Petrofac Regulatory News (PFC)

5 Mar 2007 07:03

Petrofac Limited05 March 2007 PART 1 PETROFAC LIMITED FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2006 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. Petrofac'spredominant focus is on the UK Continental Shelf (UKCS), Africa, the MiddleEast, the Commonwealth of Independent States (CIS) and the Asia Pacific region,with 17 offices worldwide and approaching 8,000 employees. FINANCIAL HIGHLIGHTS* • Revenue of US$1,864 million (2005: US$1,485 million), up 25.5% • EBITDA(1) of US$199.6 million (2005: US$115.6 million), up 72.7% - Engineering & Construction EBITDA of US$127.3 million, up 100.5% - Operations Services EBITDA of US$32.9 million, up 19.6% - Resources EBITDA of US$40.1 million, up 23.0% • Net profit(2) of US$121.9 million (2005: US$75.4 million), up 61.7% • Backlog(3) at 31 December 2006 of US$4,173 billion (2005: US$3,244 billion), up 28.6% • Return on capital employed(4) of 47.5% (2005: 32.5%) • Earnings per share (fully diluted) of 35.32 cents (2005: 22.41 cents), up 57.6% • Final dividend of 6.43 cents (3.30 pence(5)) per ordinary share taking dividends for the full year to 8.83 cents per ordinary share * continuing operations OUTLOOK The capital programmes and associated operating expenditure required to addressincreasing global energy demand and the depletion of existing productiontogether with the limited capacity of the oil services industry to support suchprogrammes should ensure that demand for the group's services remains strong forthe foreseeable future. The current level of backlog within our Engineering & Construction divisionprovides particularly strong visibility for current year revenue and we willcontinue our focus on project execution to ensure consistent margin delivery. Webelieve that we are well positioned to secure further new business, particularlyin regions and on projects which have the potential for long term capitalexpenditure. Our Operations Services division also has good visibility for revenue for thecurrent and future years and will look to continue its growth both in the UKCSand internationally, in particular, the contract with Dubai PetroleumEstablishment will make an important contribution to this growth and towardscontinued margin expansion. The integrity management of hydrocarbon facilities is becoming an increasinglysignificant challenge for many asset owners. Through our strong engineering andoperational capabilities, in particular within our growing Brownfield activity,we believe we are well positioned to assist clients extend the life span oftheir facilities whilst ensuring the highest standards of operational safety aremet. Within our Resources division, we expect the investment in Cendor, Malaysia, tohave substantially, if not entirely, recovered its costs during the first halfof the year. During the year ahead, in addition to seeking further opportunitiesto expand our investment portfolio, in particular on the energy infrastructureside, we will be actively progressing our existing development assets, inparticular Chergui, Tunisia, and the greater Don area assets in the UKCS. The current financial year has started well and, with the group's backlog atrecord levels, continuing focus on execution and strong demand for its services,the Board believes the group is well positioned to continue its growth duringthe current year and beyond. Commenting on the results, Ayman Asfari, Petrofac's Group Chief Executive, said: "I am very pleased to be able to report another set of strong financial results,in particular, with our E&C division reporting good growth in both revenue andprofitability. Whilst we continue to face challenges, in particular because ofindustry-wide resource constraints, the benefit of our consistent focus ondelivery is reflected in our results. Demand for our services continues to bestrong and we expect this to remain the case at least for the medium term which,with our backlog at its current levels, positions us well for continued growthduring the current year and beyond." 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 WilkinsonGeoff Callow Petrofac Limited Final results for the year ended 31 December 2006 (Note: all financial information set out herein reflects the group's continuingoperations, unless stated otherwise) Chairman's statement It has been a very good year for Petrofac. We have strengthened our positionfrom 2005, continued to grow and enjoyed some significant achievements along theway. We increased revenue by 26% to US$1,864 million and net profit by 62% toUS$121.9 million. In our first full year as a listed Company, these areimpressive results. Market overview The past year has seen continuing strong demand for oil & gas and, as a result,commodity prices have remained high. Brent oil has averaged US$65 per barrel andthe Henry Hub Gas price has averaged US$7 per million British thermal units. Although speculation remains concerning trends in the energy market, the mid- tolong-term prospects for oil & gas production remain solid. Demand is continuingto increase while, in areas with large, ageing oil fields, supply is beginningto decline. This is unquestionably an opportunity for Petrofac to help companiesextend the life of their assets, improve the efficiency of production anddevelop resources in new, more challenging environments. We are well positioned strategically and geographically to take advantage ofopportunities as they arise. Over the past year we have extended our globalreach with a new office in Chennai, India, entered into Egypt and Tunisia andstrengthened our position in Kazakhstan. Petrofac's progress There have