment by the oil & gas industryand with increasing demand for energy and rising rates of depletion of existingproduction, we believe the capital investment, both brownfield and greenfield,necessary to enable the industry to build the required capacity is substantialand will continue over a number of years. Each of our three divisions achieved a strong financial performance in 2005 and,on entering 2006 with record backlog, the group is well positioned to deliverfurther growth. Our Engineering & Construction division finished 2005 with backlog ofapproximately US$2.1 billion, of which approximately US$1 billion was awarded asrecently as December 2005. With good progress having been made on thosecontracts that were in an early phase of execution during much of 2005 and oncontracts that are entering their final stages, in the absence of unforeseencircumstances and subject to the scale and timing of further contract awards,the Directors expect to see some positive progression in profit margins in thisdivision during the year ahead. Our Operations Services division secured a number of significant contractrenewals, extensions and wins during 2005 and revenue increased significantly asa result. At 31 December 2005, the backlog for the division was approximatelyUS$1.1 billion with a further US$0.3 billion in new awards which, at the time,remained subject to final contract. Revenue for the current year should benefitfrom a full year's impact from the new business secured during 2005. TheDirectors expect that, in the absence of unforeseen circumstances, thedivision's profit margins will be maintained in the year ahead. The Ohanet investment continued to dominate the financial contribution from ourResources division's investment portfolio and is expected to produce relativelystable revenues and cash flows throughout the year. We expect our investment inthe Cendor field to commence production in late 2006, which is anticipated toresult in increased revenues and profitability for the division in accordancewith the terms of the Cendor production sharing contract. We are well placed to address the execution challenges and resource constraintsthat accompany a buoyant market and, with the strength and breadth of ourservice offering and strategic positioning, to capitalise on the manyopportunities it offers. Against this backdrop, and with the significantincrease in backlog, we are well positioned for continued growth during thecurrent year and beyond. Ayman Asfari Group Chief Executive ENGINEERING & CONSTRUCTION 2005 2004 US$m US$mRevenue 858.2 473.5 up 81.3%EBITDA 63.5 41.9 EBITDA margin 7.4% 8.8%Net profit 55.1 33.1 up 66.4% Net margin 6.4% 7.0%Backlog 2,121 739 up 187.0% Engineering & Construction enjoyed a year of substantial growth, successfulproject execution and a record level of new orders. The division reported significant growth in revenue, increasing to US$858.2million (2004: US$473.5 million). The increase was largely attributable to theexecution of projects secured in 2004, including significant progress on theKashagan engineering and procurement contract and substantial completion ofprojects for Qatar Petroleum, Crescent Petroleum and Kuwait Oil Company, and thecompletion of the BTC pipeline (with significant progress being made on the SCPpipeline). Net profit increased by 66.4% to US$55.1 million (2004: US$33.1 million)representing a net margin of 6.4% (2004: 7.0%). The reduction in net margin in2005 was due primarily to a decrease in operating margin. Profit recognition onlump sum contracts in the Engineering & Construction division is significantlyimpacted by the number and timing of projects reaching completion during theyear. Typically, profits are not recognised on such contracts in the earlystages of completion and it is therefore not unusual for profit recognition tolag revenue recognition. In 2004 and 2005, a number of projects reachedcompletion toward the end of the year, however, in 2005, early stage contractsgenerated a greater proportion of revenue with correspondingly lower recognitionof margin. Furthermore, a large proportion of revenue in 2005 was generated bythe Kashagan engineering and procurement contract which, since it does notinvolve construction management, was bid at a lower profit margin than typicalEPC contracts. The dilution in margin due to these factors was partially offsetby the inclusion of a net credit relating to the BTC/SCP project, a decrease indepreciation costs as a percentage of revenue, a lower effective tax rate andhigher finance income. The net credit relating to the BTC/SCP project amountedto US$2.5 million and followed a favourable reassessment of the expected loss onthe project. At 31 December 2005, the group had cumulatively provided US$17.5million in respect of its share of the loss in relation to this project (30 June2005: