Petrofac Regulatory News (PFC)

RNS Number : 4415R

Petrofac Limited

23 August 2010

 

Press Release

 

23 AUGUST 2010

 

PETROFAC LIMITED

 

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2010

 

 

FINANCIAL HIGHLIGHTS

 

·; Revenue up 34% to US$2,130.6 million (2009: US$1,586.4 million)

 

·; EBITDA(1) up 55% to US$321.3 million (2009: US$207.5 million) (2)

 

·; Net profit(3) up 128% to US$331.9 million; net profit excluding gain on EnQuest demerger up 42% to US$206.3 million (2009: US$145.6 million)

 

·; Earnings per share (diluted) up 41% to 60.14 cents (2009: 42.70 cents) (2)

 

·; Backlog(4) of US$6.9 billion at 30 June 2010 (31 December 2009: US$8.1 billion), augmented by US$1.1 billion of awards since 1 July 2010

 

·; Completed the EnQuest demerger in April 2010, generating a gain of US$125.6 million

 

·; Interim dividend up 29% to 13.80 cents (8.91 pence(5)) per share (2009: 10.70 cents)

 

 

Ayman Asfari, Petrofac's group chief executivecommented on the interim results:

 

"We have achieved an order intake(6)of approximately US$2 billion in the year to date, which, together with our healthy prospects list, gives us confidence that we will grow our backlog over the calendar year. Furthermore, we believe our strong operational performance will enable us to maintain our historical sector-leading net margins in Engineering & Construction over the medium-term.

 

"Given our strong start to the year, we expect to deliver like-for-like(7)net profit growth for the full year, excluding the gain on the EnQuest demerger, of around 20 per cent."

OPERATIONAL HIGHLIGHTS

 

Engineering & Construction

·; Secured approximately US$1.5 billion of new orders in the year to date in Kuwait, Qatar and Iraq, where we have been awarded our first project

·; Delivered good operational performance on significantly increased activity levels, following a record intake of new orders in 2009

 

Offshore Engineering & Operations

·; Improved activity levels and success in securing contract extensions with key customers including BHP Billiton and Britannia

·; Completed four small acquisitions, including TNEI and CO2DeepStore which represent the first steps in positioning us in the renewable energy and low carbon sectors

 

Engineering, Training Services and Production Solutions

·; Awarded first production enhancement contract by Petrom in July 2010, to provide services for the Ticleni oilfield and its eight satellite fields in Romania

·; Delivered good operational performance on our service operator contract in Dubai, while transitioning towards a technical services agreement with the Government of Dubai

 

Energy Developments

·; 'Build and harvest' strategy proven with completion of EnQuest demerger; Don investment generated an IRR from inception to demerger of approximately 35%

·; Submitted the Field Development Programme for the second phase of the development of the Cendor field in Malaysia, which we expect to commence in the second half of the year

 

OUTLOOK

 

In Engineering & Construction, we continue to bid actively for opportunities in our core markets of the Middle East and Africa and the Commonwealth of Independent States, particularly the Caspian region. Our near-term focus remains working towards conversion to the second phase of the South Yoloten project in Turkmenistan where we have recently submitted our technical and commercial proposals following our work on the first phase. In Iraq, we have commenced early stage engineering work for an International Oil Company which is expected to lead to a larger contract award during the second half of the year.

 

Our Offshore Engineering & Operations business development activities are focused on significant opportunities, both in the UK and internationally, which we are confident will lead to continued growth in the business.

 

In Engineering Services, we continue to experience weak activity levels and although the flow of enquiries is beginning to improve we do not expect to see a material improvement in the market until 2011. In Training Services we are seeing an improved performance in our core UK market, whereas performance in our international centres has been mixed. In Production Solutions, we were pleased to be awarded the Ticleni production enhancement contract in Romania in early July. This long-term contract gives us the opportunity to establish a track-record in the provision of our services on a commercial model which we believe will deliver increased value for both our customers and the group.

 

In Energy Developments, we expect to commence the development of the second phase of the Cendor field, offshore Malaysia, in the second half of this year.

 

We have achieved an order intake(6) of approximately US$2 billion in the year to date, which, together with our healthy prospects list, gives us confidence that we will grow our backlog over the calendar year. Furthermore, we believe our strong operational performance will enable us to maintain our historical sector-leading net margins in Engineering & Construction over the medium-term.

 

Given our strong start to the year, we expect to deliver like-for-like(7) net profit growth for the full year, excluding the gain on the EnQuest demerger, of around 20 per cent.

 

 

Notes

 

(1) EBITDA means earnings before interest, tax, depreciation and amortisation and is calculated as profit from continuing operations before tax and net finance costs adjusted to add back charges for depreciation, amortisation and impairment.

 

(2) Excluding the impact of the gain on the EnQuest demerger.

 

 (3) Net profit for the period attributable to Petrofac Limited shareholders.

 

(4) Backlog consists of the estimated revenue attributable to the uncompleted portion of lump-sum engineering, procurement and construction contracts and variation orders plus, with regard to engineering services and facilities management contracts, the estimated revenue attributable to the lesser of the remaining term of the contract and, in the case of life-of-field facilities management contracts, five years. The group uses this key performance indicator as a measure of the visibility of future earnings. Backlog is not an audited measure.

 

(5) The group reports its financial results in US dollars and, accordingly, will declare any dividends in US dollars together with a Sterling equivalent. Unless shareholders have made valid elections to the contrary, they will receive any dividends payable in Sterling. Conversion of the 2010 interim dividend from US dollars into Sterling is based upon an exchange rate of US$1.5482:£1, being the Bank of England Sterling spot rate as at midday on 20 August 2010.