been many highlights over the past year. There have been newbeginnings, for example the award of our service operator contract with theDubai Petroleum Establishment (DPE), wholly owned by the Government of Dubai, isan exciting opportunity, and we believe the first time that a national oilcompany has chosen to contract directly in this way. At the same time we havehad some successful ongoing projects such as the completion of work on thechallenging Baku to Ceyhan pipeline. After 25 years in business, Petrofac has clearly come a long way. Yet at theheart of our success there remains the continued drive, dedication and passionof the management team, and of all our people. It is important we maintain thisentrepreneurial spirit as we expand our team and broaden our services. Dividends The Board is recommending a final dividend of 6.43 cents per ordinary share withan equivalent of 3.30 pence per ordinary share which, if approved, will be paidto eligible shareholders on the register at 20 April 2007. Together with theinterim dividend of 2.40 cents per ordinary share, this gives a total dividendfor the year of 8.83 cents per ordinary share. Corporate governance As a large and growing company, it is essential we meet our responsibilities toour people, the communities where we work and the environment. To us this is notsimply a duty, it is an important aspect of our long-term success. We have takennumerous steps in this area over the past year including conducting a majorreview of our Code of Conduct to make sure all our people understand theirethical and legal commitments. We are launching a 'Give As You Earn' scheme inthe UK and we are making environmental recommendations to partners and customerson new developments. As the Company grows, I will continue to ensure we maintainthis good corporate governance. Over the past year we did experience one major incident when one of ouremployees tragically died in the Morecambe Bay helicopter accident. I would liketo take this opportunity to express my deepest sympathies to his family, friendsand colleagues. Our people Although we work with advanced technology and machinery, we are, unquestionably,a people business. Over the year the dedication of our employees has beendemonstrated in numerous ways, from their unerring attention to detail to thosemoments when they have gone the extra mile. We are delighted that over 1,000 ofour employees are participating in our employee share plans. Changes to the Board During 2006 there were no changes to report. However, subject to shareholderagreement, we look forward to welcoming two additional members to the Board,Rijnhard van Tets and Amjad Bseisu. Further details of these proposedappointments are included in a separate announcement released today. Finally, I would like to thank all our people for their hard work throughout2006. It has been a year of exciting developments and new opportunities, andwith our continued focus, energy and drive I am confident 2007 will bring manymore successes. 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 2006. 2006 2005 US$m US$mRevenue 1,863.9 1,485.5 up 25.5%EBITDA 199.6 115.6 up 72.7%EBITDA margin 10.7% 7.8%Net profit 121.9 75.4 up 61.7%Net margin 6.5% 5.1%Backlog 4,173 3,244 up 28.6% Group revenue increased by 25.5% to US$1,863.9 million (2005: US$1,485.5million) reflecting strong growth across all three divisions. EBITDA increasedby 72.7% to US$199.6 million (2005: US$115.6 million). Net profit increased by61.7% to US$121.9 million (2005: US$75.4 million), representing a net margin of6.5% (2005: 5.1%). At the close of 2006, the combined backlog of the Engineering& Construction and Operations Services divisions was US$4,173 million (2005:US$3,244 million). ENGINEERING & CONSTRUCTION 2006 2005 US$m US$mRevenue 1,081.3 858.2 up 26.0%EBITDA 127.3 63.5EBITDA margin 11.8% 7.4%Net profit 95.4 55.1 up 73.1%Net margin 8.8% 6.4%Backlog 2,228 2,121 up 5.0% Results The division's strong operational performance has increased revenue by 26.0% toUS$1,081.3 million (2005: US$858.2 million) and net profit by 73.1% to US$95.4million (2005: US$55.1 million), representing a net margin of 8.8% (2005: 6.4%).The majority of revenue in 2006 came from further progress on contract awardssecured in 2005, in particular the Kuwait Oil Company (KOC) facilities upgradeproject and the Harweel and Kauther projects in Oman. The significant growth innet profit and net margin was driven by the timing of profit recognition(profits are typically not recognised in the early stages of lump-sum contractsand, therefore, profits lag revenue recognition) on lump-sum EPC contracts andincreased profitability through the division's ongoing strong executionperformance. In 2006, the main divisional profit drivers were the Kashaganengineering and procurement contract, the KOC facilities upgrade and Kauther gasplant projects. Engineering & Construction increased its number of employees(6) fromapproximately 2,400 at 31 December 2005 to 2,700 at 31 December 2006. Much ofthe increase was in the division's operating centres in the Middle East andIndia. The group is currently building a new office tower in Sharjah, UAE, whichwill be able to accommodate approximately 1,800 employees and is establishing anew office in Chennai which expects to have around 200 employees by the end of2007. The division's backlog increased to US$2,228 million at 31 December 2006 (31December 2005: US$2,121 million) principally due to the Hasdrubal and Salam gasplant awards towards the end of the year. Review of operations In the early part of 2006, with a significant value of lump-sum contractsawarded towards the end of 2005, the