Final Results - Part 3
Petrofac Limited
10 March 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
At 31 December 2007
7 EARNINGS PER SHARE
Basic earnings per share amounts are calculated by dividing the net profit for
the year attributable to ordinary shareholders by the weighted average number of
ordinary shares outstanding during the year.
Diluted earnings per share amounts are calculated by dividing the net profit
attributable to ordinary shareholders, after adjusting for any dilutive effect,
by the weighted average number of ordinary shares outstanding during the year,
adjusted for the effects of ordinary shares granted under the employee share
award schemes which are held in trust.
The following reflects the income and share data used in calculating basic and
diluted earnings per share:
2007 2006
US$'000 US$'000
Net profit attributable to ordinary shareholders for basic and
diluted earnings per share 188,716 120,332
=====================
2007 2006
Number Number
'000 '000
Weighted average number of ordinary shares for basic earnings
per share 345,421 344,003
Weighted average number of ordinary shares granted under
share-based payment schemes held as treasury shares 3,175 1,117
----------------------
Adjusted weighted average number of ordinary shares for
diluted earnings per share 348,596 345,120
======================
8 DIVIDENDS PAID AND PROPOSED
2007 2006
US$'000 US$'000
Declared and paid during the year
Equity dividends on ordinary shares:
Final dividend for 2005: 1.87 cents per share - 6,425
Interim dividend 2006: 2.40 cents per share - 8,249
Final dividend for 2006: 6.43 cents per share 22,018 -
Interim dividend 2007: 4.90 cents per share 16,756 -
------------------------
38,774 14,674
========================
2007 2006
US$'000 US$'000
Proposed for approval at AGM
(not recognised as a liability as at 31 December)
Equity dividends on ordinary shares
Final dividend for 2007: 11.50 cents per share (2006: 6.43
cents per share) 39,725 22,228
=======================
9 PROPERTY, PLANT AND EQUIPMENT
Land,
buildings Office
Oil & and furniture Capital
gas Oil & gas leasehold Plant and and work in
assets facilities improvements equipment Vehicles equipment progress Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Cost
At 1 January
2006 11,232 124,591 19,283 21,657 12,994 19,486 - 209,243
Additions 17,548 149 7,258 10,130 1,127 14,160 9,075 59,447
Acquisition of
subsidiaries - - - 43 - - - 43
Disposals - - (6,652) (11,618) (7,522) (868) - (26,660)
Exchange
difference - - 1,573 774 85 1,667 - 4,099
--------------------------------------------------------------------------------
At 1 January
2007 28,780 124,740 21,462 20,986 6,684 34,445 9,075 246,172
Additions 65,078 631 1,170 6,604 1,092 20,593 21,989 117,157
Acquisition of
subsidiaries - - - - - 47 - 47
Transfer from
intangible
oil & gas assets
(note 12) 41,657 - - - - - - 41,657
Disposals - - (1,642) (4,514) (3,378) (2,187) - (11,721)
Exchange
difference - - 257 (520) 45 522 - 304
--------------------------------------------------------------------------------
At 31 December
2007 135,515 125,371 21,247 22,556 4,443 53,420 31,064 393,616
--------------------------------------------------------------------------------
Depreciation
At 1 January
2006 - (46,880) (7,472) (16,505) (7,094) (10,861) - (88,812)
Charge for the
year (802) (13,289) (2,695) (1,659) (2,781) (6,896) - (28,122)
Disposals - - 6,167 3,504 5,148 699 - 15,518
Exchange
difference - - (288) (502) (63) (727) - (1,580)
---------------------------------------------------------------------------------
At 1 January
2007 (802) (60,169) (4,288) (15,162) (4,790) (17,785) - (102,996)
Charge for the
year (8,072) (13,491) (1,321) (1,277) (1,676) (16,464) - (42,301)
Disposals - - 1,568 1,637 3,030 2,154 - 8,389
Exchange
difference - - (19) (247) (31) (174) - (471)
---------------------------------------------------------------------------------
At 31 December
2007 (8,874) (73,660) (4,060) (15,049) (3,467) (32,269) - (137,379)
---------------------------------------------------------------------------------
Net carrying
amount:
At 31 December
2007 126,641 51,711 17,187 7,507 976 21,151 31,064 256,237
=================================================================================
At 31 December
2006 27,978 64,571 17,174 5,824 1,894 16,660 9,075 143,176
=================================================================================
No interest has been capitalised within oil & gas facilities during the year
(2006: nil) and the accumulated capitalised interest, net of depreciation at 31
December 2007, was US$1,929,000 (2006: US$2,427,000).
Included in oil & gas assets is US$1,604,000 (2006: US$990,000) of capitalised
decommissioning costs provided on the PM304 asset in Malaysia.
On 22 February 2007, the group completed the acquisition of a 45% interest in
the Chergui gas concession in Tunisia, for a final cash consideration of
US$31,393,000 including transaction costs, which, after including advance
capital expenditures paid on behalf of the vendor of US$2,846,000, brought the
total consideration to US$34,239,000. Of the total initial consideration,
US$31,393,000 has been recognised during the year as additions to property,
plant and equipment and further post acquisition capital expenditure of
US$22,693,000 was incurred during the year.
Of the total charge for depreciation in the income statement, US$37,759,000
(2006: US$24,810,000) is included in cost of sales and US$4,542,000 (2006:
US$3,312,000) in selling, general and administration expenses.
Capital work in progress comprises of expenditures incurred on the construction
of a new office building in Sharjah, United Arab Emirates.
10 BUSINESS COMBINATIONS
Acquisitions in 2007
SPD Group Limited
On 16 January 2007, the group acquired a 51% interest in the share capital of
SPD Group Limited (SPD), a specialist provider of well operations services. The
consideration for the acquisition of the 51% interest inclusive of transaction
costs of US$172,000, was US$7,872,000. Consideration of US$7,700,000 (excluding
transaction costs) was settled by a cash payment of US$3,935,000, issuance of
loan notes payable of US$1,765,000 and the balance of US$2,000,000 by issuance
of 274,938 new ordinary shares of the Company at market value on 19 January 2007
to the vendor over three years in equal instalments on the anniversary of the
transaction. On 27 December 2007, the outstanding loan notes of US$1,765,000
were repaid to the vendors.
The terms of the sale and purchase agreement for the remaining 49% interest in
the share capital of SPD which convey call option rights on the acquirer and
minority share holder put option rights over these shares and the respective
rights to dividends and share of profits of the two parties are such that this
transaction has been accounted for as a 100% acquisition of the business by the
group. The discounted deferred consideration for the remaining 49% of the share
capital of SPD was originally estimated at US$12,025,000 based on the discounted
value of an agreed multiple of the future earnings of SPD and this has been
reassessed and maintained as an appropriate year end fair value and a charge of
US$1,455,000 for the unwinding of interest has been reflected in the income
statement as an interest expense (see note 5). The total consideration for the
100% interest therefore, including transaction costs, amounted to US$19,897,000.
The 100% fair values of the identifiable assets and liabilities of SPD on
completion of the acquisition are analysed below:
Recognised
on Carrying
acquisition value
US$'000 US$'000
Property, plant and equipment 47 47
Intangible assets 2,369 -
Trade and other receivables 5,498 5,498
Cash and short-term deposits 970 970
------------------------
Total assets 8,884 6,515
------------------------
Less:
Trade and other payables (3,210) (3,210)
Income tax payable (10) (10)
-------------------------
Total liabilities (3,220) (3,220)
-------------------------
Fair value of net assets acquired 5,664 3,295
======
Goodwill arising on acquisition 14,233
----------
Consideration 19,897
==========
Cash outflow on acquisition:
Cash acquired with subsidiary 970
Cash paid on acquisition (3,935)
Legal and professional expenses paid on acquisition (172)
Loan notes repaid (1,765)
--------
Net cash outflow on the acquisition of subsidiary (4,902)
========
Intangible assets recognised on acquisition comprise customer contracts which
are being amortised over their remaining economic useful lives on a
straight-line basis.
The residual goodwill above comprises the fair value of expected future
synergies and business opportunities arising from the integration of the
business in to the group.
From the date of acquisition, SPD has contributed a profit of US$391,000 to the
net profit of the group.