 

(6) Order intake comprises new contracts awarded, growth in scope of existing contracts and the rolling increment attributable to contracts which extend beyond five years. Order intake is not an audited measure.

 

(7) Like-for-like net profit growth excludes the trading net profit from Energy Developments' demerged assets of US$12.7 million for the year ended 31 December 2009 and US$2.1 million for the year ending 31 December 2010.

 

Ends

 

Analyst presentation:

A presentation for analysts will be held at 9.00am today, which will be webcast live via http://www.investorcalendar.com/IC/CEPage.asp?ID=148670.

Enquiries:

 

Petrofac Limited +44 (0) 20 7811 4900

Jonathan Low, Head of Investor Relations

 

Tulchan Communications Group Ltd +44 (0) 20 7353 4200

James Bradley

David Allchurch

petrofac@tulchangroup.com

 

 

Notes to Editors

 

Petrofac

 

Petrofac is a leading international provider of facilities solutions to the oil & gas production and processing industry, with a diverse customer portfolio including many of the world's leading integrated, independent and national oil & gas companies. Petrofac is quoted on the London Stock Exchange (symbol: PFC).

 

The group delivers services through seven business units: Engineering & Construction, Engineering & Construction Ventures, Engineering Services, Offshore Engineering & Operations, Training, Production Solutions and Energy Developments.

 

Through these businesses Petrofac designs and builds oil & gas facilities; operates, maintains and manages facilities and trains personnel; enhances production; and, where it can leverage its service capability, develops and co-invests in upstream and infrastructure projects. Petrofac's range of services meets its customers' needs across the full life cycle of oil & gas assets.

 

With approximately 12,500 employees, Petrofac operates out of six strategically located operational centres, in Aberdeen, Sharjah, Woking, Chennai, Mumbai and Abu Dhabi and a further 19 offices worldwide. The predominant focus of Petrofac's business is on the UK Continental Shelf (UKCS), the Middle East and Africa, the Commonwealth of Independent States (CIS) and the Asia Pacific region.

 

For additional information, please refer to the Petrofac website at www.petrofac.com.

 

The attached is an extract from the group's interim condensed consolidated financial statements for the six months ended 30 June 2010.

 

Results

We are pleased to report that the group has had an excellent first half of 2010, with strong growth in revenue and net profit, good progress on our portfolio of contracts and the successful demerger of Energy Developments' interests in the Don assets.

 

In the six months ended 30 June 2010, revenue increased by 34.3% to US$2,130.6 million (2009: US$1,586.4 million) due primarily to an increase in activity levels in Engineering & Construction, following the high level of new order intake during 2009. Excluding the gain on the EnQuest demerger of US$125.6 million, net profit increased by 41.7% to US$206.3 million (2009: US$145.6 million) and EBITDA increased by 54.8% to US$321.3 million (2009: US$207.5 million).

 

The group's net cash decreased to US$960.6 million over the six months to 30 June 2010 (31 December 2009: US$1,300.1 million) as a result of:

·; net cash used in operations during the period of US$41 million (2009: US$529 million generated from operations) due to net cash generated from operating profits before working capital changes of US$345 million, less net working capital outflows of US$385 million, principally due to an increase in work-in-progress on Engineering & Construction projects (in the corresponding period in 2009, the group received over US$397 million of advance payments received in relation to new Engineering & Construction awards)

·; taxes paid of over US$47 million

·; investing activities, including approximately US$78 million in relation to capital expenditure on property, plant and equipment and US$15 million on the acquisition of new businesses

·; financing activities, in particular, payment of the 2009 final dividend of approximately US$85 million and financing the purchase of shares for US$37 million for the purpose of making awards under the group's employee share schemes.

 

Net cash (US$ million)	30 June 2010	31 December 2009	30 June 2009
Cash and short term deposits	1,074.8	1,417.4	900.2
Interest-bearing loans and borrowings	(114.2)	(117.3)	(112.6)
Net cash	960.6	1,300.1	787.6

Net finance income for the period was US$0.5 million (2009: US$3.6 million) due to lower average net cash balances being held in the first half of the year. 

 

The tax charge for the six months ended 30 June 2010 of US$53.8 million (2009: US$28.8 million), based on the anticipated reporting segment effective tax rates for the year ending 31 December 2010, represents an effective tax rate, excluding the gain from the EnQuest demerger, of 20.7% (six months ended 30 June 2009: 16.5%; year ended 31 December 2009: 18.9%). The principal reason for the increase in the group's effective tax rate is ring fence expenditure supplement no longer being available for claim following the EnQuest demerger. Notwithstanding the adjustments made in the prior year in respect of the applicability of the lower tax rate to the group's projects in Oman, the Engineering & Construction effective tax rate decreased to 16.5% (six months ended 30 June 2009: 12.2%; year ended 31 December 2009: 18.3%) due to material changes in jurisdictions in which profits are expected to be earned.

 

Diluted earnings per share, excluding the gain on the EnQuest demerger, for the six months ended 30 June 2010 increased by 40.8% to 60.14 cents per share (2009: 42.70 cents per share) in line with the group's strong growth in net profit.

 

The group's combined backlog was US$6.9 billion at 30 June 2010 (31 December 2009: US$8.1 billion) and the group has been awarded a further US$1.1 billion of new contracts since 1 July 2010.

 

At 30 June 2010, the group had over 12,500 employees (including long-term contractors), compared to around 11,700 at 31 December 2009, with the growth primarily attributable to the Engineering & Construction and Offshore Engineering & Operations reporting segments.