focus of the Engineering & Constructiondivision was on the mobilisation of these new contracts and on the execution ofother projects in hand: Middle East Over two-thirds of the division's revenue in 2006 was generated from lump-sumEngineering, Procurement and Construction (EPC) contracts, many awarded in late2005, in the Middle East region: •The northern oil export system for KOC was substantially completed during the year, as were, following an extended commissioning period, the flare mitigation works for Qatar Petroleum. •Good progress was made on both the facilities upgrade project for KOC, where the scope, particularly in piping and civils, has increased, and with the EPC of the Kauther gas plant for the Ministry of Oil & Gas in Oman, albeit against a challenging schedule. •Satisfactory progress has been made on the Harweel Cluster Development project for Petroleum Development Oman (PDO) with significant technical re-design work meaning the expected completion of the project will be later than planned but in line with PDO's expectations. Commonwealth of Independent States (CIS) The Engineering & Construction division continues to see a high level ofprincipally reimbursable activity in the CIS, particularly in Kazakhstan andRussia: •In Kazakhstan, the Kashagan engineering and procurement contract is substantially complete, while the related construction management contract, awarded in January 2006, is still in its early stages as scheduled; the front-end engineering and design (FEED) study for the fourth oil processing train for Karachaganak Petroleum Operating B.V. (KPO), a BG Group and ENI led consortium, was substantially completed by the end of 2006 and, as referred to below, has been followed by the award of the EPCM for the fourth train. •In Russia, substantial progress was made in particular with the Kovykta project management contract and, building on our recently established engineering presence in Moscow, with various engineering services projects for other customers. •The BTC/SCP project, which became a reimbursable contract at the beginning of 2006, was successfully completed in the second half of the year. A number of significant EPC and consultancy and engineering services contractswere secured during 2006 and in early 2007: Hasdrubal Gas Plant, Tunisia In November 2006, following on from the FEED study awarded late in 2005, thegroup was awarded a US$400 million lump-sum turnkey project by BG TunisiaLimited, a BG Group (BG) subsidiary, and Entreprise Tunisienne d'ActivitesPetrolieres (ETAP) to build the new Hasdrubal onshore gas processing facilityand liquefied petroleum gas (LPG) production facility. The project scope covers project management, detailed design, procurement,construction, pre-commissioning, commissioning, start-up and performance testingof the new gas plant. Petrofac will draw on the capabilities and expertise ofPireco, a local construction and fabrication company, as its main constructionsubcontractor for the project. The award represents further progress indeveloping the group's growing business relationship with BG. Salam Gas Plant, Egypt In November 2006, the division was awarded a US$200 million lump-sum EPCcontract by Khalda Petroleum Company (KPC) to build a new gas processing train.In December 2006, KPC awarded the division a further lump-sum EPC contract foran additional gas processing train, increasing the value of the overall projectto US$375 million. KPC is adding these third and fourth gas processing trains toits existing facilities in the Salam area to process the gas produced from itsnew discoveries. KPC is a joint venture between Apache Corporation and thestate-owned Egyptian General Petroleum Corporation. The project is scheduled for completion before the end of 2008 and will utilisethe capabilities and expertise of local construction and fabrication company,Petrojet. The project scope includes project management, detailed design,procurement, construction, pre-commissioning, commissioning, start-up,performance testing and initial operations. Strasshof Development FEED, Austria In late 2006, the division was awarded a US$5 million contract by OMV AustriaExploration & Production GmbH (OMV Austria), to carry out two parallel FEEDstudies for the development of the Strasshof gas field near Vienna, Austria. Theproject is due for completion in early 2007 and represents the first time thatPetrofac has carried out FEED work on behalf of OMV Austria. Karachaganak 4th train, Kazakhstan In January 2007, the division announced the award of the engineering,procurement, construction management and commissioning support of theKarachaganak fourth train. The project, scheduled for completion in mid 2009,will be executed on a part lump-sum and part reimbursable basis. El Gassi field, Algeria In February 2007, the division was awarded a US$16 million contract by SonaHess,a joint venture of Sonatrach and Amerada Hess, to engineer, procure and managethe construction and commissioning of new facilities on an existing productionsite at the El Gassi field in Algeria. This project follows on from other recentwork in Algeria and consolidates the group's position in the North Africanmarket. OPERATIONS SERVICES 2006 2005 US$m US$mRevenue 729.2 605.3 up 20.5%EBITDA 32.9 27.5 up 19.6%EBITDA margin 4.5% 4.5%Net profit 18.1 15.6 up 16.0%Net margin 2.5% 2.6%Backlog 1,945 1,123 up 73.2% Results Divisional revenue for the period increased by 20.5% to US$729.2 million (2005:US$605.3 million) reflecting new business and an increased level of pass-throughrevenue. Net profit increased to US$18.1 million (2005: US$15.6 million),representing a net margin of 