US$27.5 million; 31 December 2004: US$20.0 million). The $10.0 millionpartial write-back since the position at 30 June 2005 reflects the currentstatus of ongoing negotiations with the customer regarding claims forreimbursement of cost overruns and associated costs. The division's staff numbers increased by one-third in 2005 to approximately2,400 personnel, with the majority of this growth in the Mumbai and Wokingoffices, where we have now achieved critical mass to carry out large-scaleprojects. Our Woking office has broadened its service offering to includeproject management contracts (PMC) and, selectively, brownfield and greenfieldengineering, procurement and construction (EPC) execution. Our Mumbai office nowoffers a truly world-class engineering capability that we expect to continue togrow through 2006. While there is increasing competition for experienced engineers in our sector,we strive to ensure that we attract and retain the best talent and reward andincentivise our employees appropriately while maintaining a competitive coststructure. In addition, Petrofac has continued its focus on graduate recruitmentwith great success. There is no doubt that the future of our business growth andfurther success will depend on successfully attracting first-rate, motivatedyoung engineers. In terms of project execution, there were a number of highlights during 2005.These included the completion of the BTC pipeline and pumping stations inGeorgia and Azerbaijan; entering the final stages, ahead of schedule, ofengineering and procurement for the three process plants for the Kashagan FieldDevelopment project in Kazakhstan; the mechanical completion of the Crescent GasPlant in the UAE; and entering the final phase of a major upgrade project forQatar Petroleum. These achievements have been accomplished while maintaining agood HSE record. New order intake during the year was in excess of US$2.1 billion (2004: US$0.9billion), with major awards in Oman, Kuwait, Russia and Kazakhstan, and smallerawards in the UKCS, Africa and the UAE. In addition to a buoyant market that isyielding significant opportunities, our success in securing new business hasbeen achieved through Petrofac's reputation for execution excellence. Our focuson Project Development Services has achieved strong growth during the year,underpinned by the successful award of several PMC type contracts and a largerflow of consultancy work and studies. It is pleasing to note that these recentsuccesses have created opportunities for major contracts in our OperationsServices division for both Facilities Management and Training services. Thesignificant order intake achieved in 2005 took the division's backlog toUS$2,121 million at 31 December 2005, an increase of 187.0% from US$739 millionat 31 December 2004. The Engineering & Construction division's strategic focus is on customers andregions that will create a platform for sustained growth through significantmedium and long-term investment programmes. In particular, we are well placedfor future phases and expansion opportunities on our current projects in Omanand the north Caspian region. The challenges ahead remain in finding anddeveloping the resources required to support growth. The outlook in our core regional markets of the UKCS, Middle East, Africa andFormer Soviet Union is expected to remain positive through 2006. Our main focuswill be to maintain our track record of safe, high quality and cost effectiveproject development and execution and continue to meet our customers'expectations. OPERATIONS SERVICES 2005 2004 US$m US$mRevenue 605.3 440.1 up 37.5%EBITDA 27.5 21.1 EBITDA margin 4.5% 4.8%Net profit 15.6 9.6 up 61.5% Net margin 2.6% 2.2%Backlog 1,123 1,001 up 12.2% Operations Services had a successful 2005, aided by a buoyant core market, theUKCS, driven by sustained high oil prices. Overall, key contracts were renewed,competence was extended, both organically and through acquisition, majorprojects were mobilised and significant new business was secured. All of theseachievements were accomplished while maintaining high safety standards. The division experienced strong growth with revenue up 37.5% to US$605.3 million(2004: US$440.1 million). A large proportion of the growth was attributable to anew service operator contract with Lundin Petroleum in the UK, which contributedsignificant revenues. Growth was also generated by the new brownfield serviceoffering and, internationally, by the commencement of the maintenance managementcontract with Kuwait Oil Company (KOC). Notwithstanding the dilution effect ofincreased pass-through revenues (which attract no margin), which resulted in thelower EBITDA margin, the operating margin increased due primarily to thecessation of goodwill amortisation. Net profit increased to US$15.6 million(2004: US$9.6 million) with the net margin higher