 

Dividend

The Board has declared an interim dividend of 13.80 cents per share (2009: 10.70 cents), an increase of 29.0%, which will be paid on 22 October 2010 to eligible shareholders on the register at 24 September 2010. Shareholders who have not elected to receive dividends in US dollars will receive a Sterling equivalent of 8.91 pence per share. The Board will set the total dividends payable for the year to 31 December 2010 according to the group's earnings and, as previously announced, expects to distribute approximately 35% of full year post tax profits excluding the gain on the EnQuest demerger, by way of dividend.

 

Segmental review

The group reports the financial results of its seven business units under four reporting segments:

 

Business unit		Reporting segment
Engineering & Construction	>	Engineering & Construction
Engineering & Construction Ventures
Offshore Engineering & Operations	>	Offshore Engineering & Operations
Engineering Services	>	Engineering, Training Services and Production Solutions
Training Services
Production Solutions
Energy Developments	>	Energy Developments

We present below an update on each of the group's reporting segments:

 

US$ million	Revenue		Operating profit1,3		Net profit 2,3		EBITDA3
For the six months ended 30 June	2010	2009	2010	2009	2010	2009	2010	2009
Engineering & Construction	1,587.5	1,060.7	214.4	129.5	180.4	121.2	231.4	140.5
Offshore Engineering & Operations	327.2	294.9	5.8	4.5	4.0	2.9	7.0	4.8
Engineering, Training Services and Production Solutions	161.5	184.0	13.6	17.4	13.0	14.8	21.5	21.1
Energy Developments	106.3	82.2	37.1	24.8	17.5	9.8	69.8	46.7
Corporate, consolidation & elimination	(51.9)	(35.4)	(8.3)	(5.5)	(8.6)	(3.1)	(8.4)	(5.6)
	───────	───────	───────	──────	──────	──────	──────	──────
Group	2,130.6	1,586.4	262.6	170.7	206.3	145.6	321.3	207.5
	══════	══════	══════	════	════	════	════	════

 

Growth/margin analysis %	Revenue growth		Operating margin		Net margin		EBITDA margin
For the six months ended 30 June	2010	2009	2010	2009	2010	2009	2010	2009
Engineering & Construction	49.7	14.9	13.5	12.2	11.4	11.4	14.6	13.2
Offshore Engineering & Operations	10.9	(21.8)	1.8	1.5	1.2	1.0	2.1	1.6
Engineering, Training Services and Production Solutions	(12.2)	(32.1)	8.4	9.5	8.1	8.1	13.3	11.5
Energy Developments	29.3	5.8	34.9	30.2	16.5	12.0	65.7	56.9
	───────	───────	───────	──────	──────	─────	──────	─────
Group	34.3	0.7	12.3	10.8	9.7	9.2	15.1	13.1
	══════	═════	══════	════	════	════	═════	════

1 Profit from operations before tax and finance costs.

2 Profit for the year attributable to Petrofac Limited shareholders.

3 Excludes gain on the EnQuest demerger.

 

Engineering & Construction

The Engineering & Construction reporting segment includes the group's Sharjah-based Engineering & Construction business unit and Engineering & Construction Ventures, which has been established to replicate the success of the Sharjah business, but in new markets, such as Abu Dhabi and Saudi Arabia. Engineering & Construction typically undertakes engineering, procurement and construction (EPC) projects on a lump-sum basis, with a duration of approximately two to four years, and is focused on markets in the Middle East and Africa and the Commonwealth of Independent States, particularly the Caspian region.

 

The Engineering & Construction reporting segment secured a record intake of new orders in 2009 (more than US$6.0 billion), which has led to a significant increase in activity levels in the first half of 2010. We continue to deliver good operational performance on our portfolio of projects, including those secured in 2009.

 

In late December 2009, we were awarded a contract by Turkmengas, Turkmenistan's state-run gas producer, to undertake a front-end engineering and design (FEED) study and early engineering work for a 10 billion cubic metres per annum (bcma) gas processing facility along with the infrastructure and pipelines for the entire 20 bcma development (a second 10 bcma gas processing facility will be built by another contractor). Upon satisfactory conclusion of the first stage, the contract contemplates moving into a second phase which will include the full engineering, procurement and construction of the facility, associated infrastructure and pipelines, for a value not to exceed US$4.0 billion. During the first half of 2010, we have completed the majority of the FEED study and early engineering work and we have submitted technical and commercial proposals in relation to the second phase.

 

New awards

In March 2010 we were successful in securing an award for gas sweetening facilities in Qatar. The contract, for more than US$600 million, includes the engineering, procurement, installation and commissioning of gas sweetening facilities in Qatar's Messaieed and Dukhan industrial districts. The project includes a sulphur recovery upgrade in Messaieed and an acid gas recovery plant in Dukhan. Work on the projects is due for completion within 38 months.

 

In addition, since 30 June 2010, we have been successful in securing the following awards:

 

Pipelines from Mina Al Ahmadi to power stations, Kuwait

In July 2010, we were awarded a US$400 million contract by Kuwait Oil Company (KOC) for EPC services for the installation of fuel gas and gas oil pipelines from Mina Al Ahmadi to the Azzour and Shuaiba Power Stations in Kuwait. The project is expected to last approximately two years.

 

Water injection project, Kuwait

In August 2010, we were awarded a further EPC project by KOC for US$430 million for effluent water and central sea water injection facilities. The project involves the installation of a new central injection pumping facility and modifications to three of the existing gathering centres and seawater treatment plant. When completed, both effluent water and sea water will be fed into a central injection pumping facility and injected into the wells with the objective of increasing the oil recovery capacity in the Raudhatain and Sabriyah fields. The project is estimated for completion within 36 months.