2.5% (2005: 2.6%). Net of pass-through revenue(7),net margin increased by 0.2%, reflecting an improvement in the division'soperational performance. Operations Services' employee numbers grew from 4,700 at 31 December 2005 toover 4,900 at 31 December 2006 principally due to the growth in PetrofacBrownfield. The division's backlog increased to US$1,945 million at 31 December 2006 (2005:US$1,123 million) as a result of a successful year of new contract awards,including the DPE contract, and existing contract renewals and extensions. Review of operations During the year, the facilities management and training businesses continued toperform strongly in a buoyant oil & gas market and secured a number ofsignificant contract wins, renewals and extensions. The European facilities management business continues to be the largestcontributor to the division and achieved strong growth during the year. During2006, Petrofac Facilities Management Europe secured a further 12-month renewalwith Maersk Oil for the Gryphon, Janice and Global Producer III assets and anextension of the contract with Sea Production for the Northern Producer, afloating production installation located on the Galley field, operated byTalisman Energy. Petrofac Facilities Management Europe extended its range of service operatorcontracts in November 2006 by taking on duty holder responsibility from BHPBilliton for the Irish Sea Pioneer, a mobile, self-elevating operations supportvessel in the Liverpool Bay area of the Irish Sea. Petrofac was also awarded asmall life-of-field duty holder contract by Helix Energy Solutions for anormally unmanned installation on the Camelot field. New operations supportcontracts, as referred to in the 2005 Annual Report, were signed during the yearwith CNR International and Marathon. A key operational highlight in 2006 was the performance of Petrofac Brownfield,which provides maintenance and modifications engineering services, primarily tothe UK Continental Shelf (UKCS) market. This business has achieved exceptionalgrowth since inception in 2004 and now employs over 600 staff. PetrofacBrownfield has projects underway for a variety of customers including LundinPetroleum, Marathon, Venture Production and Talisman Energy. In September 2006,Lundin Petroleum awarded Petrofac Brownfield a two-year contract extension toprovide engineering support and construction services to both the Heather andThistle North Sea installations. During the year, Petrofac Brownfield safely andsuccessfully installed the Wood and Gas Export (WaGE) module onto TalismanEnergy's Montrose platform. Associated gas from the Montrose platform, which iscurrently being flared, will, in the future, be compressed and exported usingthe new facilities. In November 2006, Talisman awarded the division a conceptand optional FEED study for the Claymore platform compression upgrade projectand in February 2007, following the findings of the conceptual study, Talismanawarded the division the FEED study. The additional facilities represent asignificant undertaking in the future of the Claymore production platform. InSeptember 2006, the group completed, safely and a month ahead of schedule, thetie-back from the Venture Production owned Goosander field to the Kittiwakeinstallation, through a subsea flow-line providing production, gas lift andwater injection facilities. Internationally, the facilities management business continues to perform in linewith expectations, supporting national oil companies and their subsidiaries,directly and in consortia, in Kuwait, Sudan and Iran and working with Marathonin Equatorial Guinea. The division's most significant contract win during the year was a major serviceoperator contract with Dubai Petroleum Establishment (DPE), wholly-owned by theGovernment of Dubai, for the provision of well and facilities managementservices to Dubai's offshore oil & gas assets. The transition process from theexisting operator commenced in the second half of 2006 and the group will takefull responsibility for these operations in April 2007. The award of this majorcontract was the result of significant investment over a number of years in ourinternational business development activities and represents a material increasein scale for the international Operations Services business. The contract coversfour offshore oilfields, with approximately 70 platforms, currently run byaround 1,100 personnel. Some 600 staff will be employed by Petrofac from April2007, the remainder being contractors. In January 2007, the division extended its capabilities with the acquisition ofa majority interest in SPD Group Limited (SPD), a specialist provider of welloperations services. Based in Dubai and Aberdeen, SPD's main areas of expertiseare well project management, well engineering optimisation, well engineeringstudies and consultancy services. SPD, which was already providing services inthe Dubai fields, was recently awarded a new contract to provide well operationsmanagement services in support of the DPE contract. The training business continues to perform well in the UK and its range ofservices was further strengthened during the year with the opening of RubiconResponse's integrated Emergency Response Service Centre (ERSC) in Aberdeen, thefirst integrated ERSC in the UKCS. The ERSC is located in close proximity to theemergency services and is the first point of contact for a number of North Seainstallations, providing them with an immediate and effective response inemergency situations. Good progress has been made internationally with awards inthe Gulf of Mexico from BP, to design, establish and implement a world classtraining function