at 2.6% in 2005 (2004: 2.2%)due primarily to an increase in the operating margin and a lower effective taxrate. Key contract renewals included five year operations support contracts withExxonMobil and CNR, a two year extension to our training management solutionscontract for Shell, and one year extensions with Maersk Oil for the Gryphon,Janice and Global Producer III installation operations support contract, andwith Sea Production for the duty holder contract on Talisman Energy's Galleyfield. A number of significant new contract awards were secured during the yearincluding the five year Marathon engineering, construction, operations andmaintenance contract won in competitive tender and now being delivered inconjunction with our Engineering & Construction division. We also extended ourrelationship with Tullow Oil, taking responsibility for the Schooner & Ketch andHorne & Wren facilities. The year also saw excellent progress with project execution. We successfullymobilised two major projects, the Heather & Thistle service operator contractfor Lundin Petroleum and the maintenance services contract for KOC in Kuwait,our largest international contract so far. These projects demonstrate Petrofac'sability to mobilise rapidly and to execute large-scale operations andmaintenance projects, both in the UKCS and internationally, at a time when theindustry is facing a shortage of skilled people. Backlog for the Operations Services division increased 12.2% to US$1,123 millionat 31 December 2005 (2004: US$1,001 million). On a constant currency basis, theyear on year increase was 24.6% (2004: US$901 million). In addition, at the yearend, the division was providing services under letters of award which, hadformal contracts been entered into at that time, would have added approximatelyUS$0.3 billion to backlog at 31 December 2005. Sustained high oil prices had mixed effects on the business. Our specialistmanpower services and survival training businesses saw particular benefit fromthese economic conditions. However, the price environment led to something of ahiatus in mature UK field asset trading. It has typically been in periods ofincreased asset trading activity that Petrofac has been able to secure serviceoperator contracts with new entrant independent oil companies. During the year,major oil companies largely postponed asset divestment programmes due toimproved economic viability and potentially reflecting a relative shortage ofavailable reserve replacement opportunities. During the year, we saw the ownership of two of our clients change. PaladinResources was acquired by Talisman Energy and Kerr McGee's UK oil & gas assetswere acquired by Maersk Oil. In both cases, we continue to work on the sameassets for the new owners although, with regard to the Montrose & Arbroathfacilities, now owned by Talisman Energy, in line with their establishedoperating strategy, we expect to transition duty holder responsibility duringthe course of this year. Such events require Petrofac to be agile and responsiveto changing customer needs but they also create opportunities to demonstrate ourcapabilities to new customers of scale. Petrofac Facilities Management supported National Oil Companies (NOCs) and theirsubsidiaries, directly and in consortia, in Iran, Sudan and Kuwait, whilePetrofac Training continued to expand and service our target markets of NOCs,major oil companies and independents. Petrofac Training acquired Rubicon Response, a specialist provider of criticalincident/emergency response, training and consultancy services, in January 2005.This acquisition has positioned Petrofac as a world leader in the provision ofthis specialised capability and is an excellent fit with our overall serviceoffering. We are confident in the growth potential of our businesses as we continue todevelop our capabilities and project them internationally. RESOURCES 2005 2004 US$m US$mRevenue 46.3 45.0 up 2.9%EBITDA 32.6 32.3 EBITDA margin 70.4% 71.7%Net profit* 18.3 7.0 Net margin 39.5% 15.4% * 2005 net profit includes recognition of a tax credit of US$8.9 million fromtax losses in Petrofac (Malaysia-PM304) Limited Our Resources division enjoyed another successful year with an increase in ourbusiness development capability allowing access to a greater number ofopportunities. In particular, we expanded our presence in Malaysia andestablished a representative office in Indonesia, bringing South East Asia intoour areas of core focus. Our existing investments performed well during the yearand we made good progress with those that are under development. Furthermore, weexpanded the investment portfolio with the acquisition of an interest in theWest Don field in the UKCS. The division's revenues increased marginally to US$46.3 million (2004: US$45.0million) reflecting the portfolio of investments remaining largely as