 

Results

Revenue for the first half of the year increased by 49.7% to US$1,587.5 million (2009: US$1,060.7 million), reflecting increased levels of activity following a record level of new contract awards in 2009. Net profit increased by 48.8% to US$180.4 million (2009: US$121.2 million), representing a net margin of 11.4% (2009: 11.4%). The net profit margin in the first half of 2010 benefited from the first-time profit recognition on a number of contracts awarded in 2009.

 

During the first half, Engineering & Construction grew its headcount from 4,200 to 4,700, with the majority of the growth in Engineering & Construction Ventures, where we now have approximately 1,800 employees, including 300 in our Abu Dhabi operational centre. In addition, our engineering offices in Mumbai and Chennai are reported within our Engineering, Training Services and Productions Solutions reporting segment, but principally support our Engineering & Construction activities. At 30 June 2010, we had more than 1,400 employees in our Indian offices (31 December 2009: 1,300).

 

At 30 June 2010, the Engineering & Construction backlog stood at US$5.4 billion (31 December 2009: US$6.2 billion) and we have been awarded a further US$0.8 billion of new contracts since 1 July 2010.

 

 

Offshore Engineering & Operations

 

Offshore Engineering & Operations provides engineering and construction services at all stages of greenfield and brownfield offshore projects. In addition, through the provision of operations management services, we deliver production and maintenance support and extend field life. Offshore Engineering & Operations' activities are primarily in the UK Continental Shelf (UKCS) and are predominantly provided on a reimbursable basis, but often with incentive income linked to the successful delivery of performance targets. Many of our production and maintenance contracts are long-term (typically three to five years) and in the case of the provision of Duty Holder services1 are generally open-ended.

 

Activity levels in Offshore Engineering & Operations have improved during the first half of 2010 due to the commencement of work on major contracts awarded in the second half of 2009 with Apache and BP and a general improvement in market conditions. In addition, we secured contract extensions with key customers in the first half of the year, such as a five-year agreement with BHP Billiton to provide operations and maintenance personnel both onshore and offshore in support of the Liverpool Bay Development in the Irish Sea, and a five-year agreement with Britannia to continue to provide operations and maintenance support services for Britannia's ongoing operations in the central North Sea.

 

We have successfully completed four small acquisitions in the year to date which broaden our capability, including: Scotvalve Services, which provides servicing and repair for oilfield pressure control equipment, and Stephen Gillespie Consultants, which designs and manufactures metering systems. The acquisitions of TNEI Services Limited, a specialist consultancy supporting the energy, power and renewable sectors, and CO2DeepStore, a company focused on the CO2 geological storage sector of the carbon capture and storage market, represent the first steps in positioning us in the renewable energy and low carbon sectors.

 

Results

Reported revenue for the period increased by 10.9% to US$327.2 million (2009: US$294.9 million) and revenue excluding 'pass-through' revenue2 increased by 16.5% to US$243.8 million (2009: US$209.3 million), reflecting the commencement of major contracts secured in the second half of 2009 and a general improvement in activity levels in the UKCS. Approximately 90% of Offshore Engineering & Operations' revenue is generated in the UKCS and those revenues are generally denominated in Sterling. The average US dollar to Sterling exchange rate for the first half of 2010 was broadly similar to the corresponding period in 2009.

 

 

 

1Contracts where the group takes full responsibility for managing a customer's asset and is responsible for the safety case of the asset, reporting to the Department of Energy and Climate Change.

2Pass-through revenue refers to the revenue recognised from low or zero margin third-party procurement services provided to customers.

 

Financial reporting exchange rates US$/Sterling	6 months ended 30 June 2010	Year ended 31 December 2009	6 months ended 30 June 2009
Average rate for period	1.52	1.56	1.49
Period-end rate	1.50	1.62	1.64

 

Net profit increased by 34.1% to US$4.0 million (2009: US$2.9 million), reflecting the increase in activity levels. Net margin on revenue excluding pass-through revenue increased to 1.6%, compared to 1.4% in the corresponding period in 2009, as selling, general and administrative expenses fell as a percentage of revenue. Net margins in the first half of the year are typically lower than those expected in the second half of the year due to the timing of recognition of incentive income, which is usually based on performance over a calendar year.

During the first half of 2010, headcount increased from 4,100 to 4,500, primarily due to an increase in activity levels but also due to the four acquisitions completed during the period.

Backlog for Offshore Engineering & Operations is predominantly denominated in Sterling, and stood at US$1.4 billion at 30 June 2010 (31 December 2009: US$1.6 billion) primarily reflecting the stronger US dollar exchange rate at 30 June 2010 compared to 31 December 2009.

 

 

Engineering, Training Services and Production Solutions

The Engineering Services, Training Services and Production Solutions business units are reported together within this segment. These businesses currently provide services primarily on a reimbursable basis. Production Solutions offers customers access to a wide range of services to help them improve production, profitability, operational efficiency, asset integrity and the recovery of marginal reserves. In addition to providing these specialist services on a stand-alone basis, we have been working towards a new commercial offering for customers whereby services are packaged together and offered on a tariff or quasi-equity basis. We were awarded our first such 'production enhancement' contract in early July 2010 (which is outlined below).

Engineering Services provides early stage engineering such as conceptual or FEED studies. Although we are seeing a steady flow of enquiries, we continue to experience subdued activity levels. While employee numbers in our Woking office in the UK are broadly unchanged over the first half of the year, we have continued to grow our Mumbai and Chennai offices. These Indian offices are managed through Engineering Services but predominantly support the businesses in our Engineering & Construction reporting segment.