Acquisitions in 2006
PPS Process Control and Instrumentation Services Limited
On 28 April 2006, the group acquired a 100% interest in the share capital of PPS
Process Control and Instrumentation Services Limited (subsequently renamed, and
hereafter referred to as, Petrofac (Cyprus) Limited), a company incorporated in
Cyprus which is also the holding company of the subsidiaries listed below. The
Petrofac (Cyprus) Limited subsidiaries provide operations and maintenance
training on Sakhalin Island, Russia, and process control and instrumentation
services in Singapore, Malaysia and Indonesia. The total consideration for the
acquisition inclusive of transaction costs of US$211,000 and earn-out provision
of US$189,000 was US$2,000,000 and the carrying value of the net assets acquired
was US$1,332,000. The consideration of US$1,600,000 (excluding transaction costs
and earn-out provision) was settled by a cash payment of US$527,000 and the
extinguishment of receivables due from the vendor of US$1,073,000. During 2007 a
deferred consideration payment of US$64,000 was made to the vendors.
The residual goodwill of US$668,000 comprises the fair value of expected
synergies in the group's Training business arising from the acquisition.
Petrofac (Malaysia-PM304) Limited
During 2006, contingent consideration of US$4,450,000 was paid in respect of the
acquisition of 100% of the issued and outstanding shares of Petrofac
(Malaysia-PM304) Limited (formally Amerada Hess (Malaysia-PM304) Limited), which
the group acquired on 16 June 2004. Petrofac (Malaysia-PM304) Limited held a
40.5% interest in a Production Sharing Contract (PSC) in Block PM304 and under
pre-emption rights contained within the PSC, Petrofac (Malaysia-PM304) Limited
sold a 10.5% interest in the PSC to one of the partners in the PSC on the same
commercial terms and conditions of the acquisition and received US$1,154,000 as
contingent consideration in 2006. The net cash outflow of these related
transactions amounting to US$3,296,000 is shown in the consolidated cash flow
statement within the acquisition of subsidiaries line.
11 GOODWILL
A summary of the movements in goodwill is presented below:
2007 2006
US$'000 US$'000
At 1 January 56,732 49,183
Acquisitions during the year (note 10) 14,233 668
Exchange difference 778 6,881
----------------------
At 31 December 71,743 56,732
======================
Goodwill acquired through business combinations has been allocated to three
groups of cash-generating units, which are reportable segments, for impairment
testing as follows:
• Facilities Management (comprising Petrofac Facilities Management, Plant
Asset Management and SPD)
• Training (comprising Petrofac Training and PPS Process Control &
Instrumentation)
• Energy Developments (comprising Petrofac Energy Developments
International Limited)
These represent the lowest level within the group at which the goodwill is
monitored for internal management purposes.
Facilities Management and Training cash-generating units
The recoverable amounts for the Facilities Management and Training units have
been determined based on value in use calculations, using discounted pre-tax
cash flow projections. Management has adopted a ten year projection period to
assess each unit's value in use as it considers the life of the goodwill for
both the Facilities Management and Training cash-generating units to
significantly exceed the five year impairment test period referred to in IAS 36.
The cash flow projections are based on financial budgets approved by senior
management covering a five year period, extrapolated, thereafter at a growth
rate of 5% per annum. Management considers this is a conservative long-term
growth rate relative to both the economic outlook for the units in their
respective markets within the oil & gas industry and the growth rates
experienced in the recent past by each unit.
Energy Developments cash-generating unit
The recoverable amount of the Energy Developments unit is also determined on a
value in use calculation using discounted pre-tax cash flow projections based on
financial budgets and economic parameters for the unit approved by senior
management and covering a five year period, as referred to in IAS 36.
Carrying amount of goodwill allocated to each group of cash-generating units
2007 2006
US$'000 US$'000
Facilities Management unit 44,769 30,091
Training unit 24,757 24,424
Energy Developments unit 2,217 2,217
---------------------
71,743 56,732
=====================
Key assumptions used in value in use calculations
The calculation of value in use for both the Facilities Management and Training
units is most sensitive to the following assumptions:
Market share: the assumption relating to market share for the Facilities
Management unit is based on the unit re-securing those existing customer
contracts in the UK which are due to expire during the projection period; for
the Training unit, the key assumptions relate to management's assessment of
maintaining the unit's market share in the UK and developing further the
business in international markets.
Growth rate: estimates are based on management's assessment of market share
having regard to macro-economic factors and the growth rates experienced in the
recent past by each unit. A growth rate of 5% per annum has been applied for the
remaining five years of the ten year projection period.
Net profit margins: estimates are based on management's assumption of achieving
a level of performance at least in line with the recent past performance of each
of the units.
Discount rate: management has used a pre-tax discount rate of 9.8% (2006: 8.0%)
per annum which is derived from the estimated weighted average cost of capital
of the group. This discount rate has been calculated using an estimated risk
free rate of return adjusted for the group's estimated equity market risk
premium and the group's cost of debt.
The calculation of value in use for the Energy Developments unit is most
sensitive to the following assumptions:
Financial returns: estimates are based on the unit achieving returns on existing
investments (comprising both those that are currently cash flowing and those
which are in development and which may therefore be consuming cash) at least in
line with current forecast income and cost budgets during the planning period.
Discount rate: management has used an estimate of the pre-tax weighted average
cost of capital of the group plus a risk premium to reflect the particular risk
characteristics of each individual investment. The discount rate used for 2007
was 10% for each asset (2006: 10% to 15%).
Oil prices: management has used a prudent oil price assumption of US$55 (2006:
US$40) per barrel for the impairment testing of its individual oil & gas
investments.
Reserve volumes and production profiles: management has used its internally
developed economic models of reserves and production as a basis of calculating
value in use.
Sensitivity to changes in assumptions
With regard to the assessment of value in use of the cash generating units,
management believes that no reasonably possible change in any of the above key
assumptions would cause the carrying value of the relevant unit to exceed its
recoverable amount, after giving due consideration to the macro-economic outlook
for the oil & gas industry and the commercial arrangements with customers
underpinning the cash flow forecasts for each of the units.
12 INTANGIBLE ASSETS
2007 2006
US$'000 US$'000
Intangible oil & gas assets
Cost:
At 1 January 16,788 2,982
Additions 49,700 12,926
Disposals (8,793) -
Transferred to tangible oil & gas assets (note 9) (41,657) -
Exchange difference (111) 880
-----------------------
At 31 December 15,927 16,788
-----------------------
Accumulated impairment:
At 1 January - -
Impairment (8,686) -
------------------------
At 31 December (8,686) -
------------------------
Net book value of intangible oil & gas assets at 31 December 7,241 16,788
------------------------
Other intangible assets
Cost:
At 1 January 1,561 -
Additions (note 10) 2,369 1,561
-----------------------
At 31 December 3,930 1,561
-----------------------
Accumulated amortisation:
At 1 January (390) -
Amortisation (1,771) (390)
-----------------------
At 31 December (2,161) (390)
-----------------------
Net book value of other intangible assets at 31 December 1,769 1,171
-----------------------
Total intangible assets 9,010 17,959
=======================
Intangible oil & gas assets
On 29 May 2007, the group entered into a farm-in arrangement to acquire a 10%
interest in Permit NT/P68 300km north- north-west of Darwin in Australian waters
and an option to acquire an interest in any LNG or methanol project in Tassie
Shoal that results from this investment. The terms of the farm-in require the
group to fund two appraisal wells to a cap of US$13,200,000 and US$12,500,000
respectively. This was subject to an option to terminate the agreement within
sixty hours of the decision by the parties to the farm-in arrangement to plug
and abandon the primary well. As at 31 December 2007 the group had incurred well
appraisal costs of US$15,927,000 on the primary well and exercised its option to
enter the second well appraisal programme on 24 January 2008. However due to
continuing uncertainties surrounding the commercial outcome of this project an
impairment provision of US$8,686,000 has been made against this asset at 31
December 2007.
On 27 August 2007, the group entered in to an exchange agreement whereby it
swapped its 29% interest in the Crawford field with a carrying value of
US$8,793,000 for a 3.12% interest in the 211/18a Block in West Don (equating to
a unit interest of 2%) for nil consideration.
Included in oil & gas asset additions above are US$32,673,000 of pre-development
capital expenditure incurred during the year on the group's Don assets. Other
intangible oil & gas additions relate to the acquisition of interests in fields.
Transfers to tangible oil & gas assets relate to the group's Don interests which
are now considered to be a part of a commercial development (note 9).