it wasthrough 2004. The increase in revenue is primarily attributable to higherproduct prices for sales from our refinery joint venture in Kyrgyzstan. TheEBITDA and operating margins were broadly comparable to 2004. Net profitincreased significantly from US$7.0 million to US$18.3 million primarilyreflecting the impact of an income tax credit of US$8.9 million from tax lossesin Petrofac (Malaysia-PM304) Limited (the division's investment in Cendor PM304)and a reduction in finance costs due to the repayment of project finance loansrelating to the Ohanet investment. Our Upstream group aims to identify and develop opportunities in producing andproved or probable but undeveloped reserves through, for example, participationin large onshore field developments, onshore and offshore field developmentsthat major oil companies may consider to be marginal and late life producingassets, particularly those offshore. The investment in the undeveloped Cendorfield offshore Peninsular Malaysia in Block PM304 is an excellent example ofthis and, following approval of the field development plan early in 2005, theyear saw considerable activity on this project with the establishment of a fullproject team. First production is currently scheduled for the second half of2006. In late 2005, we reached agreement to acquire Centrica's interest in theHewett field in the UKCS. However, following the exercise of pre-emption rightsby the existing partners, this investment did not proceed. While this was adisappointment, we continue to seek opportunities to achieve greater alignmentwith our partners. As announced in early 2006, we completed the acquisition ofan interest in the West Don field, alongside FirstOil and Valiant Petroleum, andthe field development plan is currently being prepared. We also secured a 50%interest in the adjoining block in the UK's 23rd oil & gas licensing round. The Energy Infrastructure Solutions group aims to identify and developbrownfield and greenfield opportunities in oil & gas midstream and downstreaminfrastructure, for example, refineries, pipeline transmission, tolling processplants and utilities. Typically, these will be structured either as the directacquisition of an asset or in a turnkey project development structure, includingBuild Operate Transfer (BOT), Build Own Operate Transfer (BOOT) and Build OwnOperate (BOO) development arrangements. During the year, we established analliance with First Reserve, a US private equity firm specialising in the energyindustry. The alliance brings together First Reserve's financing and transactionstructuring expertise, with Petrofac's project identification and assessmentcapabilities, particularly in relation to assets and regions where ourEngineering & Construction and Operations Services businesses have experience. In addition to our development investments, our portfolio comprises two assetsthat have been cash flowing for some time; the operational performance of theOhanet gas field in Algeria during the year was very satisfactory, with a 24%increase in production levels over 2004, while in Kyrgyzstan, our refinery jointventure also performed well through the year. While we continue to see competition for asset investments, we are confidentthat our experienced business development team and our enhanced ability toassess and manage risk through accessing the wider group's capabilities, shouldenable us to secure suitable investment opportunities. Chief Financial Officer's review 2005 2004 US$m US$mRevenue 1,485.5 951.5 up 56.1%Operating profit(7) 88.6 68.3 up 29.8% Operating margin 6.0% 7.2%EBITDA 115.6 96.1 up 20.3% EBITDA margin 7.8% 10.1%Net profit 75.4 46.1 up 63.6% Net margin 5.1% 4.8%Backlog 3,244 1,740 up 86.4% Group revenue increased by 56.1% to US$1,485.5 million (2004: US$951.5 million)reflecting significant growth in the Engineering & Construction and OperationsServices divisions. The Resources division reported slightly higher revenuesfrom a similar portfolio of investments to that held in 2004. Operating profit increased from US$68.3 million in 2004 to US$88.6 million in2005, an increase of 29.8%, reflecting the strong growth in revenue withinEngineering & Construction and Operations Services. As a percentage of revenue,operating profit decreased from 7.2% in 2004 to 6.0% in 2005, primarilyreflecting the stage of completion, and, therefore, timing of profitrecognition, and risk profile of major projects executed by the Engineering &Construction division and the impact of US$6.3 million of one-off costsassociated with the IPO. These dilutive factors were partially offset by adecrease in depreciation costs as a percentage of revenue and the cessation ofgoodwill amortisation. Net profit increased by 63.6% to US$75.4 million (2004: US$46.1 million).Notwithstanding the decrease in operating margin, the net margin increased