In Training Services, we have recently seen an increase in overall delegate numbers, particularly in relation to UKCS survival and marine training, with some courses now operating seven days a week. We remain focused on strategic business development opportunities, both in the UK and internationally, particularly in the areas of 'nationalisation' of government workforces and in assisting oil & gas companies to recruit and train new technicians as much of the industry's ageing workforce will retire over the next few years.

After making significant progress with negotiations during the first half of the year, Production Solutions was awarded its first production enhancement contract by Petrom in July 2010. Under the terms of the 15-year contract, which includes an option for extension by a further ten years, we will provide production enhancement services to Petrom as the concession holder for the Ticleni oilfield and its eight satellite fields in Romania. These services will cover a range of operations, drilling management, production engineering, facilities upgrade and training skills to increase production through improving recovery rates, optimising operational efficiencies and investing to upgrade the facilities. We will be paid a tariff per barrel of oil produced, including an enhanced tariff for incremental production. Elsewhere, we continue to deliver a good operational performance in Dubai, where we are transitioning towards a technical services agreement with the Government of Dubai. The technical services agreement will be effective from October 2010 and will be reported through the Offshore Engineering & Operations reporting segment.

Results

Reported revenue for the period was US$161.5 million (2009: US$184.0 million) and revenue excluding 'pass-through' revenue was US$149.8 million (2009: US$166.8 million). The decrease in revenue is primarily due to Production Solutions, where revenues from drilling management activities for Dubai Petroleum are lower than in the prior year, and in Engineering Services, where activity levels remain subdued.

Net profit was lower at US$13.0 million (2009: US$14.8 million), principally reflecting the lower levels of drilling management activities in Dubai. Net margin on revenue excluding pass-through revenue was broadly unchanged at 8.7% (2009: 8.9%).

At 30 June 2010, headcount was broadly unchanged at 2,900 (31 December 2009: 2,900). A further 900 personnel joined the group in conjunction with the award of the Ticleni production enhancement contract in Romania in July 2010. More than 500 personnel are expected to transfer from the group to Dubai Petroleum by October 2010, as part of the transition to a technical services agreement.

Backlog for the Engineering, Training Services and Production Solutions reporting segment was approximately US$30 million at 30 June 2010 (31 December 2009: US$0.3 billion) due to the planned transition from the facilities management contract with Dubai Petroleum to a technical services agreement. The award of the Ticleni production enhancement contract in July 2010 has added a further US$270 million to backlog after the period end.

 

 

Energy Developments

Where the group can leverage its service capabilities to mitigate risks and reduce costs, Energy Developments selectively co-invests alongside the group's partners in oil & gas upstream developments and energy infrastructure to create additional value for the group.

In early April 2010, we completed the demerger of Energy Development's UKCS assets, including its investments in the Don fields, to EnQuest PLC, an independent company subsequently listed on the London and Stockholm stock exchanges. The demerged assets contributed a trading net profit for the period from 1 January 2010 up to the date of the demerger of US$2.1 million in addition to a capital gain of US$125.6 million. Our investment in the Don project generated an Internal Rate of Return from inception to demerger of approximately 35 per cent, demonstrating the value of our proven 'build and harvest' strategy.

The Cendor field, in Block PM304, offshore Peninsular Malaysia, produced an average of 14,300 barrels per day (bpd) of oil during the first half of the year (2009: 14,400 bpd) and achieved production uptime of over 99 per cent. As operator (with a 30% interest), Energy Developments, along with its partners (Petronas, PetroVietnam and Kuwait Foreign Petroleum Exploration Company (KUFPEC)) has recently submitted a Field Development Programme for the second phase of the development of Block PM304.

The Ohanet development in Algeria, in which Energy Developments has a 10% share of a Risk Service Contract (alongside BHP Billiton, Japan Ohanet Oil & Gas Co and Woodside Energy) with Sonatrach, continues to perform in line with expectations. The 10,000 bpd capacity KPC refinery in Kyrgyzstan (in which Energy Developments has a 50% share) has recommenced operations following a two week shutdown in June 2010 due to a period of civil unrest in the country.

In Tunisia, the Chergui gas plant (in which Energy Developments has a 45% operated interest) produced an average of 27.0 million standard cubic feet per day (mmscfd) of gas during the period (2009: 24.3 mmscfd). A third production well was tied into the plant in early July.

Results

Energy Developments' revenue for the period increased to US$106.3 million (2009: US$82.2 million) and net profit increased to US$17.5 million (2009: US$9.8 million) due principally to higher average oil prices1.

 

1 Brent, a benchmark crude, averaged US$77 per barrel for the six months ended 30 June 2010, compared to US$52 per barrel for the corresponding period in 2009. Energy Developments' policy is to hedge 75% of forecast production on a rolling 12-month basis for those assets that have achieved steady-state production. At 30 June 2010, a series of commodity price collars and swaps were outstanding in relation to the Cendor and Chergui assets.