across BP's deepwater activities in the United States, andwith Shell, for a multi-year contract which includes the provision of watersurvival and helicopter underwater egress training (HUET). In April 2006, thegroup acquired PPS Process Control and Instrumentation Services Limited (PPS)which provides operations and maintenance training in Sakhalin, Russia (andprocess control and instrumentation services in Singapore, Malaysia andIndonesia). In January 2007, PPS secured a further contract with Sakhalin Energyto provide operations and maintenance training at the Sakhalin TechnicalTraining Centre. In late 2006, Petrofac Training, in conjunction with jointventure partner TTE International, was awarded a two-year extension to itsmanagement and operations contract for BP's technical training centre in Baku,Azerbaijan. RESOURCES 2006 2005 US$m US$mRevenue 62.1 46.3 up 34.1%EBITDA 40.1 32.6 up 23.0%EBITDA margin 64.6% 70.4%Net profit* 14.4 18.3 down 21.3%Net margin 23.1% 39.5% Adjusted net profit* 13.8 9.4 up 46.8%Adjusted net margin 22.2% 20.3% * 2006 net profit includes recognition of a net tax credit of US$0.6 millionfrom tax losses in Petrofac (Malaysia-PM304) Limited (2005: US$8.9 million); theadjusted net profit and adjusted net profit margin presented above exclude theimpact of these tax credits Results Divisional revenue increased by 34.1% to US$62.1 million (2005: US$46.3 million)due predominantly to commencement of production from the Cendor field andsubsequent cargo liftings. Net profit for the period was US$14.4 million (2005:US$18.3 million). The net profit in 2005 included the recognition of a deferredtax asset of US$8.9 million in respect of Cendor pre-trading losses. Followingcommencement of production in late 2006, the UK deferred tax asset was writtendown to recognise the future availability of Malaysian double tax creditsagainst UK tax, whilst a Malaysian deferred tax asset was set up to reflect theanticipated utilisation of carried forward losses against Malaysian tax at 38%;this resulted in an overall recognition of a further tax credit of US$0.6million in the year. Net of Cendor tax credits, the division's net profitincreased from US$9.4 million in 2005 to US$13.8 million in 2006. Review of operations The division increased its portfolio of producing assets in the latter part ofthe year with the commencement of oil production from the Cendor field, offshorePeninsular Malaysia in Block PM304. Petrofac, as operator, working alongside itspartners, developed an innovative and low-cost solution for the development ofthe field, which delivered first oil in September 2006, ahead of schedule andwithin budget. The division's other producing assets, Ohanet and the KyrgyzPetroleum Company refinery, continued to perform strongly and in line withexpectations during 2006. Under the terms of the Cendor production sharing contract (PSC), by way of whichthe group owns a 30% share in the field, the division will receive revenuesbased on the market value of crude oil sales until its development and operatingcosts are recovered, which is expected to be during 2007. Subsequently, thedivision will be entitled to its share of production at an index-linked pricewhich is currently below market price. Following a gradual ramp-up inproduction, the field averaged 12,100 bpd for the month of December 2006.Current production levels, uptime and reservoir performance are in excess of theproject investment case. The division is undertaking detailed analysis of thereservoir to re-evaluate the extent of estimated reserves. Ohanet production was marginally lower than during 2005 at, on average,approximately 14.6 million m3/d (2005: 15.5 million m3/d) of gas for export,approximately 24,240 bpd (2005: 28,000 bpd) of condensate and approximately2,770 tonnes per day (2005: 2,230 tonnes per day) of liquefied petroleum gas (acombined oil equivalent of 138,500 bpd; 2005: 151,700 bpd). On average, thedivision earned its share of the monthly liquids production by the 11th day ofthe month reflecting the prevailing oil price (2005: 9th). At the division'scurrent base case production profiles and current oil price forecasts, it islikely that the group will earn its defined return within the target eight-yearperiod ending November 2011. Resources owns a 50% share in Kyrgyz Petroleum Company which is engaged in theproduction and refining of crude oil and marketing the sale of oil products fromthe refinery. The Operations Services division runs the refinery on behalf ofthe joint venture partners on a reimbursable basis. During 2006, the refineryproduced an average of approximately 1,700 bpd (2005: 1,700 bpd) of principallygasoline, diesel and fuel oil. Finding a steady supply of feedstock remains achallenge, although increased product prices during 2006 resulted in an improvedfinancial performance. The division's portfolio of development assets in the UKCS was extended in 2006and early 2007: •In December 2006, the division acquired a 60% interest in part of Block 211/18a containing the Don Southwest discovery. The partners in the acquisitions were First Oil (30% interest in West Don area) and Valiant Petroleum (30% interest in West Don; 40% interest in Don Southwest). •During 2006, Petrofac (50%) and Valiant Petroleum (50%) were successful in securing Block 211/18c, adjoining the West Don field, in the UK's 23rd licensing round. In February 2007, Petrofac (50%) and Valiant (50%) secured Block 211/17 in the 24th licensing round. These awards are an important development in the strategy to build a core area of operations in the 'greater Don area' and seek opportunities in neighbouring blocks. •The division