There were investing cash outflows relating to capitalised intangible oil & gas
assets of US$48,604,000 (2006: US$6,187,000) in the current period arising from
pre-development activities pertaining to the Don and NT/P68 interests. As at 31
December 2007 there were cash and deposits of US$3,582,000 (2006: nil), trade
and other receivables of US$3,106,000 (2006: nil) and trade and other payables
of US$4,840,000 (2006: nil) arising from pre-development activities in the
current period.
Other intangible assets
Other intangible assets comprise the fair values of customer contracts arising
on acquisition (note 10). Customer contracts
are being amortised over their remaining estimated economic useful life of three
years on a straight-line basis and the related amortisation charge included in
selling, general and administrative expenses (note 4e).
13 INTEREST IN JOINT VENTURES
In the normal course of business, the group establishes jointly controlled
entities and operations for the execution of certain of its operations and
contracts. A list of these joint ventures is disclosed in note 32. The group's
share of assets, liabilities, revenues and expenses relating to jointly
controlled entities and operations are as follows:
2007 2006
US$'000 US$'000
Revenue 37,140 92,800
Cost of sales (10,990) (71,103)
-----------------------
Gross profit 26,150 21,697
Selling, general and administration expenses (1,246) (1,140)
Finance income, net 42 45
-----------------------
Profit before income tax 24,946 20,602
Income tax (819) (616)
-----------------------
Net profit 24,127 19,986
=======================
Current assets 46,991 63,009
Non-current assets 3,883 4,459
-----------------------
Total assets 50,874 67,468
-----------------------
Current liabilities 12,667 40,993
Non-current liabilities 323 299
-----------------------
Total liabilities 12,990 41,292
-----------------------
Net assets 37,884 26,176
=======================
14 AVAILABLE-FOR-SALE FINANCIAL ASSETS
2007 2006
US$'000 US$'000
Shares - listed 1,022 1,212
Units in a mutual fund 564 514
----------------------
1,586 1,726
======================
Available-for-sale financial assets consist of investments in the ordinary
shares of quoted companies and units in a mutual fund and therefore have no
fixed maturity date or coupon rate.
15 DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER FINANCIAL ASSETS
2007 2006
US$'000 US$'000
Non-current
Fair value of derivative instruments (note 31) 1,775 1,925
======================
Other financial assets 23 22
======================
Current
Fair value of derivative instruments (note 31) 27,298 7,483
======================
Other financial assets
Interest receivable 1,351 1,479
Restricted cash 1,351 883
Short-term notes receivable from shareholders - 216
Other - 72
----------------------
2,702 2,650
======================
Restricted cash is comprised of deposits with financial institutions securing
various guarantees and performance bonds associated with the group's trading
activities.
16 INVENTORIES
2007 2006
US$'000 US$'000
Crude oil 1,173 763
Processed hydrocarbons 18 227
Stores and spares 732 697
Raw materials 333 256
----------------------
2,256 1,943
======================
Included in the income statement are costs of inventories expensed of
US$23,528,000 (2006: US$7,535,000).
17 WORK IN PROGRESS AND BILLINGS IN EXCESS OF COST AND ESTIMATED EARNINGS
2007 2006
US$'000 US$'000
Cost and estimated earnings 2,194,088 1,714,647
Less: billings (1,923,907) (1,346,778)
--------------------------
Work in progress 270,181 367,869
==========================
Billings 1,114,500 359,079
Less: cost and estimated earnings (906,395) (234,089)
--------------------------
Billings in excess of cost and estimated earnings 208,105 124,990
==========================
Total cost and estimated earnings 3,100,483 1,948,736
==========================
Total billings 3,038,407 1,705,857
==========================
18 TRADE AND OTHER RECEIVABLES
2007 2006
US$'000 US$'000
Trade receivables 453,256 293,803
Retentions receivable 3,450 4,591
Advances 19,154 10,754
Prepayments and deposits 19,450 12,323
Other receivables 13,715 9,044
----------------------
509,025 330,515
======================
Trade receivables are non-interest bearing and are generally on 30 to 60 days'
terms. Trade receivables are reported net of provision for impairment. The
movements in the provision for impairment against trade receivables totalling
US$453,256,000 (2006: US$293,803,000) are as follows:
2007 2006
Specific General Specific General
impairment impairment Total impairment impairment Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
At 1 January 5,073 364 5,437 3,736 107 3,843
Charge for the year 2,948 849 3,797 1,956 245 2,201
Amounts written off (3,555) - (3,555) - - -
Unused amounts reversed (382) - (382) (640) - (640)
Exchange difference 2 3 5 21 12 33
-------------------------------------------------------------
At 31 December 4,086 1,216 5,302 5,073 364 5,437
=============================================================
At 31 December, the analysis of trade receivables is as follows:
Neither Number of days past due
past
due nor
impaired < 30 30-60 60-90 90-120 120-360 > 360
days days days days days days Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Unimpaired 88,788 240,033 84,184 20,148 5,044 8,273 876 447,346
Impaired - 162 745 1,865 1,772 4,653 2,015 11,212
------------------------------------------------------------------
88,788 240,195 84,929 22,013 6,816 12,926 2,891 458,558
Less: impairment
provision - (162) (745) (222) (947) (2,040) (1,186) (5,302)
------------------------------------------------------------------
Net trade receivables
2007 88,788 240,033 84,184 21,791 5,869 10,886 1,705 453,256
==================================================================
Unimpaired 85,395 161,406 35,734 5,193 1,419 2,946 1,140 293,233
Impaired - 604 3,194 - 406 874 929 6,007
------------------------------------------------------------------
85,395 162,010 38,928 5,193 1,825 3,820 2,069 299,240
Less: impairment
provision - (604) (3,194) - (67) (446) (1,126) (5,437)
------------------------------------------------------------------
Net trade receivables
2006 85,395 161,406 35,734 5,193 1,758 3,374 943 293,803
==================================================================
The credit quality of trade receivables that are neither past due nor impaired
is assessed by management with reference to externally prepared customer credit
reports and the historic payment track records of the counterparties.
Advances represent payments made to certain of the group's sub-contractors for
projects in progress, on which the related work had not been performed at the
balance sheet date.
All trade and other receivables are expected to be settled in cash.
Certain trade and other receivables will be settled in cash using currencies
other than the reporting currency of the group, and will be largely paid in
Sterling and Kuwaiti Dinars.
19 CASH AND SHORT-TERM DEPOSITS
2007 2006
US$'000 US$'000
Cash at bank and in hand 106,454 120,003
Short-term deposits 475,098 337,845
-----------------------
Total cash and bank balances 581,552 457,848
=======================
Cash at bank earns interest at floating rates based on daily bank deposit rates.
Short-term deposits are made for varying periods of between one day and one
month depending on the immediate cash requirements of the group, and earn
interest at respective short-term deposit rates. The fair value of cash and bank
balances is US$581,552,000 (2006: US$457,848,000).
For the purposes of the cash flow statement, cash and cash equivalents comprise
the following:
2007 2006
US$'000 US$'000
Cash at bank and in hand 106,454 120,003
Short-term deposits 475,098 337,845
Bank overdrafts (note 24) (15,666) (20,442)
-----------------------
565,886 437,406
=======================
20 SHARE CAPITAL
The share capital of the Company as at 31 December was as follows:
2007 2006
US$'000 US$'000
Authorised
750,000,000 ordinary shares of US$0.025 each
(2006: 750,000,000 ordinary shares of US$0.025 each) 18,750 18,750
=======================
Issued and fully paid
345,434,858 ordinary shares of US$0.025 each
(2006: 345,159,920 ordinary shares of US$0.025 each) 8,636 8,629
=======================
The movement in the number of issued and fully paid ordinary shares is as
follows:
Number
Ordinary shares:
Ordinary shares of US$0.025 each at 1 January 2006 345,159,920
Movement during the year -
-----------
Ordinary shares of US$0.025 each at 1 January 2007 345,159,920
Issued during the year on acquisition of a subsidiary (note 10) 274,938
-----------
Ordinary shares of US$0.025 each at 31 December 2007 345,434,858
===========
21 TREASURY SHARES
For the purpose of making awards under its employee share schemes, the Company
acquires its own shares which are held by the Petrofac Employee Benefit Trust.
In addition at 31 December 2007, Petrofac ESOP held 40,000 ordinary shares
(2006: 40,000) of US$0.025 each in the Company with a carrying value of
US$17,000 (2006: US$17,000). All these shares have been classified in the
balance sheet as treasury shares within equity.