 

 

Key risks and uncertainties

Those key risks and uncertainties that could lead to a significant loss of reputation or that could prevent us from executing our strategy and creating shareholder value are summarised below. Our approach to managing and mitigating these risks is as described on pages 36 and 37 of the group's Annual report and accounts 2009, as is an explanation of our risk management systems and procedures:

 

Industry risk	Description
Level of demand for the group's services	The demand for our services is linked to the level of capital and operational expenditure by the oil & gas industry.
Oil & gas commodity prices	Long-term expectations of the price of oil & gas may have an impact on the level of new investment in the industry and may therefore affect demand for our services.   The financial performance of Energy Developments is more leveraged to the price of oil & gas through its co-investment in upstream oil & gas assets, and its financial result may be impacted.
Availability of essential executive or project staff	The availability of skilled personnel remains one of the most significant challenges facing the oil & gas industry.
Country risk	Description
Security	We operate in a number of countries where the security risk is significant.
Business continuity	We are potentially exposed to, inter alia, natural hazards, acts of terrorism, war and civil unrest that could impact our infrastructure, either through the unavailability of physical assets or access to systems and data.
Exchange rates	Significant movements in exchange rates could impact our financial performance.
Sovereign change of law and contract enforcement	We operate in a number of countries where our ability to rely upon our contracts for protection is potentially reduced by the opaqueness of the legal system.
Breach of legal or regulatory code	We recognise the potential financial and reputational risk that could result from a breach of local or international laws, particularly in respect of behaviour relating to bribery and corruption.
Political Risk	We are exposed to potential regime change and civil unrest that could affect our operations.
Project Risk	Description
Contract performance	Our financial performance could be materially affected by the performance of a relatively small number of large contracts, particularly those which are lump-sum. Furthermore, our operational performance is important in maintaining our reputation for successful project delivery.
Counterparty	Particularly given the downturn in economic conditions, there is a risk of commercial counterparties defaulting on payment terms or financial counterparties defaulting on deposits that we hold with them.
Cost inflation	Unexpected inflation in costs could adversely impact the financial performance of our contracts.
Health, safety and environmental performance	A serious health, safety or environmental incident on any of our projects has the potential to cause significant commercial and reputational damage.

The list above does not purport to be exhaustive. There may be other risks and uncertainties, not presently known to us or that we currently deem to be immaterial, that could affect the performance of the business.

 

Going concern

The financial position of the Company, its cash flows, liquidity position and borrowing facilities, and its business activities, together with the factors likely to affect its future development, performance and position are set out in this Business Review and in the group's Annual report and accounts 2009 on pages 18 to 52. In addition, note 31 to the group's Annual report and accounts 2009 includes the Company's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk.

The Company has considerable financial resources together with long-term contracts with a number of customers and suppliers across different geographic areas and industries. As a consequence, the Directors believe that the Company is well placed to manage its business risks successfully.

The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

 

Outlook

In Engineering & Construction, we continue to bid actively for opportunities in our core markets of the Middle East and Africa and the Commonwealth of Independent States, particularly the Caspian region. Our near-term focus remains working towards conversion to the second phase of the South Yoloten project in Turkmenistan where we have recently submitted our technical and commercial proposals following our work on the first phase. In Iraq, we have commenced early stage engineering work for an International Oil Company which is expected to lead to a larger contract award during the second half of the year.

Our Offshore Engineering & Operations business development activities are focused on significant opportunities, both in the UK and internationally, which we are confident will lead to continued growth in the business.

In Engineering Services, we continue to experience weak activity levels and although the flow of enquiries is beginning to improve we do not expect to see a material improvement in the market until 2011. In Training Services we are seeing an improved performance in our core UK market, whereas performance in our international centres has been mixed. In Production Solutions, we were pleased to be awarded the Ticleni production enhancement contract in Romania in early July. This long-term contract gives us the opportunity to establish a track-record in the provision of our services on a commercial model which we believe will deliver increased value for both our customers and the group.

In Energy Developments, we expect to commence the development of the second phase of the Cendor field, offshore Malaysia, in the second half of this year.

We have achieved an order intake of approximately US$2 billion in the year to date, which, together with our healthy prospects list, gives us confidence that we will grow our backlog over the calendar year. Furthermore, we believe our strong operational performance will enable us to maintain our historical sector-leading net margins in Engineering & Construction over the medium-term.

Given our strong start to the year, we expect to deliver like-for-like1 net profit growth for the full year, excluding the gain on the EnQuest demerger, of around 20 per cent.

 

 

 

Rodney Chase Ayman Asfari

Chairman Group Chief Executive

 

1 Like-for-like net profit growth excludes the trading net profit from Energy Developments' demerged assets of US$12.7 million for the year ended 31 December 2009 and US$2.1 million for the year ending 31 December 2010.

 

INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT

For the six months ended 30 June 2010

 

				6 months ended		6 months ended		Year ended
				30 June		30 June		31 December
				2010		2009		2009
				Unaudited		Unaudited		Audited
	Notes			US$'000		US$'000		US$'000
Revenue	4			2,130,628		1,586,408		3,655,426
Cost of sales	5			(1,755,517)		(1,337,958)		(3,035,120)
Gross profit				375,111		248,450		620,306
Selling, general and administration expenses				(115,405)		(78,812)		(180,197)
Gain on EnQuest demerger	11			125,569		-		-
Other income				7,185		2,729		4,075
Other expenses				(4,319)		(1,666)		(2,998)
Profit from operations before tax
and finance income/(costs)				388,141		170,701		441,186
Finance costs				(4,580)		(3,586)		(5,582)
Finance income				5,049		7,210		11,942
Profit before tax				388,610		174,325		447,546
Income tax expense	6			(53,832)		(28,754)		(84,515)
Profit for the period				334,778		145,571		363,031
Attributable to:
Petrofac Limited shareholders				331,918		145,571		353,603
Non-controlling interests				2,860		-		9,428
				334,778		145,571		363,031
Earnings per share (US cents)	7
- Basic (excluding gain on EnQuest demerger)			60.90			43.22		104.78
- Diluted (excluding gain on EnQuest demerger)			60.14			42.70		103.19

 

- Basic (including gain on EnQuest demerger)		97.96		43.22		104.78
- Diluted (including gain on EnQuest demerger)		96.73		42.70		103.19

 

 

 

The attached notes 1 to 19 form part of these interim condensed consolidated financial statements.