increased its interest in Block 9/28a part B (containing the Crawford field) from 5.58% to 29% in February 2006, assuming operatorship of the field. The group's partners are Fairfield Acer (52%) and Stratic (19%). •In early 2007, Petrofac was awarded a 100% equity interest in Block 28/3b in the 24th licensing round. The group already owns 100% equity in Block 28/ 3a, containing the Elke field. The three divisions of the Petrofac group are working together towardssubmission of field development plans for these assets. In November 2006, the group agreed to acquire, subject to approval by therelevant government authorities, a 45% interest in the Chergui concession,Tunisia, for a consideration of approximately US$30 million from EntrepriseTunisienne d'Activites Petrolieres, the Tunisian state oil company, which holdsthe remaining 55% interest. The transaction legally completed in February 2007(see note 33 to the financial statements). Petrofac will be operator of thenewly acquired concession. In addition to the initial consideration of US$30million, Petrofac will incur a share of the costs to complete the centralproduction facilities and pipeline to shore, amounting to approximatelyUS$20 million. Production is expected to start at the field in late 2007, withplateau rates expected to be maintained for around four years with a furthereight years of operation beyond that. Produced gas is to be sold to SocieteTunisienne d'Electricite et Gaz under the gas pricing formula fixed by existinglaw, in which the price of gas is linked to FOB Med (free on boardMediterranean) fuel oil prices. The return on the investment will depend uponfuel oil prices, the performance of the reservoir and managing, in conjunctionwith the Engineering & Construction division, the completion of the centralprocessing facilities and pipeline. OUTLOOK The capital programmes and associated operating expenditure required to addressincreasing global energy demand and the depletion of existing productiontogether with the limited capacity of the oil services industry to support suchprogrammes should ensure that demand for the group's services remains strong forthe foreseeable future. The current level of backlog within our Engineering & Construction divisionprovides particularly strong visibility for current year revenue and we willcontinue our focus on project execution to ensure consistent margin delivery. Webelieve that we are well positioned to secure further new business, particularlyin regions and on projects which have the potential for long term capitalexpenditure. Our Operations Services division also has good visibility for revenue for thecurrent and future years and will look to continue its growth both in the UKCSand internationally, in particular, the contract with Dubai PetroleumEstablishment will make an important contribution to this growth and towardscontinued margin expansion. The integrity management of hydrocarbon facilities is becoming an increasinglysignificant challenge for many asset owners. Through our strong engineering andoperational capabilities, in particular within our growing Brownfield activity,we believe we are well positioned to assist clients extend the life span oftheir facilities whilst ensuring the highest standards of operational safety aremet. Within our Resources division, we expect the investment in Cendor, Malaysia, tohave substantially, if not entirely, recovered its costs during the first halfof the year. During the year ahead, in addition to seeking further opportunitiesto expand our investment portfolio, in particular on the energy infrastructureside, we will be actively progressing our existing development assets, inparticular Chergui, Tunisia, and the greater Don area assets in the UKCS. The current financial year has started well and, with the group's backlog atrecord levels, continuing focus on execution and strong demand for its services,the Board believes the group is well positioned to continue its growth duringthe current year and beyond. Ayman AsfariGroup Chief Executive Chief Financial Officer's review 2006 2005 US$m US$mRevenue 1,863.9 1,485.5 up 25.5%Operating profit(8) 171.1 88.6 up 93.1%Operating margin 9.2% 6.0%EBITDA 199.6 115.6 up 72.7%EBITDA margin 10.7% 7.8%Net profit 121.9 75.4 up 61.7%Net margin 6.5% 5.1%Backlog 4,173 3,244 up 28.6% Group revenue increased by 25.5% to US$1,863.9 million (2005: US$1,485.5million) reflecting strong growth across all three divisions, though theincrease is principally driven by the Engineering & Construction and OperationsServices divisions which contribute 97% of the group's revenue. The revenueincrease in Engineering & Construction was primarily as a result of constructionprogress made on contracts awarded in late 2005 and in Operations Services wasprimarily due to new contract awards and increased pass-through revenue. Operating profit increased by 93.1% from US$88.6 million in 2005 to US$171.1million in 2006, with all three divisions showing growth. Operating marginsincreased to 9.2% (2005: 6.0%), reflecting strong growth in margins inEngineering & Construction, a slight decline in Operations Services due toincreased levels of pass-through revenue, a slight increase in Resourcesoperating margins and US$6.3 million of one off IPO costs in 2005. The increasedmargin in the Engineering & Construction division reflects the stage ofcompletion, and, therefore, timing of profit recognition, and residual riskprofile of major projects and continuing good execution. Net of pass-throughrevenues, the Operations Services division generated an increased operatingmargin as a result of additional margins earned on new contracts