from4.8% in 2004 to 5.1% in 2005. The increase in net margin was due primarily tothe group's low effective tax rate in 2005 and a decrease in net finance costs. EBITDA increased to US$115.6 million (2004: US$96.1 million), representing 7.8%(2004: 10.1%) of revenue. The decrease in EBITDA margin was largely attributableto lower operating margins for the reasons noted above. Engineering &Construction division accounted for 51.4% (2004: 43.9%) of group(6) EBITDA,Operations Services 22.2% (2004: 22.2%) and Resources 26.4% (2004: 33.9%). At the close of 2005, the combined backlog of the Engineering & Construction andOperations Services divisions was US$3,244 million (2004: US$1,740 million),representing an increase of 86.4% on the comparative figure at 31 December 2004. Net losses from the group's discontinued operation in the US were US$0.8 million(2004: US$13.2 million). The loss for the year includes a small impairmentprovision against the operation's remaining freehold property. Operationalactivities in the US are now largely complete. Earnings per share Fully diluted earnings per share on continuing operations increased in 2005 to22.41 cents per share (2004: 11.93 cents per share), reflecting primarily thegroup's improved profitability and, to a lesser extent, the lower weightedaverage number of shares outstanding. Interest and taxation Net interest payable on continuing operations decreased during the year toUS$5.3 million (2004: US$5.5 million) despite increases in LIBOR interest ratesfor both US dollar and Sterling denominated borrowings. The reduction in netinterest payable was largely attributable to the group's higher average cashbalances, a reduction in borrowings relating to the Ohanet investment and theconversion of 3i's loan notes. The group had interest cover of 16.9 times (2004: 12.3 times) based on profitfrom continuing operations. The significant improvement in interest cover wasattributable to an increase in operating profit and lower interest costs. The income tax charge on continuing operations as a percentage of profit beforetax in 2005 was 9.5% (2004: 26.6%). The tax rate in 2005 was affected by thefollowing factors: - the recognition of a tax credit of US$8.9 million from taxlosses in Petrofac (Malaysia-PM304) Limited within the Resources divisionfollowing the approval of the company's field development plan for Cendor PM304(2004: nil); - the improved profitability in various projects resulting in theutilisation of US$3.1 million of tax losses brought forward that had not beenpreviously recognised as deferred tax assets (2004: nil), net of unrecognisedtax losses of US$1.5 million related to tax losses in various jurisdictions(2004: US$3.1m); and - expenditure not allowable for tax purposes of US$2.3 million(2004 : US$0.2 million). Adjusting for these factors, the underlying effective tax rate was 19.3% for2005 (2004: 21.4%), as set out in the table below: 2005 2004 US$'000 (unless otherwise stated)Reported tax charge 7,951 9.5% 16,699 26.6%Tax credit re Cendor PM304 8,943 10.7% - -Net project losses utilised / 1,538 1.9% (3,087) (4.9%)(unrecognised)Expenditure not allowable for tax (2,328) (2.8%) (174) (0.3%)purposes -------- -------- 16,104 19.3% 13,438 21.4% Operating cash flow and liquidity The net cash flow from all operating activities in 2005 was US$108.2 million(2004: US$80.9 million); net cash flow from continuing operating activities wasUS$108.9 million in 2005 compared with US$89.8 million in 2004, representing94.1% of EBITDA (2004: 93.5%). The significant cash generation from operations together with the conversion ofthe loan notes held by 3i prior to listing enabled the group to reduce its levelof interest-bearing loans and borrowings to US$106.9 million (2004: US$161.5million) and restore a net cash position. The group's gross gearing ratio decreased to 54.8% at 31 December 2005 (2004:116.5%) reflecting the strong cash generation in 2005 and the conversion of 3i'sloan notes. The group's net cash position at the end of 2005 compared with a13.0% net gearing ratio at 31 December 2004. Gearing ratio 2005 2004 US$'000Interest-bearing loans and 106,870 161,478borrowingsCash and short term deposits 208,896 143,534Net cash/(debt) 102,026 (17,944)Total net assets 195,127 138,558Gross gearing ratio 54.8% 116.5%Net gearing ratio Net cash 13.0% The group's total gross borrowings before associated debt acquisition costs atthe end of 2005 were US$108.3 million (2004: US$166.8 million), of which 49.5%was denominated in US dollars (2004: 65.9%), 44.7% was denominated in Sterling(2004: 34.1%) with the balance of 5.8% denominated in Kuwaiti Dinars (2004:nil). The group maintained a balanced borrowing profile with 28.3% of borrowingsmaturing within one year, 56.1% maturing between one and five years and theremaining 15.6% maturing in more than five years (2004: 30.4%, 51.9% and 17.7%respectively). The borrowings repayable within one year include US$15.0 millionof bank overdrafts and revolving credit facilities (representing 13.8% of totalgross borrowings), which are expected to be renewed during 2006 in the normalcourse of business (2004: US$19.0 million and 11.4% of total gross borrowings). The group's general policy is to hedge between 60% and 80% of variable interestrate loans and borrowings. At 31 December 2005, 84.7% of the group's terminterest-bearing loans and borrowings were hedged (2004: 67.6%). Capital expenditure Capital expenditure on property, plant and equipment during 2005 was US$17.6million (2004: US$17.1 million). The main elements of the expenditure includedinvestment in, and replacement of, vehicles and equipment to support the growthin Engineering & Construction and Operations Services divisions and Resources'investment in Cendor PM304 in Malaysia. Shareholders' funds Total equity increased from US$138.6 million at 31 December 2004 to US$195.1million at 31 December 2005. The main elements of the increase were the retainedprofits for the year, net of dividends paid, and the conversion of 3i's loannotes to equity, partly offset by the movement in the group's unrealisedposition on derivative instruments. Currency Petrofac's functional currency for financial reporting purposes is the USdollar. However, there are a number of group subsidiaries with non-US dollarfunctional currencies. In particular, the group's main trading subsidiaries withactivities in the UK use Sterling as their functional currency. During 2005,there was only a slight change in the average US$/Sterling exchange ratecompared to 2004 and therefore the year on year impact of currency fluctuationon the group's UK trading activities was not significant. The impact on backlog,which is reported using year end exchange rates, was more significant with anappreciation in the relative value of US dollars against Sterling ofapproximately 11%. The table below sets out the average and year end exchange rates for US dollarsand Sterling for the years ended 31 December 2005 and 2004 as used by Petrofacfor its financial reporting. 2005 2004 US$/SterlingAverage rate for the period 1.81 1.83 Year end rate 1.72 1.93 Keith Roberts Chief Financial Officer End notes: (1) EBITDA means earnings before interest, tax, depreciation andamortisation and is calculated as profit from continuing operations before taxand finance costs adjusted to add back charges for depreciation, amortisationand impairment (see note 3 to the financial statements). (2) Net profit (for the group) means profit for the year from continuingoperations attributable to Petrofac 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. The group uses this keyperformance indicator as a measure of the visibility of future earnings. Backlogis not an audited measure. Other companies in the oil & gas industry maycalculate this measure 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 losses) (EBITA) and average capital employed,being average total assets employed less average total current liabilities. (5) The group reports its financial results is 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 2005 final dividend from USdollars into Sterling is based upon an exchange rate of US$1.7457:£1, being theBank of England Sterling spot rate as at midday, 15 March 2006. (6) Excluding the effect of consolidation and elimination adjustments. (7) Operating profit means profit from continuing operations before tax andfinance costs. CONSOLIDATED INCOME STATEMENTFor the year ended 31 December 2005 2005 2004 Notes US$'000 US$'000 Restated Continuing operations Revenue 4a 1,485,472 951,530 Cost of sales (1,324,673) (829,081) _______ _______Gross profit 160,799 122,449 Selling, general and administration expenses 4d (74,928) (58,825)Other income 4b 5,223 6,246Other expenses 4c (2,491) (1,587) _______ _______Profit from continuing operations before taxand finance costs 88,603 68,283 Finance costs 5 (8,448) (7,544)Finance income 5 3,193 1,997 _______ _______Profit before tax 83,348 62,736 Income tax expense 6 (7,951) (16,699) _______ _______ Profit for the year from continuing operations 75,397 46,037 Discontinued operations Loss for the year from discontinued operation 7 (815) (13,162) _______ _______Profit for the year 74,582 32,875 _______ _______ Attributable to:Petrofac Limited shareholders 74,582 32,921Minority interests - (46) _______ _______ 74,582 32,875 _______ _______ Earnings per share (US cents) 8 Restated From continuing and discontinued operations:- Basic 24.52 9.43- Diluted 22.17 8.70 From continuing operations:- Basic 24.79 13.19- Diluted 22.41 11.93 The attached notes 1 to 31 form part of these consolidated financial statements. CONSOLIDATED BALANCE SHEETAt 31 December 2005 2005 2004 Notes