 

 

 

INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ended 30 June 2010

 

			6 months ended		6 months ended		Year ended
			30 June		30 June		31 December
			2010		2009		2009
			Unaudited		Unaudited		Audited
			US$'000		US$'000		US$'000
Profit for the period			334,778		145,571		363,031
Foreign currency translation			(10,247)		15,249		15,087
Foreign currency translation recycled to income statement in the period on EnQuest demerger (note 11)			45,818		-		-
Net gains on maturity of cash flow hedges
recycled in the period			(14,409)		(6,732)		(4,303)
Net changes in fair value of derivatives and
financial assets designated as cash flow hedges			(35,470)		49,838		29,229
Disposal of available-for-sale financial assets			(74)		-		-
Other comprehensive (loss) income			(14,382)		58,355		40,013
Total comprehensive income for the period			320,396		203,926		403,044
Attributable to:
Petrofac Limited shareholders			322,917		203,926		389,416
Non-controlling interests			(2,521)		-		13,628
			320,396		203,926		403,044

 

 

 

 

 

 

The attached notes 1 to 19 form part of these interim condensed consolidated financial statements.

 

 

 

 

INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 30 June 2010

		30 June		30 June		31 December
		2010		2009		2009
		Unaudited		Unaudited		Audited
	Notes	US$'000		US$'000		US$'000
ASSETS
Non-current assets
Property, plant and equipment	9	286,631		599,724		677,996
Goodwill	12	105,189		96,668		97,922
Intangible assets	13	75,793		61,068		73,107
Investment in associates	10	716		-		-
Available-for-sale financial assets		-		537		539
Other financial assets	14	5,101		31,287		12,535
Deferred income tax assets		28,932		53,353		49,726
		502,362		842,637		911,825
Current assets
Inventories		6,007		5,665		9,798
Work in progress		868,294		437,461		333,698
Trade and other receivables		819,559		636,810		878,670
Due from related parties	19	292		2,805		18,260
Other financial assets	14	27,760		22,173		30,957
Cash and short-term deposits	15	1,074,853		900,177		1,417,363
		2,796,765		2,005,091		2,688,746
TOTAL ASSETS		3,299,127		2,847,728		3,600,571
EQUITY AND LIABILITIES
Equity attributable to Petrofac Limited shareholders
Share capital		6,912		8,636		8,638
Share premium		-		68,203		69,712
Capital redemption reserve		10,881		10,881		10,881
Shares to be issued		1,988		1,988		1,988
Treasury shares	16	(67,039)		(57,246)		(56,285)
Other reserves	17	4,508		24,417		21,194
Retained earnings		608,045		662,597		834,382
		565,295		719,476		890,510
Non-controlling interests		8,993		2,659		16,245
TOTAL EQUITY		574,288		722,135		906,755
Non-current liabilities
Interest-bearing loans and borrowings		51,074		86,345		59,195
Provisions		42,008		79,998		92,103
Other financial liabilities	14	31,546		11,317		27,485
Deferred income tax liabilities		53,789		33,398		42,192
		178,417		211,058		220,975
Current liabilities
Trade and other payables		871,130		530,995		967,791
Due to related parties	19	1,077		459		57,326
Interest-bearing loans and borrowings		63,157		26,265		58,071
Other financial liabilities	14	47,565		14,815		3,634
Income tax payable		97,593		115,372		88,219
Billings in excess of cost and estimated earnings		424,719		607,711		461,144
Accrued contract expenses		1,041,181		618,918		836,656
		2,546,422		1,914,535		2,472,841
TOTAL LIABILITIES		2,724,839		2,125,593		2,693,816
TOTAL EQUITY AND LIABILITIES		3,299,127		2,847,728		3,600,571

The attached notes 1 to 19 form part of these interim condensed consolidated financial statements.

INTERIM CONDENSED CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 30 June 2010

			6 months ended		6 months ended		Year ended
			30 June		30 June		31 December
			2010		2009		2009
			Unaudited		Unaudited		Audited
	Notes		US$'000		US$'000		US$'000
OPERATING ACTIVITIES
Profit before tax including gain on EnQuest demerger			388,610		174,325		447,546
Gain on EnQuest demerger			(125,569)		-		-
			263,041		174,325		447,546
Adjustments for:
Depreciation, amortisation, impairment and write-off			58,731		36,802		117,780
Share-based payments	16		6,538		6,111		13,263
Difference between other long-term employment benefits
paid and amounts recognised in the income statement			5,282		4,339		7,905
Net finance (income)			(469)		(3,624)		(6,360)
Gain (loss) on disposal of property, plant and equipment			(192)		100		(784)
Other non-cash items, net			11,586		5,559		(3,233)
Operating profit before working capital changes			344,517		223,612		576,117
Trade and other receivables			(24,936)		68,254		(176,773)
Work in progress			(534,596)		(184,766)		(81,003)
Due from related parties			17,968		102		(15,353)
Inventories			(1,787)		(1,588)		(5,721)
Other current financial assets			4,843		639		(4,775)
Trade and other payables			44,104		32,062		466,469
Billings in excess of cost and estimated earnings			(36,425)		322,184		175,617
Accrued contract expenses			204,525		67,057		284,795
Due to related parties			(56,249)		(100)		56,767
Other current financial liabilities			7,089		-		177
			(30,947)		527,456		1,276,317
Other non-current items, net			(9,786)		1,957		(58)
Cash (used in) / generated from operations			(40,733)		529,413		1,276,259
Interest paid			(941)		(2,276)		(3,351)
Income taxes paid, net			(47,167)		(35,247)		(87,714)
Net cash flows (used in) / from operating activities			(88,841)		491,890		1,185,194
INVESTING ACTIVITIES
Purchase of property, plant and equipment	9		(78,177)		(176,430)		(317,174)
Acquisition of subsidiaries, net of cash acquired			(15,290)		-		-
Purchase of other intangible assets			-		(1,127)		(10,375)
Purchase of intangible oil & gas assets	13		(4,778)		(20,290)		(29,230)
Cash outflow on EnQuest demerger (including transaction costs)	11		(17,783)		-		-
Proceeds from disposal of property, plant and equipment			987		358		1,333
Proceeds from disposal of available-for-sale financial assets			534		95		95
Purchase of available-for-sale financial assets			-		(103)		(106)
Interest received			3,914		7,263		12,158
Net cash flows used in investing activities			(110,593)		(190,234)		(343,299)