awarded during2006. Operating margins were marginally higher in the Resources division duelargely to the commencement of production from the Cendor field in September2006. Net profit attributable to the shareholders of Petrofac Limited from the group'scontinuing business activities increased by 61.7% to US$121.9 million (2005:US$75.4 million). The net margin increased to 6.5% (2005: 5.1%) due primarily tothe 3.2% increase in the group's operating margin, net finance income of US$2.2million (as compared to net finance cost of US$5.3 million in 2005, reflecting acombination of higher average cash balances held by the group during the yearoffset slightly by higher prevailing interest rates on the group's debt),partially offset by a significant increase in the group's effective tax rate. EBITDA increased by 72.7% to US$199.6 million (2005: US$115.6 million),representing 10.7% (2005: 7.8%) of revenue. The increase in the group EBITDAmargin was driven by the Engineering & Construction division's strongoperational performance. This improvement was partly offset by a decrease inResources' EBITDA margin brought about by lower than divisional average EBITDAmargin contribution from the Cendor asset. The significant revenue and EBITDA margin growth achieved in 2006 by theEngineering & Construction division diluted the proportion of EBITDA contributedby the Operations Services and Resources divisions relative to 2005. Taken as apercentage of EBITDA, excluding the effect of corporate costs, consolidation andelimination adjustments, Engineering & Construction accounted for 63.5% (2005:51.4%) of group EBITDA, Operations Services 16.5% (2005: 22.2%) and Resources20.0% (2005: 26.4%). At the close of 2006, the combined backlog of the Engineering & Construction andOperations Services divisions was US$4,173 million (2005: US$3,244 million),representing an increase of 28.6% on the comparative figure at 31 December 2005.A significant proportion of the Operations Services division backlog isdenominated in Sterling and has therefore benefited from the depreciation of theUS$ against Sterling over the year. On a constant currency basis, group backlogincreased 23.4% compared to 31 December 2005. Petrofac's functional currency for financial reporting purposes is US dollars.Although during 2006, there was a significant change in the year-end US$ toSterling exchange rates, there was only a marginal change in the averageexchange rate compared to 2005, and therefore the year on year impact ofcurrency fluctuation on the group's UK trading activities was not significant.The table below sets out the average and year end exchange rates for US dollarand Sterling for the years ended 31 December 2006 and 2005 as used by Petrofacfor its financial reporting. 2006 2005 US$ to SterlingAverage rate for the year 1.85 1.81Year end rate 1.96 1.72 Discontinued operations Net losses from the group's discontinued operation in the US, Petrofac Inc, wereUS$1.6 million (2005: US$0.8 million). The loss incurred in the year includes animpairment provision against the remaining property in Tyler, Texas, and currentand projected costs in relation to the arbitration of a claim against a customerfor the recovery of project-related costs. While the group is confident of afavourable outcome to the arbitration process, no revenue from the claims whichare subject to arbitration has been recognised to date. Interest and taxation Net interest receivable for the year on continuing operations was US$2.2 million(2005: net interest payable of US$5.3 million). The reduction in net interestpayable was largely attributable to the group's higher average cash balancesduring 2006. These arose principally from the significant increase in contractadvance payments from Engineering & Construction division customers and theimpact of strong conversion of earnings into operating cash flows. Gearing ratio 2006 2005 US$'000 (unless otherwise stated) Interest-bearing loans and 117,180 106,870borrowings (A)Cash and short term deposits (B) 457,848 208,896Net cash/(debt) (C = B - A) 340,668 102,026Total net assets (D) 324,904 195,127Gross gearing ratio (A/D) 36.1% 54.8%Net gearing ratio (C/D) Net cash position Net cash position Interest cover 2006 2005 US$'000 (unless otherwise stated) Operating profit from continuing operations (A) 171,119 88,603Net interest cost (B) n/a - net 5,255 interest receivableInterest cover (A/B) n/a 16.9 times An analysis of the income tax charge is set out in note 6 to the financialstatements. The income tax charge on continuing operations as a percentage ofprofit before tax in 2006 was 29.6% (2005: 9.5%). The increase in the effectivetax rate for 2006 is largely attributable to the following factors: •During 2006, the Engineering & Construction division generated the majority of its profits from higher taxable jurisdictions; •The Resources division's effective tax rate in 2005 included recognition of a deferred tax asset of US$8.9 million in respect of Cendor pre-trading losses. Following commencement of production in late 2006, the UK deferred tax asset was written down to recognise the future availability of Malaysian double tax credits against UK tax, whilst a Malaysian deferred tax asset was set up to reflect the anticipated utilisation of carried forward losses against Malaysian tax at 38%; this resulted in an overall recognition of a further tax credit of US$0.6 million in the period; and •The group had unrecognised tax losses of US$1.8 million at 31 December 2006 (2005: US$1.5 million less utilisation of tax losses of US$3.1 million). Adjusting for Cendor tax credits and net tax losses utilised/(unrecognised), theunderlying