The movements in total treasury shares are shown below:
2007 2006
Number US$'000 Number US$'000
At 1 January 1,500,135 8,144 40,000 17
Acquired during the year 2,551,889 21,698 1,460,135 8,127
------------------------------------------
At 31 December 4,052,024 29,842 1,500,135 8,144
==========================================
22 SHARE-BASED PAYMENT PLANS
Performance Share Plan (PSP)
Under the Performance Share Plan of the Company, share awards are granted to
executive Directors and a restricted number of other senior executives of the
group. The shares cliff vest at the end of three years subject to continued
employment and the achievement of certain pre-defined non-market and market
based performance conditions. The non-market based condition governing the
vesting of 50% of the total award, is subject to achieving between 15% and 25%
earning per share (EPS) growth targets over a three year period. The fair values
of the equity-settled award relating to the EPS part of the scheme are estimated
based on the quoted closing market price per Company share at the date of grant
with an assumed vesting rate per annum built into the calculation (subsequently
trued up at year end based on the actual leaver rate during the period from
award date to year end) over the three year vesting period of the plan. The fair
value and assumed vesting rates of the EPS part of the scheme are shown below:
Fair Trued up
value vesting
per rate
share
2007 award 415p 98.6%
2006 award 353p 97.7%
The remaining 50% market performance based part of these awards is dependent on
the total shareholder return (TSR) of the group compared to an index composed of
selected relevant companies. The fair value of the shares vesting under this
portion of the award is determined by an independent valuer using a Monte Carlo
simulation model taking into account the terms and conditions of the plan rules
and using the following assumptions at the date of grant:
2007 2006
award award
Expected share price volatility 29.0% 28.0%
(based on median of comparator group's three year
volatilities)
Share price correlation with comparator group 17.0% 10.0%
Risk-free interest rate 5.2% 4.6%
Expected life of share award 3 years 3 years
Fair value of TSR portion 245p 234p
The number of ordinary shares awarded in the year in relation to the PSP was
449,537 (2006: 431,194). 864,181 (2006: 431,194) of the 2006 and 2007 awards
were still outstanding but not exercisable at 31 December 2007. The charge
recognised in the current year amounted to US$1,497,000 (2006: US$536,000).
Deferred Bonus Share Plan (DBSP)
Executive Directors and selected employees are eligible to participate in this
scheme although the Remuneration Committee decided during 2007 that executive
Directors should no longer participate. Participants may be invited to elect or
in some cases, be required, to receive a proportion of any bonus in ordinary
shares of the Company ("Invested Awards"). Following such award, the Company
will generally grant the participant an additional award over a number of shares
bearing a specified ratio to the number of his or her invested shares ("Matching
Shares"). The 2006 awards vest on the third anniversary of the grant date
provided that the participant did not leave the group's employment, subject to a
limited number of exceptions. However, a change in the rules of the DBSP scheme
was approved by shareholders at the Annual General Meeting of the Company on 11
May 2007 such that for the March 2007 share awards and for any awards made
thereafter, the invested and matching shares would, unless the Remuneration
Committee of the Board of Directors determined otherwise, vest 33.33% on the
first anniversary of the date of grant, a further 33.33% after year two and the
final 33.34% of the award after the end of year three.
At the year end the values of the bonuses settled by shares cannot be determined
until all employees have confirmed the voluntary portion of their bonus they
wish to be settled by shares rather than cash and until the Remuneration
Committee has approved the mandatory portion of the employee bonuses to be
settled in shares. Once the voluntary and mandatory portions of the bonus to be
settled in shares are determined, the final bonus liability to be settled in
shares is transferred to the reserve for share-based payments. The costs
relating to the matching shares are recognised over the relevant vesting period
and the fair values of the equity-settled matching shares granted to employees
are based on the quoted closing market price at the date of grant adjusted for
the trued up percentage vesting rate of the plan. For details of the fair values
and assumed vesting rates of the DBSP scheme see table below:
Weighted Trued up
average vesting
fair rate
value
per
share
2007 awards 415p 94.7%
2006 awards 353p 92.4%
During the year 791,083 (2006: 597,167) Invested Awards and 791,083 (2006:
548,214) Matching Shares were granted to the participants in the scheme and
1,058,413 of the original 2006 awards and 1,500,298 of the 2007 awards (2006
awards: 1,104,503) were outstanding but not exercisable at 31 December 2007. The
charge recognised in the 2007 income statement in relation to matching share
awards amounted to US$2,393,000 in respect of 2007 awards and US$1,018,000 in
respect of the second year of the 2006 awards (2006 year one awards charge:
US$666,000).
Share Incentive Plan (SIP)
All UK employees, including UK resident Directors, are eligible to participate
in the scheme. Employees may invest up to GBP1,500 per tax year of gross salary
(or, if less, 10% of salary) to purchase ordinary shares in the Company. There
is no holding period for these shares.
Restricted Share Plan (RSP)
Under the Restricted Share Plan scheme, employees are granted shares in the
Company over a discretionary vesting period which may or may not be, at the
direction of the Remuneration Committee of the Board of Directors, subject to
the satisfaction of performance conditions. At present there are no performance
conditions applying to this scheme nor is there currently any intention to
introduce them in the future. The fair values of the awards granted under the
plan at various grant dates during the year are based on the quoted market price
at the date of grant adjusted for an assumed vesting rate over the relevant
vesting period. For details of the fair values and assumed vesting rate of the
RSP scheme, see table below:
Weighted Trued up
average vesting
fair rate
value
per
share
2007 awards 456p 100.0%
2006 awards 278p 96.3%
The Company awarded 239,567 (2006: 161,101) shares to participants in the scheme
during the year and recognised a charge of US$504,000 in the current year income
statement (2006: US$79,000). At 31 December 2007, there were 394,216 (2006:
161,101) share awards outstanding but not exercisable.
The group has recognised a total charge of US$5,412,000 (2006: US$1,281,000) in
the income statement during the year relating to the above employee share-based
schemes (see note 4f) which has been transferred to the reserve for share-based
payments along with US$6,105,000 of the bonus liability accrued for the year
ended 31 December 2006 which has been voluntarily elected or mandatorily obliged
to be settled in shares granted during the year (2006: US$3,363,000).
23 OTHER RESERVES
Net unrealised
gains/(losses) Net
on unrealised
available-for- (losses) / Foreign Reserve for
sale-financial gains on currency share-based
assets derivatives translation payments Total
US$'000 US$'000 US$'000 US$'000 US$'000
Balance at 1 January 2006 1,347 (11,213) (2,560) - (12,426)
Foreign currency translation - - 7,449 - 7,449
Net gains on maturity of cash
flow hedges recognised in income
statement - (2,378) - - (2,378)
Net changes in fair value of
derivatives - 22,931 - - 22,931
Realised gains on the sale of
available-for-sale
financial assets recognised in
income statement (1,671) - - - (1,671)
Changes in fair value of
available-for-sale
financial assets 1,062 - - - 1,062
Share-based payments charge
(note 22) - - - 1,281 1,281
Transfer during the year (note
22) - - - 3,363 3,363
---------------------------------------------------------
Balance at 1 January 2007 738 9,340 4,889 4,644 19,611
Foreign currency translation - - (72) - (72)
Net gains on maturity of cash
flow hedges recognised in income
statement - (22,183) - (22,183)
Net changes in fair value of
derivatives - 41,734 - - 41,734
Changes in fair value of
available-for-sale
financial assets (140) - - - (140)
Share-based payments charge
(note 22) - - - 5,412 5,412
Transfer during the year (note
22) - - - 6,105 6,105
---------------------------------------------------------
Balance at 31 December 2007 598 28,891 4,817 16,161 50,467
=========================================================
Nature and purpose of other reserves
Net unrealised gains / (losses) on available-for-sale financial assets
This reserve records fair value changes on available-for-sale financial assets
held by the group net of deferred tax effects. Realised gains and losses on the
sale of available-for-sale financial assets are recognised as other income or
expenses in the income statement.
Net unrealised gains / (losses) on derivatives
The portion of gains or losses on cash flow hedging instruments that are
determined to be effective hedges are included within this reserve net of
related deferred tax effects. When the hedged transaction occurs or is no longer
forecast to occur the gain or loss is transferred out of equity to the income
statement. Realised net gains amounting to US$21,475,000 (2006: US$1,963,000)
relating to foreign currency forward contracts have been recognised in cost of
sales and realised net gains of US$708,000 (2006: US$415,000) relating to
interest rate derivatives have been classified as a net interest expense.