 

 

INTERIM CONDENSED CONSOLIDATED CASH FLOW STATEMENT

For the six months ended 30 June 2010 (continued)

 

				6 months ended		6 months ended		Year  ended
				30 June		30 June		31 December
				2010		2009		2009
				Unaudited		Unaudited		Audited
	Notes			US$'000		US$'000		US$'000
FINANCING ACTIVITIES
Repayment of interest-bearing loans and borrowings				(5,900)		(5,000)		(9,958)
(Payment to) / proceeds from non-controlling interest				(4,731)		-		2,408
Treasury shares purchased		16		(37,016)		-		-
Equity dividends paid				(84,548)		(61,756)		(98,995)
Net cash flows used in financing activities				(132,195)		(66,756)		(106,545)
NET (DECREASE) / INCREASE IN CASH AND CASH
EQUIVALENTS				(331,629)		234,900		735,350
Net foreign exchange difference on cash and cash equivalents				(13,480)		139		6,235
Cash and cash equivalents at 1 January				1,390,744		649,159		649,159
CASH AND CASH EQUIVALENTS AT PERIOD END		15		1,045,635		884,198		1,390,744

 

 

The attached notes 1 to 19 form part of these interim condensed consolidated financial statements.

 

 

 

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN ENQUITY

For the six months ended 30 June 2010

 

	Attributable to Petrofac Limited Shareholders
	Issued		Capital						Non-
	share	Share	redemption	Shares to	\* Treasury	Other	Retained		controlling	Total
	capital	premium	reserve	be issued	shares	reserves	earnings	Total	interests	equity
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
					(note 16)	(note 17)
For the six months ended 30 June 2010
Balance at 1 January 2010	8,638	69,712	10,881	1,988	(56,285)	21,194	834,382	890,510	16,245	906,755
Net profit for the period	-	-	-	-	-	-	331,918	331,918	2,860	334,778
Other comprehensive income	-	-	-	-	-	(9,001)	-	(9,001)	(5,381)	(14,382)
Total comprehensive income	-	-	-	-	-	(9,001)	331,918	322,917	(2,521)	320,396
Share-based payments charge (note 16)	-	-	-	-	-	6,538	-	6,538	-	6,538
Shares vested during the period (note 16)	-	-	-	-	26,262	(24,895)	(1,367)	-	-	-
Transfer to reserve for share-based payments (note 16)	-	-	-	-	-	12,750	-	12,750	-	12,750
Deferred tax on share-based payment reserve	-	-	-	-	-	(2,078)	-	(2,078)	-	(2,078)
Treasury shares purchased (note 16)	-	-	-	-	(37,016)	-	-	(37,016)	-	(37,016)
Shares issued on acquisition	2	1,460	-	-	-	-	-	1,462	-	1,462
Dividends (note 8)	-	-	-	-	-	-	(85,291)	(85,291)	-	(85,291)
EnQuest demerger share split and redemption (note 11)	(1,728)	-	-	-	-	-	1,728	-	-	-
Distribution on Enquest de-merger (note 11)	-	(71,172)	-	-	-	-	(473,325)	(544,497)	-	(544,497)
Payment to non-controlling interest	-	-	-	-	-	-	-	-	(4,731)	(4,731)
Balance at 30 June 2010 (unaudited)	6,912	-	10,881	1,988	(67,039)	4,508	608,045	565,295	8,993	574,288

 

	Attributable to Petrofac Limited Shareholders
	Issued		Capital						Non-
	share	Share	redemption	Shares to	\* Treasury	Other	Retained		controlling	Total
	capital	premium	reserve	be issued	shares	reserves	earnings	Total	interests	equity
	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000	US$'000
					(note 16)	(note 17)
For the six months ended 30 June 2009
Balance at 1 January 2009	8,636	68,203	10,881	1,988	(69,333)	(39,292)	577,739	558,822	209	559,031
Net profit for the period	-	-	-	-	-	-	145,571	145,571	-	145,571
Other comprehensive income	-	-	-	-	-	58,355	-	58,355	-	58,355
Total comprehensive income	-	-	-	-	-	58,355	145,571	203,926	-	203,926
Share-based payments charge (note 16)	-	-	-	-	-	6,111	-	6,111	-	6,111
Shares vested during the period (note 16)	-	-	-	-	12,087	(11,706)	(381)	-	-	-
Transfer to reserve for share-based payments (note 16)	-	-	-	-	-	10,949	-	10,949	-	10,949
Dividends (note 8)	-	-	-	-	-	-	(60,332)	(60,332)	-	(60,332)
Movement in non-controlling interest	-	-	-	-	-	-	-	-	2,450	2,450
Balance at 30 June 2009 (unaudited)	8,636	68,203	10,881	1,988	(57,246)	24,417	662,597	719,476	2,659	722,135

 

*Shares held by Petrofac Employee Benefit Trust.