US$'000 US$'000 RestatedASSETSNon-current assetsProperty, plant and equipment 10 120,431 123,413Goodwill 12 49,183 49,653Intangible assets 13 2,982 6,721Available-for-sale financial assets 15 2,413 4,104Other financial assets 16 680 11,205Deferred income tax assets 6 5,576 782 _______ _______ 181,265 195,878 _______ _______ Current assetsInventories 1,156 1,702Work in progress 17 235,047 109,037Trade and other receivables 18 325,716 216,796Due from related parties 28 28,402 20,889Other financial assets 16 4,501 37,843Cash and short-term deposits 19 208,896 143,534 _______ _______ 803,718 529,801 _______ _______Assets of discontinued operation classified as 7 1,667 3,678held for sale _______ _______TOTAL ASSETS 986,650 729,357 _______ _______ EQUITY AND LIABILITIESEquity attributable to Petrofac LimitedshareholdersShare capital 20 8,629 7,166Share premium 66,210 28,553Capital redemption reserve 10,881 10,881Treasury shares (17) -Other reserves 21 (12,426) 27,047Retained earnings 121,850 64,911 _______ _______Total equity 195,127 138,558 _______ _______Non-current liabilitiesInterest-bearing loans and borrowings 22 76,187 110,787Provisions 23 8,284 5,912Other financial liabilities 24 1,222 6,877Deferred income tax liabilities 6 3,121 1,535 _______ _______ 88,814 125,111 _______ _______Current liabilitiesTrade and other payables 25 219,425 157,934Due to related parties 28 1,335 1,453Interest-bearing loans and borrowings 22 30,683 50,691Other financial liabilities 24 15,810 1,275Income tax payable 2,210 3,172Billings in excess of cost and estimated 17 69,776 72,155earningsAccrued contract expenses 26 363,470 179,008 _______ _______ 702,709 465,688 _______ _______TOTAL LIABILITIES 791,523 590,799 _______ _______TOTAL EQUITY AND LIABILITIES 986,650 729,357 _______ _______ CONSOLIDATED CASH FLOW STATEMENTFor the year ended 31 December 2005 2005 2004 Notes US$'000 US$'000 RestatedOPERATING ACTIVITIESNet profit / (loss) before income taxes:Continuing operations 83,348 62,736Discontinued operation 7 (815) (13,162) _______ _______ 82,533 49,574Adjustments for:Depreciation, amortisation and impairment 27,281 27,888Share-based payments 4d 897 -Difference between end-of-service benefitspaid and amounts recognised in theincome statement 2,372 1,513Finance costs, net 5,195 5,512Gain on disposal of investments 4b (2,390) (2,932)Other non-cash items, net (2,026) 78 _______ _______Operating profit before working capital changes 113,862 81,633Trade and other receivables (106,794) (101,187)Work in progress (126,010) (6,196)Due from related parties (7,513) 746Inventories 546 (113)Current financial assets 15,121 1,776Trade and other payables 61,010 19,746Billings in excess of cost and estimated earnings (2,379) 60,773Accrued contract expenses 184,462 28,489Due to related parties (118) 1,345Current financial liabilities 4,261 (6,363) _______ _______ 136,448 80,649Other non-current items, net (4,022) 19,206 _______ _______Cash generated from operations 132,426 99,855Interest paid (9,097) (5,695)Income taxes paid, net (15,085) (13,278) _______ _______Net cash flows from operating activities 108,244 80,882 _______ _______ Of which discontinued operations (619) (8,903) 2005 2004 Notes US$'000 US$'000 Restated INVESTING ACTIVITIESPurchase of property, plant and equipment (17,556) (17,142)Acquisition of business assets 11 - (695)Acquisition of subsidiary, net of cash 11 acquired (4,073) (9,119)Purchase of minority interest 11 (1,644) -Acquisition of interest in joint venture 11 - (1,000)Purchase of intangible oil & gas assets (3,079) (4,480)Purchase of available-for-sale financial assets (691) -Proceeds from disposal of property, plant and 647 804equipmentProceeds from disposal of assets ofdiscontinued operationclassified as held for sale 1,832 -Proceeds from disposal of available-for-sale financial assets 4,545 2,344Net foreign exchange difference (135) (1,659)Interest received 3,442 1,665 _______ _______Net cash flows used in investing activities (16,712) (29,282) _______ _______ Of which discontinued operations 1,892 39 FINANCING ACTIVITIESProceeds from issue of share capital - 1,511Proceeds from interest-bearing loans and borrowings 28,339 45,722Repayment of interest-bearing loans and borrowings (32,026) (35,684)Purchase of derivative financial instruments (689) (62)Shareholders loan note transactions, net 4,968 (1,581)Transactions with employee share plan, net 537 3,016Exercise of option to acquire group shares 11 (2,400) -Repurchase of shares 20 - (30,760)Equity dividends paid (15,243) (1,315) _______ _______Net cash flows used in financing activities (16,514) (19,153) _______ _______ Of which discontinued operations - - NET INCREASE IN CASH AND CASH EQUIVALENTS 75,018 32,447 Cash and cash equivalents at 1 January 127,823 95,376 _______ _______CASH AND CASH EQUIVALENTS AT 31 DECEMBER 19 