Foreign currency translation reserve
The foreign currency translation reserve is used to record exchange differences
arising from the translation of the financial statements in foreign
subsidiaries. It is also used to record exchange differences arising on monetary
items that form part of the group's net investment in subsidiaries.
Reserve for share-based payments
The reserve for share-based payments is used to record the value of equity
settled share-based payments awarded to employees and transfers out of this
reserve are made upon vesting of the original share awards.
The transfer during the year reflects the transfer from accrued expenses within
trade and other payables of the bonus liability relating to the year ended 2006
of US$6,105,000 (2005 bonus of US$3,363,000) which has been voluntarily elected
or mandatorily obliged to be settled in shares during the year (see note 22 for
further information on this share-based payment scheme).
24 INTEREST-BEARING LOANS AND BORROWINGS
The group had the following interest-bearing loans and borrowings outstanding:
31 December 31 December Effective
2007 2006
Actual Actual interest Maturity 2007 2006
interest interest rate%
rate% rate%
US$'000 US$'000
Current
Revolving credit (i) US LIBOR + US LIBOR + US LIBOR + 2008 6,500 -
facility 0.875% 0.875% 0.875%
Short term loan (ii) KD Discount KD Discount KD Discount 2008 3,627 6,033
Rate + 1.50% Rate + 1.50% Rate + 1.50%
Bank overdrafts (iii) UK LIBOR + UK LIBOR + UK LIBOR +
0.875%, US 0.875%, US 0.875%, US
LIBOR + LIBOR LIBOR +
0.875%,KD +0.875%,KD 0.875%,KD
Discount Rate Discount Discount Rate on demand 15,666 20,442
+ 1.50% Rate + 1.50% + 1.50%
Other loans:
Current portion (iv) US/UK LIBOR + - 4.95% to 2,662 -
of term loan 0.875%- 5.84% (2006:
5.39% to
6.26%)
--------------
28,455 26,475
==============
Non-current
Revolving credit (v) US/UK LIBOR + US/UK LIBOR 4.97% to 2013 8,953 8,864
facility 0.875% + 0.875% 5.62% (2006:
5.73% to
6.04%)
Revolving credit (i) US LIBOR + US LIBOR + (2006: 5.18%) 2008 - 6,500
facility 0.875% 0.875%
Term loan (iv) US/UK LIBOR + US/UK LIBOR 4.95% to 2008-2013 75,019 77,111
0.875% + 0.875% 5.84% (2006:
5.39% to
6.26%)
---------------
83,972 92,475
Less:
Debt acquisition
costs,
net of
accumulated
(2,332) (1,770)
---------------
amortisation
81,640 90,705
===============
Details of the group's interest-bearing loans and borrowings are as follows:
(i) Revolving credit facilities
This facility, provided by The Royal Bank of Scotland / Halifax Bank of Scotland
(RBOS/HBOS), is committed until 30 September 2008 and subject to annual review.
(ii) Short term loan
The short term loan is denominated in Kuwaiti Dinars (KD) and relates to funding
provided for a project in Kuwait. The loan was partially settled during 2007 and
subject to annual review thereafter.
(iii) Bank overdrafts
Bank overdrafts are drawn down in US dollars, Kuwaiti Dinars and Sterling
denominations to meet the group's working capital requirements. These are
repayable on demand.
(iv) Term loan
The term loan with RBOS/HBOS at 31 December 2007 comprised drawings of
US$35,310,000 (2006: US$35,310,000) denominated in US$ and US$42,371,000 (2006:
US$41,801,000) denominated in Sterling. Both elements of the loan are repayable
over a period of five years commencing 31 December 2008 to 30 September 2013.
(v) Revolving credit facility
The drawings against this facility, which is also provided by RBOS/HBOS, will be
converted to a term loan on 30 September 2010 to be repaid over a period of
three years ending 30 September 2013. The drawing at 31 December 2007 comprised
US$2,400,000 (2006: US$2,400,000) denominated in US$ and US$6,553,000 (2006:
US$6,464,000) denominated in Sterling.
The group's credit facilities and debt agreements contain covenants relating to
cash flow cover, cost of borrowings cover, dividends and various other financial
ratios. With the exception of Petrofac International Ltd, which under its
existing bank covenants, is restricted from making upstream cash payments in
excess of 70 per cent. of its net income in any one year, none of the Company's
subsidiaries is subject to any material restrictions on their ability to
transfer funds in the form of cash dividends, loans or advances to the Company.
25 PROVISIONS
Other
long- term
employment
benefits Provision for
provision decommissioning Total
US$'000 US$'000 US$'000
At 1 January 2007 11,366 1,132 12,498
Additions during the year 6,605 637 7,242
Unused amounts reversed (753) - (753)
Unwinding of discount - 59 59
----------------------------------------
At 31 December 2007 17,218 1,828 19,046
========================================
Other long- term employment benefits provision
Labour laws in certain countries in which the group operates require employers
to provide for other long- term employment benefits. These benefits are payable
to employees at the end of their period of employment. The provision for these
long- term benefits is calculated based on the employees' last drawn salary at
the balance sheet date and length of service, subject to the completion of a
minimum service period in accordance with the local labour laws of the
jurisdictions in which the group operates.
Provision for decommissioning
The decommissioning provision primarily relates to the Company's obligation for
the removal of facilities and restoration of the site at the PM304 field in
Malaysia. The liability is discounted at the rate of 3.5% and the unwinding of
the discount is classified as a finance cost (note 5). The Company estimates
that the cash outflow against this provision will arise in 2014.
26 OTHER FINANCIAL LIABILITIES
2007 2006
US$'000 US$'000
Other financial liabilities - non-current
Deferred consideration 13,622 7,373
Fair value of derivative instruments (note 31) 130 -
Other 118 -
----------------------
13,870 7,373
======================
Other financial liabilities - current
Interest payable 812 172
Fair value of derivative instruments (note 31) 52 -
----------------------
864 172
======================
27 TRADE AND OTHER PAYABLES
2007 2006
US$'000 US$'000
Trade payables 187,417 122,683
Advances received from customers 61,744 118,117
Accrued expenses 136,514 83,125
Other taxes payable 16,885 15,696
Other payables 5,457 7,085
-----------------------
408,017 346,706
=======================
Trade payables are non-interest bearing and are normally settled on terms of
between 30 and 60 days.
Advances from customers represent payments received for contracts on which the
related work had not been performed at the balance sheet date.
Included in other payables are retentions held against subcontractors of
US$4,292,000 (2006: US$1,532,000).
Certain trade and other payables will be settled in currencies other than the
reporting currency of the group, mainly in Sterling, Euros and Kuwaiti Dinars.
28 ACCRUED CONTRACT EXPENSES
2007 2006
US$'000 US$'000
Accrued contract expenses 416,322 432,003
Reserve for contract losses 3,226 -
----------------------
419,548 432,003
======================
29 COMMITMENTS AND CONTINGENCIES
Commitments
In the normal course of business the group will obtain surety bonds, letters of
credit and guarantees, which are contractually required to secure performance,
advance payment or in lieu of retentions being withheld. Some of these
facilities are secured by issue of corporate guarantees by the Company in favour
of the issuing banks.
At 31 December 2007, the group had letters of credit of US$8,184,000 (2006:
US$16,920,000) and outstanding letters of guarantee, including performance and
bid bonds, of US$663,292,000 (2006: US$573,185,000) against which the group had
pledged or restricted cash balances of, in aggregate, US$1,351,000 (2006:
US$883,000).
At 31 December 2007, the group had outstanding forward exchange contracts
amounting to US$326,442,000 (2006: US$221,188,000). These commitments consist of
future obligations to either acquire or sell designated amounts of foreign
currency at agreed rates and value dates (see note 31).
Leases
The group has financial commitments in respect of non-cancellable operating
leases for office space and equipment. These non-cancellable leases have
remaining non-cancellable lease terms of between one and seventeen years and,
for certain property leases, are subject to renegotiation at various intervals
as specified in the lease agreements. The future minimum rental commitments
under these non-cancellable leases are as follows:
2007 2006
US$'000 US$'000
Within one year 70,870 16,679
After one year but not more than five years 76,493 24,748
More than five years 52,827 13,500
-----------------------
200,190 54,927
=======================
Included in the above are commitments relating to the lease of an office
building extension in Aberdeen,United Kingdom of US$54,933,000 (2006: nil) and
the lease of a drilling rig for the Don Southwest project of US$43,200,000
(2006: nil).
Minimum lease payments recognised as an operating lease expense during the year
amounted to US$21,359,000 (2006: US$8,643,000).