effective tax rate was 28.9% for 2006 (2005: 22.1%), as set out inthe table below: 2006 2005 (as restated) US$'000 % US$'000 % Reported tax charge 51,340 29.6% 7,951 9.5%Tax credit re Cendor PM304 609 0.4% 8,943 10.7%Net tax losses utilised/ (unrecognised) (1,797) (1.1%) 1,538 1.9% ----------------------------------------- 50,152 28.9% 18,432 22.1% ======================================== Earnings per share Fully diluted earnings per share from continuing operations increased by 57.6%in 2006 to 35.32 cents per share (2005: 22.41 cents per share, after adjustingfor the 40:1 share split in October 2005), reflecting the group's improvedprofitability. Operating cash flow and liquidity Net cash flow from continuing operations was US$329.0 million compared withUS$133.0 million in 2005, representing 164.8% of EBITDA (2005: 115.1%). Theincrease in net cash inflows was principally as a result of increased operatingprofit and a decrease in the utilisation of net working capital. The favourablenet working capital movement arose principally from short-term timingdifferences at the year end in respect of the customer billing and supplierpayment positions on long-term engineering and construction contracts and fromthe impact of significant cash advances received on certain major engineeringand construction contracts. The group maintained a broadly comparable level of interest-bearing loans andborrowings at US$117.2 million (2005: US$106.9 million) on an increased equitybase, resulting in a decrease in the group's gross gearing ratio to 36.1% at 31December 2006 (2005: 54.8%). The group's total gross borrowings before associated debt acquisition costs atthe end of 2006 were US$119.0 million (2005: US$108.3 million), of which 38.1%was denominated in US dollars (2005: 49.5%), 56.0% was denominated in Sterling(2005: 44.7%) with the majority of the balance, 5.9%, denominated in KuwaitiDinars (2005: 5.8%). The group maintained a balanced borrowing profile with 22.3% of borrowingsmaturing within one year, 40.6% maturing between one and five years and theremaining 37.1% maturing in more than five years (2005: 28.3%, 56.1% and 15.6%respectively). The increase in the average duration of borrowings reflects therenegotiation in December 2006 of the group's facilities with the Royal Bank ofScotland/Halifax Bank of Scotland. The borrowings repayable within one yearinclude US$20.4 million of bank overdrafts and revolving credit facilities(representing 17.2% of total gross borrowings), which are expected to be renewedduring 2007 in the normal course of business (2005: US$15.0 million and 13.8% oftotal gross borrowings). The group's policy is to hedge between 60% and 80% of variable interest rateloans and borrowings. At 31 December 2006, 64.8% of the group's terminterest-bearing loans and borrowings were hedged (2005: 84.7%). An analysis ofthe derivative instruments used by the group to hedge this exposure and ananalysis of the group's risk management objectives and policies is contained innote 32 to the financial statements. 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 upstream cash payments in excess of 70% ofits net profit in any one year, none of the Company's subsidiaries is subject toany material restrictions on their ability to transfer funds in the form of cashdividends, loans or advances to the Company. Capital expenditure Capital expenditure on property, plant and equipment during 2006 was US$59.4million (2005: US$17.6 million). The main elements were the purchase of freeholdland and other capital expenditure in relation to the construction of thegroup's new office building in Sharjah, UAE, amounting to US$15.0 million andUS$17.6 million of development expenditure on Resources' oil & gas assets. Othercapital expenditure included the cost of plant, equipment and office furnitureto support the growth in the Engineering & Construction and Operations Servicesdivisions. Capital expenditure on intangible oil & gas assets totalled US$12.9 million(2005: US$4.8 million), principally in relation to the Crawford and DonSouthwest acquisitions. Shareholders' funds Total equity increased from US$195.1 million at 31 December 2005 to US$324.9million at 31 December 2006. The primary elements of the increase were theretained profits for the year of US$105.7 million, the favourable movement inthe group's unrealised position on derivative instruments and foreign currencytranslation of US$30.4 million, partially offset by the cost of additionaltreasury shares purchased by the Company in relation to employee share schemesof US$8.1 million. Return on capital employed (ROCE) The group's ROCE for 2006 was 47.5% (2005: 32.5%). The increase reflects theincreased profitability of the group, albeit on an expanding capital base as thegroup continues to grow. Keith RobertsChief 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 losses (as set out in 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. 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 and 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 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 2006 final dividend from USdollars into Sterling is based upon an exchange rate of US$1.9481:£1, being theBank of England Sterling spot rate as at midday on 2 March 2007. (6) Includes agency and contract staff but exclude employees of jointventures. (7) Pass-through revenue refers to the revenue recognised from low orzero-margin third-party procurement services provided to customers. (8) Operating profit means profit from continuing operations before tax andfinance costs. MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock Exchange