202,841 127,823 _______ _______ The attached notes 1 to 31 form part of these consolidated financial statements. CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2005 (Restated) Attributable to Shareholders of Petrofac Limited ______________________________________________________________ Issued Capital share Share redemption Treasury Other Retained Minority Total capital premium reserve shares reserves earnings Total interest equity US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Balance at 1 January 2004 9,066 52,592 8,634 - (1,803) 35,552 104,041 2,241 106,282 Change in accounting policy (note 2) - - - (106) - - (106) - (106) _______ _______ _______ _______ ________ _______ _______ _______ _______Balance at 1 January 2004 (restated) 9,066 52,592 8,634 (106) (1,803) 35,552 103,935 2,241 106,176 Foreign currency translation - - - - 3,598 - 3,598 - 3,598 Net loss onmaturity of cashflow hedges recognisedin income statement - - - - 486 - 486 - 486 Net changes infair value ofderivatives - - - - 23,498 - 23,498 - 23,498 Changes in thefair valueofavailable-for-salefinancial assets - - - - 1,268 - 1,268 - 1,268 _______ _______ _______ _______ ________ _______ _______ _______ _______Total income andexpensesfor the yearrecognisedin equity - - - - 28,850 - 28,850 - 28,850 Net profit for the year - - - - - 32,921 32,921 (46) 32,875 _______ _______ _______ _______ ________ _______ _______ _______ _______Total income andexpensesfor the year - - - - 28,850 32,921 61,771 (46) 61,725 Shares issued during the year 115 1,396 - - - - 1,511 - 1,511 Shares repurchasedduring the year (2,247) (28,513) 2,247 - - (2,247) (30,760) - (30,760) Petrofac ESOPtransactions, net 232 2,784 - 106 - - 3,122 - 3,122 Increase in valueofstock warrants - 294 - - - - 294 - 294 Elimination ofminority interest - - - - - - - (2,195) (2,195) Dividends - - - - - (1,315) (1,315) - (1,315) _______ _______ _______ _______ ________ _______ _______ _______ _______Balance at 31 December 2004 7,166 28,553 10,881 - 27,047 64,911 138,558 - 138,558 _______ _______ _______ _______ ________ _______ _______ _______ _______ For the comparative year ended 31 December 2004 a capital redemption reserveresulting from shares repurchased was not disclosed separately from retainedearnings. This comparative data has been restated to reflect this separatedisclosure. As restated, a capital redemption reserve of US$8,634,000 is reflected as at 1January 2004. Retained earnings has been reduced by this amount at this date.During 2004, the capital redemption reserve increased as a result of furthershares repurchased during the year (US$2,247,000). This movement has beenreclassified from retained earnings. As at 31 December 2004, a capitalredemption reserve is separately disclosed of US$10,881,000 with a correspondingreduction in retained earnings. There is no impact on basic or diluted earningsper share. The attached notes 1 to 31 form part of these consolidated financial statements. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)For the year ended 31 December 2005 (Restated) Attributable to Shareholders of Petrofac Limited ______________________________________________________________ Issued Capital share Share redemption Treasury Other Retained Minority Total capital premium reserve shares reserves earnings Total interest equity US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$' 000 US$'000 US$'000 Balance at 1 January 2005 (Restated) 7,166 28,553 10,881 - 27,047 64,911 138,558 - 138,558 Foreign currency translation - - - - (4,248) - (4,248) - (4,248) Net gain onmaturity of cashflow hedges recognised inincome statement - - - - (5,628) - (5,628) - (5,628) Net changes infair value ofderivatives - - - - (28,549) - (28,549) - (28,549) Changes in thefair value ofavailable-for-salefinancial assets - - - - (1,048) - (1,048) - (1,048) _______ _______ _______ _______ ________ _______ _______ _______ _______Total income andexpensesfor the yearrecognisedin equity - - - - (39,473) - (39,473) - (39,473) Net profit for the year - - - - - 74,582 74,582 - 74,582 _______ _______ _______ _______ ________ _______ _______ _______ _______Total income andexpensesfor the year - - - - (39,473) 74,582 35,109 - 35,109 Petrofac ESOPtransactions, net 65 1,398 - (17) - - 1,446 - 1,446 Conversion of debt instruments 1,398 36,259 - - - - 37,657 - 37,657 Exercise option toacquire group shares (note 11) - - - - - (2,400) (2,400) - (2,400) Dividends - - - - - (15,243) (15,243) - (15,243) _______ _______ _______ _______ ________ _______ _______ _______ _______Balance at 31 December 2005 8,629 66,210 10,881 (17) (12,426) 121,850 195,127 - 195,127 ======= ======= ======= ======= ======== ======= ======= ======= ======= The attached notes 1 to 31 form part of these consolidated financial statements. 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