Capital commitments
At 31 December 2007, the group had capital commitments of US$29,630,000 (2006:
US$21,819,000).
Included in the above are commitments for the construction of a new office
building in Sharjah, United Arab Emirates amounting to US$10,260,000 (2006:
US$20,577,000) and commitments relating to the further appraisal and development
of wells as part of the Cendor project in Malaysia amounting to US$11,389,000
(2006: nil).
30 RELATED PARTY TRANSACTIONS
The consolidated financial statements include the financial statements of
Petrofac Limited and the subsidiaries listed in note 32. Petrofac Limited is the
ultimate parent entity of the group.
The following table provides the total amount of transactions which have been
entered into with related parties:
Sales to Purchases
related from Amounts owed Amounts owed
parties related by related to related
parties parties parties
US$'000 US$'000 US$'000 US$'000
Joint ventures 2007 180 507 3,147 625
2006 4,520 3,282 7,725 133
Other Directors' 2007 - 614 - 119
interests 2006 - 49 - 49
All sales to and purchases from joint ventures are made at normal market prices
and the pricing policies and terms of these transactions are approved by the
group's management.
All related party balances at 31 December 2007 will be settled in cash.
Purchases in respect of other Directors' interests of US$614,000 (2006:
US$49,000) reflect the market rate based costs of chartering the services of an
aeroplane used for the transport of senior management and Directors of the group
on company business, which is owned by an offshore trust of which the Chief
Executive of the Company is a beneficiary.
Compensation of key management personnel
The following details remuneration of key management personnel of the group
comprising of executive and non-executive Directors of the Company and other
senior personnel. Further information relating to the individual Directors is
provided in the Directors' Remuneration report on pages 51 to 64.
2007 2006
US$'000 US$'000
Short-term employee benefits 5,063 4,412
Other long -term employment benefits 43 40
Share-based payments 906 288
Fees paid to non-executive directors 546 415
----------------------
6,558 5,155
======================
31 FINANCIAL INSTRUMENTS
Risk management objectives and policies
The group's principal financial assets and liabilities, other than derivatives,
comprise trade and other receivables, cash and short -term deposits, interest
bearing loans and borrowings, trade and other payables and deferred
consideration.
The group's activities expose it to various financial risks particularly
associated with interest rate risk on its variable rate loans and borrowings and
foreign currency risk on both conducting business in currencies other than
reporting currency as well as translation of the assets and liabilities of
foreign operations to the reporting currency. These risks are being addressed by
using a combination of various derivative instruments, principally interest rate
swaps, caps and forward currency contracts in line with the group's hedging
policy. The group has a policy not to enter into speculative trading of
financial derivatives.
The Board of Directors of the Company has established an Audit Committee and
Risk Committee to help identify, evaluate and manage the significant financial
risks faced by the group and their activities are discussed in detail on pages X
to Y of the financial statements.
The other main risks besides interest rate and foreign currency risk arising
from the group's financial instruments are credit risk, liquidity risk and
commodity price risk and the policies relating to these risks are discussed in
detail below:
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates
will affect the value of the group's interest-bearing financial liabilities and
assets.
The group's exposure to market risk arising from changes in interest rates
relates primarily to the group's long-term variable rate debt obligations and
its cash and bank balances. The group's policy is to manage its interest cost
using a mix of fixed and variable rate debt and specifically to keep between 60%
and 80% of its term borrowings at fixed or capped rates of interest. At 31
December 2007, after taking into account the effect of interest rate swaps and
collars, approximately 69.1% (2006: 64.8%) of the group's term borrowings are at
a fixed or capped rate of interest.
Interest rate sensitivity analysis
The impact on the group's pre-tax profit and equity due to a reasonably possible
change in interest rates is demonstrated in the table below. The analysis
assumes that all other variables remain constant.
Pre-tax profit Equity
100 basis 100 basis 100 basis 100 basis
point point point point
increase decrease increase decrease
US$'000 US$'000 US$'000 US$'000
31 December 2007 (1,058) 1,058 272 (670)
31 December 2006 (1,114) 1,114 1,044 62
The following table reflects the maturity profile of these financial liabilities
and assets:
Year ended 31 December 2007
More
Within 1-2 2-3 3-4 4-5 than
1 year years years years years 5 years Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Financial liabilities
Floating rates
Revolving credit facilities
(note 24) 6,500 - 448 2,015 3,134 3,356 15,453
Short-term loan (note 24) 3,627 - - - - - 3,627
Bank overdrafts (note 24) 15,666 - - - - - 15,666
Term loan (note 24) 2,662 10,000 11,250 15,625 18,750 19,394 77,681
Interest rate collars (note
31) - 130 - - - - 130
-------------------------------------------------------
28,455 10,130 11,698 17,640 21,884 22,750 112,557
=======================================================
Financial assets
Floating rates
Cash and short-term deposits
(note 19) 581,552 - - - - - 581,552
Restricted cash balances
(note 15) 1,351 - - - - - 1,351
Interest rate swap (note 31) - 28 - - - - 28
--------------------------------------------------------
582,903 28 - - - - 582,931
========================================================
Year ended 31 December 2006
More
Within 1-2 2-3 3-4 4-5 than
1 year years years years years 5 years Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Financial liabilities
Floating rates
Revolving credit facilities
(note 24) - 6,500 443 1,994 6,427 15,364
Short-term loan (note 24) 6,033 - - - - - 6,033
Bank overdrafts (note 24) 20,442 - - - - - 20,442
Term loan (note 24) - 2,500 10,000 11,250 15,625 37,736 77,111
--------------------------------------------------------
26,475 9,000 10,000 11,693 17,619 44,163 118,950
========================================================
Financial assets
Floating rates
Cash and short-term deposits
(note 19) 457,848 - - - - - 457,848
Restricted cash balances
(note 15) 883 - - - - - 883
Interest rate swaps and cap
(note 31) - 491 77 - - - 568
--------------------------------------------------------
458,731 491 77 - - - 459,299
========================================================
Financial liabilities in the above table are disclosed gross of debt acquisition
costs of US$2,332,000 (2006: US$1,770,000).
Interest on financial instruments classified as floating rate is repriced at
intervals of less than one year. The other financial instruments of the group
that are not included in the above tables are non-interest bearing and are
therefore not subject to interest rate risk.
Derivative instruments designated as cash flow hedges
At 31 December 2007, the group held the following derivative instruments,
designated as cash flow hedges in relation to floating rate interest-bearing
loans and borrowings:
Fair value of asset
/(liability)
Nominal amount Date 2007 2006
Instrument (US$ equivalent) Period to commenced US$'000 US$'000
maturity
UK LIBOR interest US$9,531,000 1 year and 9 31 December 28 77
rate swap months 2004
UK interest rate - Matured 31 December - 4
cap 2004
US LIBOR interest - Matured 31 December - 487
rate swap 2004
UK LIBOR interest US$42,371,000 2 years 31 December (74) -
rate collar 2007
US LIBOR interest US$35,310,000 2 years 31 December (56) -
rate collar 2007
During 2007 changes in fair value of US$-102,000 (2006: US$501,000) relating to
these derivative instruments were taken to equity and US$708,000 (2006:
US$415,000) were recycled from equity into interest expense in the income
statement.
Foreign currency risk
The group is exposed to foreign currency risk on sales, purchases, and
translation of assets and liabilities that are in a currency other than the
functional currency of its operating units. The group is also exposed to the
translation of the functional currencies of its units to the US dollar reporting
currency of the group. The following table summarises the percentage of foreign
currency denominated revenues, costs, financial assets and financial
liabilities, expressed in US dollar terms, of the group totals. Included in the
foreign currency analysis below are currencies that are pegged to the US dollar
and therefore the group is not exposed to foreign currency risk on these
amounts.
2007 2006
% of foreign % of foreign
currency currency
denominated denominated
items items
Revenues 48.6% 70.1%
Costs 68.7% 68.2%
Current financial assets 67.9% 74.8%
Non-current financial assets 0.6% 2.8%
Current financial liabilities 45.8% 48.0%
Non-current financial liabilities 44.0% 49.8%
The group uses forward currency contracts to manage the currency exposure on
transactions significant to its operations. It is the group's policy not to
enter into forward contracts until a firm commitment is in place and to
negotiate the terms of the derivative instruments used for hedging to match the
terms of the hedged item to maximise hedge effectiveness.
