Petrofac slumps on profits warning

An unexpected profits warning from Petrofac on Friday wiped more than $700 million (£415.08 million) off the value of the company, as investors sold the oil and gas services group's stock.

Petrofac said it now expected its profit for 2014 to come in at between $580 million and $600 million, well below the previous target of around $650 million, which would in itself have represented almost no growth on 2013's performance.

The company blamed the setback on a range of operational difficulties at projects in several different areas, with delays and production disappointments experienced in locations including the North Sea and Romania. Further problems in Nigeria have also knocked the company.

However, the business's difficulties are characteristic of the oil and gas services sector, which is coming under increasing pressure from its customers - the big oil majors are seeking to cut costs in the face of a flat oil price and are seeking to pass some of the pain on to companies such as Petrofac.

The biggest problems are in Petrofac’s flagship Integrated Energy Services (IES) division which continues to disappoint.

Its Greater Stella Area project in the North Sea has seen development delays while its Ticleni site in Romania has generated lower than hoped for production.

Other parts of the business, particularly the Engineering, Construction, Operations & Maintenance (ECOM) division are performing more strongly.

The company promised on Friday to refocus the IES unit. "We have stepped back from certain business development opportunities and, going forward, we will prioritise IES opportunities which best lever our existing core areas of strength, which offer clear synergies with ECOM, and which deliver attractive returns on capital employed," it said.

Petrofac shares fell almost 16% to 1,172p in early trading.

Change of fortune

The profits warning took investors by surprise and represents further bad news for a business that had been performing very strongly until relatively recently. "The warning was very unexpected and may lead to a risk on its dividend," said Beaufort Securities analyst Basil Petrides.

Petrofac's long-time target has been to double its net income for 2010 by 2015 but last autumn the company began to strike a more cautious tone as the market outlook become more challenging.

Petrofac's chief executive Ayman Asfari warned earlier this year that the oil majors were forcing oil and gas services companies to accept more risk, as they sought to reduce delays on major projects and to save money against the lacklustre oil price backdrop.

The company's IES division is a good example: it takes equity stakes in oil fields, investing alongside the oil producers, and typically earns money on the basis of how many barrels of oil are extracted from the ground.

Petrofac had high hopes for IES, but these have so far failed to come to fruition and the company said on Friday that it was cutting spending at the unit. The company now insists the business will not be cash absorbent from 2015 onwards - investors will want to see speedy progress towards that goal.