Foreign currency sensitivity analysis
The income statements of foreign operations are translated into the reporting
currency using a weighted average rate of conversion. Foreign currency monetary
items are translated using the closing rate at the date of the balance sheet.
Revenues and costs in currencies other than the functional currency of an
operating unit are recorded at the prevailing rate at the date of the
transaction. The following significant exchange rates applied during the year in
relation to US dollars:
2007 2006
Average Closing Average Closing
rate rate rate rate
Sterling 2.01 1.99 1.85 1.96
Kuwaiti Dinars 3.51 3.66 3.41 3.45
Euros 1.38 1.46 1.26 1.32
The following table summarises the impact on the group's pre-tax profit and
equity (due to change in the fair value of monetary assets, liabilities and
derivative instruments) of a reasonably possible change in US dollar exchange
rates with respect to different currencies:
Pre-tax profit Equity
+10% US -5% US +10% US -5% US
dollar dollar dollar dollar
rate rate rate rate
increase decrease increase decrease
US$'000 US$'000 US$'000 US$'000
31 December 2007 (27,285) 13,642 (35,065) 17,532
31 December 2006 (25,312) 12,656 (22,691) 11,345
Derivative instruments designated as cash flow hedges
At 31 December 2007, the group had foreign exchange forward contracts designated
as cash flow hedges with a fair value gain of US$28,657,000 (2006: US$8,840,000)
as follows:
Net unrealised
Contract value Fair value gain/(loss)
2007 2006 2007 2006 2007 2006
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Euro currency purchases 321,264 203,908 349,964 212,694 28,700 8,786
Sterling currency
purchases 4,500 3,901 4,448 4,098 (52) 197
Yen currency purchases 678 13,379 687 13,236 9 (143)
-----------------
28,657 8,840
=================
The above foreign exchange contracts mature and will affect income between
January 2008 and February 2009 (2006: between January 2007 and February 2008).
During 2007, changes in fair value of US$41,500,000 (2006: US$22,430,000)
relating to these derivative instruments were taken to equity and US$21,475,000
(2006: US$1,963,000) were recycled from equity into cost of sales in the income
statement.
Commodity price risk - oil prices
The group is exposed to the impact of changes in oil prices on its revenues and
profits generated from sales of crude oil. The group did not hedge this risk in
the current year as the exposure to movements in the price of oil primarily
relating to the Cendor field in Malaysia were not considered significant.
However in late 2007, the group introduced a new oil production hedging strategy
whereby on a project by project basis it evaluates the size of the potential oil
price exposure and using the near term forward oil price curve aims to hedge up
to 75% of its current year P90 production forecasts.
On 23 November 2007, the group entered into a zero premium oil price collar to
hedge its exposure to fluctuations in oil prices which mature on a monthly basis
from 31 January 2008 to 31 December 2008. The collar hedges 240,000 barrels of
oil production with a floor price of US$85.00 per barrel and a capped price of
US$102.30 per barrel. The fair value of the oil price collar at 31 December 2007
was US$336,000 with a corresponding gain recognised in equity.
The following table summarises the impact on the group's pre-tax profit and
equity (due to a change in the fair value of oil derivative instruments and the
overlifting liability) of a reasonably possible change in the oil price:
Pre-tax profit Equity
+10 US$/ -10 US$/ +10 US$/ -10 US$/
bbl bbl bbl bbl
increase decrease increase decrease
US$'000 US$'000 US$'000 US$'000
31 December 2007 (446) 446 (1,739) 741
31 December 2006 - - - -
Credit risk
The group trades only with recognised, creditworthy third parties. Divisional
Risk Review Committees (DRRC) have been set up by the Board of Directors to
evaluate the creditworthiness of each individual third party at the time of
entering into new contracts. Limits have been placed on the approval authority
of the DRRC above which the approval of the Board of Directors of the Company is
required. Receivable balances are monitored on an ongoing basis with the result
that the group's exposure to bad debts is not considered a key risk. At 31
December 2007, the group's five largest customers accounted for 58.0% of
outstanding trade receivables and work in progress (2006: 66.3%).
With respect to credit risk arising from the other financial assets of the
group, which comprise cash and cash equivalents, available-for-sale financial
assets and certain derivative instruments, the group's exposure to credit risk
arises from default of the counterparty, with a maximum exposure equal to the
carrying amount of these instruments.
Liquidity risk
The group's objective is to maintain a balance between continuity of funding and
flexibility through the use of overdrafts, revolving credit facilities, project
finance and term loans to reduce its exposure to liquidity risk. The maturity
profiles of the group's financial liabilities at 31 December 2007 are as
follows:
Year ended 31 December 2007
Contractual
6 6-12 1-2 2-5 More undiscounted Carrying
months than
or less months years years 5 years cash flows amount
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Financial liabilities
Interest-bearing loans
and borrowings 19,293 9,162 10,000 51,222 22,750 112,427 110,095
Trade and other payables
(excluding advances from
customers) 345,833 440 - - - 346,273 346,273
Income tax payable 28,658 18,919 - - - 47,577 47,577
Due to related parties 744 - - - - 744 744
Deferred consideration 1,964 2,088 9,570 - - 13,622 13,622
Derivative instruments 52 - 130 - - 182 182
Interest payable 812 - - - - 812 812
--------------------------------------------------------------
397,356 30,609 19,700 51,222 22,750 521,637 519,305
==============================================================
Year ended 31 December 2006
Contractual
6 6-12 1-2 2-5 More undiscounted Carrying
months than
or less months years years 5 years cash flows amount
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Financial liabilities
Interest-bearing loans
and borrowings 19,317 7,158 9,000 39,312 44,163 118,950 117,180
Trade and other payables
(excluding advances from
customers) 211,722 16,867 - - - 228,589 228,589
Income tax payable 8,042 277 1,766 - - 10,085 10,085
Due to related parties 182 - - - - 182 182
Deferred consideration - 7,210 73 90 - 7,373 7,373
Interest payable 172 - - - - 172 172
--------------------------------------------------------------
239,435 31,512 10,839 39,402 44,163 365,351 363,581
==============================================================
The group uses various funded facilities provided by banks and its own financial
assets to fund the above mentioned financial liabilities.
Capital management
The group's policy is to maintain a healthy capital base to sustain future
growth and maximise shareholder value.
The group seeks to optimise shareholder returns by maintaining a balance between
debt and capital and monitors the efficiency of its capital structure on a
regular basis. The gearing ratio and return on shareholders' equity is as
follows:
2007 2006
US$'000 US$'000
Cash and short-term deposits 581,552 457,848
Interest-bearing loans and borrowings (A) (110,095) (117,180)
-------------------------
Net cash (B) 471,457 340,668
=========================
Equity attributable to Petrofac Limited shareholders (C) 485,795 324,695
=========================
Profit for the year attributable to Petrofac Limited
shareholders (D) 188,716 120,332
=========================
Gross gearing ratio (A/C) 22.7% 36.1%
=========================
Net gearing ratio (B/C) Net cash Net cash
position position
=========================
Shareholders' return on investment (D/C) 38.8% 37.1%
=========================
Fair values of financial assets and liabilities
The fair value of the group's financial instruments and their carrying amounts
included within the group's balance sheet are set out below:
Carrying amount Fair value
2007 2006 2007 2006
US$'000 US$'000 US$'000 US$'000
Financial assets
Cash and short-term deposits 581,552 457,848 581,552 457,848
Restricted cash 1,351 883 1,351 883
Available-for-sale financial assets 1,586 1,726 1,586 1,726
Oil derivatives 336 - 336 -
Interest rate swap 28 568 28 568
Forward currency contracts 28,709 8,840 28,709 8,840
=========================================
Financial liabilities
Interest-bearing loans and borrowings 110,095 117,180 110,095 117,180
Deferred consideration 13,622 7,373 13,622 7,373
Interest rate collar 130 - 130 -
Forward currency contracts 52 - 52 -
==========================================
Market values have been used to determine the fair values of available-for-sale
financial assets and forward currency contracts. The fair values of interest
rate swaps, collars and caps have been calculated by discounting the expected
future cash flows at prevailing interest rates. The fair values of long-term
interest-bearing loans and borrowings are their amortised costs determined as
the present value of discounted future cash flows using the effective interest
rate. The Company considers that the carrying amounts of trade and other
receivables, trade and other payables, other current and non-current financial
assets and liabilities approximate their fair values and are therefore excluded
from the above table.
32 SUBSIDIARIES AND JOINT VENTURES
At 31 December 2007, the group had investments in the following subsidiaries and
incorporated joint ventures:
Proportion of
nominal
value of issued
shares
Name of company Country of controlled by the
incorporation group
Trading subsidiaries 2007 2006
Petrofac Inc. USA *100 *100
Petrofac International Ltd Jersey *100 *100
Petrofac Energy Developments Limited
(formally Petrofac Resources Limited) England *100 *100
Petrofac Energy Developments International
Limited (formally Petrofac Resources
International Limited) Jersey *100 *100
Petrofac UK Holdings Limited England *100 *100
Petrofac Facilities Management Jersey *100 *100
International Limited
Petrofac Services Limited England *100 *100
Petrofac Services Inc. USA *100 *100
Petrofac Training International Limited Jersey *100 *100
Petroleum Facilities E & C Limited Jersey *100 *100
Petrofac ESOP Trustees Limited Jersey *100 *100
Petrofac Employee Benefit Trust Jersey *100 *100
Atlantic Resourcing Limited Scotland 100 100
Petrofac Algeria EURL Algeria 100 100
Petrofac Engineering India Private Limited India 100 100
Petrofac Engineering Services India India 100 100
Private Limited
Petrofac Engineering Limited England 100 100
Petrofac Offshore Management Limited Jersey 100 100
Petrofac FZE United Arab Emirates 100 100
Petrofac Facilities Management Group Scotland 100 100
Limited
Petrofac Facilities Management Limited Scotland 100 100
Petrofac International Nigeria Ltd Nigeria 100 100
Petrofac Pars (PJSC) Iran 100 100
Petrofac Iran (PJSC) Iran 100 100
Plant Asset Management Limited Scotland 100 100
Petrofac Nuigini Limited Papua New Guinea 100 100
PFMAP Sendirian Berhad Malaysia 100 100
Petrofac Caspian Limited Azerbaijan 100 100
Petrofac (Malaysia-PM304) Limited England 100 100
Petrofac Training Group Limited Scotland 100 100
Petrofac Training Holdings Limited Scotland 100 100
Petrofac Training Limited Scotland 100 100
Petrofac Training Inc. USA 100 100
Petrofac Training (Trinidad) Limited Trinidad 100 100
Monsoon Shipmanagement Limited Jersey 100 100
Petrofac E&C International Limited United Arab Emirates 100 100
Rubicon Response Limited Scotland 100 100
Petrofac Energy Developments (Ohanet) Jersey 100 100
Jersey Limited
Petrofac Energy Developments (Ohanet) LLC USA 100 100
PEDL Limited England 100 n/a
Petrofac (Cyprus) Limited Cyprus 100 100
PKT Technical Services Ltd Russia 50 50
PKT Training Services Ltd Russia 100 100
Pt PCI Indonesia Indonesia 80 80
Process Control and Instrumentation Singapore 100 100
Services Pte Ltd
Process Control and Instrumentation Malaysia 100 100
Sendirian Berhad
Sakhalin Technical Training Centre Russia 80 80
Petrofac Norge AS Norway 100 100
* Directly held by Petrofac Limited
Proportion of
nominal
value of issued
shares
Name of Company Country of controlled by the
incorporation group
Trading subsidiaries (continued) 2007 2006
SPD Group Limited British Virgin Islands 51 n/a
SPD UK Limited Scotland 51 n/a
SPD FZCO United Arab Emirates 51 n/a
SPD LLC United Arab Emirates 25 n/a
Petrofac Energy Developments Oceania
Limited Cayman Islands 100 n/a
Joint Ventures
Costain Petrofac Limited England 50 50
Kyrgyz Petroleum Company Kyrgyz Republic 50 50
MJVI Sendirian Berhad Brunei 50 50
Spie Capag - Petrofac International Jersey 50 50
Limited
TTE Petrofac Limited Jersey 50 50
Dormant subsidiaries
Petrofac Saudi Arabia Limited Saudi Arabia 100 100
ASJV Venezuela SA Venezuela 100 100
Joint Venture International Limited Scotland 100 100
Montrose Park Hotels Limited Scotland 100 100
RGIT Ethos Health & Safety Limited Scotland 100 100
Scota Limited Scotland 100 100
Petrofac Russia Limited England 100 100
Monsoon Shipmanagement Limited Cyprus 100 100
OIL AND GAS RESERVES (UNAUDITED)
Europe Africa South East Total
Asia
Oil & Gas Oil & Gas Oil & Gas Oil & Gas Oil
NGLs NGLs NGLs NGLs equivalent
mmbbl bcf mmbbl bcf mmbbl bcf mmbbl bcf mmboe
Proven reserves
At 1 January 2007
Developed - - 3.3 - 4.2 - 7.5 - 7.5
Undeveloped - - - - - - - - -
-----------------------------------------------------------------------
Proven - - 3.3 - 4.2 - 7.5 - 7.5
-----------------------------------------------------------------------
Changes during the
year:
Revisions - - (0.3) - 0.5 - 0.2 - 0.2
Additions 12.2 - - - - - 12.2 - 12.2
Acquisitions - - 0.1 26.1 - - 0.1 26.1 4.6
Production - - (0.5) - (1.3) - (1.8) - (1.8)
At 31 December 2007
Developed - - 2.6 24.1 3.2 - 5.8 24.1 9.9
Undeveloped 12.2 - - 2.0 0.2 - 12.4 2.0 12.8
----------------------------------------------------------------------
Proven 12.2 - 2.6 26.1 3.4 - 18.2 26.1 22.7
----------------------------------------------------------------------
Probable reserves
At 1 January 2007 - - - - 1.3 - 1.3 - 1.3
Changes during the
year:
Revisions - - - - 0.2 - 0.2 - 0.2
Additions 11.4 - - - - - 11.4 - 11.4
Acquisitions - - - 6.4 - - - 6.4 1.1
Production - - - - - - - - -
----------------------------------------------------------------------
At 31 December 2007 11.4 - - 6.4 1.5 - 12.9 6.4 14.0
----------------------------------------------------------------------
Total proven &
probable reserves
At 1 January 2007 - - 3.3 - 5.5 - 8.8 - 8.8
Changes during the
year:
Revisions - - (0.3) - 0.7 - 0.4 - 0.4
Additions 23.6 - - - - - 23.6 - 23.6
Acquisitions - - 0.1 32.5 - - 0.1 32.5 5.7
Production - - (0.5) - (1.3) - (1.8) - (1.8)
---------------------------------------------------------------------
At 31 December 2007 23.6 - 2.6 32.5 4.9 - 31.1 32.5 36.7
---------------------------------------------------------------------
Notes
• These estimates of reserves were prepared by the group's engineers and
the group's estimates of its reserves have been audited by a competent,
independent third party based on the guidelines of the Petroleum Resources
Management System, recently adopted by the Society of Petroleum Engineers,
World Petroleum Council, the American Association of Petroleum Geologists
and the Society of Petroleum Evaluation Engineers.
• The reserves presented are the net entitlement volumes attributable to
the company, under the terms of relevant production sharing contracts and
assuming future oil prices equal to the average of prevailing prices during
2007.
• For the purpose of calculating oil equivalent total reserves, volumes of
natural gas have been converted to oil equivalent volumes at the rate of
5,800 standard cubic feet of gas per barrel of oil.
Petrofac shares are traded on the London Stock Exchange using code 'PFC.L'.
Registrar Company Secretary and registered office
Capita Registrars Ogier Corporate Services (Jersey) Limited
The Registry Whiteley Chambers
34 Beckenham Road Don Street
Beckenham St Helier
Kent BR3 4TU Jersey JE4 9WG
Legal Advisers to the Company
As to English Law As to Jersey Law
Norton Rose LLP Ogier
3 More London Place Whiteley Chambers
London SE1 2AF Don Street
St Helier
Jersey JE4 9WG
Joint Brokers
Credit Suisse Lehman Brothers
1 Cabot Square 25 Bank Street
London E14 4QJ London E14 5LE
Auditors Corporate and Financial PR
Ernst & Young LLP Bell Pottinger Corporate & Financial
1 More London Place 6th Floor Holborn Gate
London SE1 2AF 330 High Holborn
London WC1V 7QD
Financial Calendar
16 May 2008 Annual General Meeting
19 May 2008 Final dividend payment
27 August 2008 Interim results announcement
November 2008 Interim dividend payment
Dates correct at time of print, but subject to change
The group's investor relations website can be found through www.petrofac.com
This information is provided by RNS
The company news service from the London Stock Exchange
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