Final Results

RNS Number : 5019O

Petrofac Limited

09 March 2009

 



PETROFAC LIMITED

FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2008

Petrofac Limited (Petrofac, the group or the Company), a leading international provider of facilities solutions to the oil & gas production and processing industry, today announces its results for the year ended 31 December 2008.  

FINANCIAL HIGHLIGHTS

• Revenue of US$3,329.5 million (2007: US$2,440.3 million), up 36.4%

• EBITDA(1) of US$419.0 million (2007: US$301.3 million), up 39.1%

• Net profit(2) of US$265.0 million (2007: US$188.7 million), up 40.4%

  • Engineering & Construction net profit of US$224.1 million, up 63.5%

  • Operations Services net profit of US$31.8 million, up 10.1%

  • Energy Developments net profit of US$21.9 million, down 34.4% (up 25.0% on an adjusted basis at US$38.5 million) (3)

• Backlog(4) at 31 December 2008 of US$4.0 billion (2007: US$4.4 billion) has been augmented by a further US$2.8 billion of new awards secured so far in 2009

• Gross cash balances at 31 December 2008 stood at US$694.4 million (2007:US$581.6 million) an increase of US$112.8 million over the year

• Return on capital employed(5) of 52.7% (2007 restated: 45.7%)

• Earnings per share (fully diluted) of 77.1 cents (2007: 54.6 cents), up 41.2%

• Final dividend of 17.90 cents (12.57 pence(6)) per ordinary share taking dividends for the full year to 25.40 cents per ordinary share (16.66 pence), up 55%. Dividend pay-out ratio increased from 30% to 35%, with effect from 2008 final dividend.

OPERATIONAL HIGHLIGHTS

Engineering & Construction

• US$2.0 billion of order intake during 2008, including the Mina Al-Ahmadi refinery pipelines project in Kuwait and Jihar and Ebla gas plants in Syria

• Successful in securing US$2.8 billion of new contract awards in Abu Dhabi and Saudi Arabia in 2009 to date, which have been targeted as key markets for medium-term growth

Operations Services

• First full year of operating Dubai Petroleum's offshore assets 

• Northern Producer Duty Holder contract secured; Venture Production and BHP Billiton Duty Holder contracts extended

• Acquisition of Eclipse and Caltec develops capability to deliver solutions to enhance and improve production and will form part of new Production Solutions business

Energy Developments

• Commencement of commercial export of gas from the Chergui gas plant in August 2008

• Significant progress on Don development, with Field Development Programme approval in May 2008, Northern Producer refurbished and on location, subsea infrastructure nearing completion and drilling of three wells commenced (one completed)

  OUTLOOK

Despite the recent rapid and severe downturn in the global economic outlook, Petrofac has reported a year of excellent growth in 2008 and remains well-positioned to deliver further strong growth in 2009 and beyond.

The group's Engineering & Construction business has continued its excellent record of execution whilst developing its engineering, construction management and project management capacity to accommodate the significant inflow of business seen over the last few months. The group's historic focus on onshore, upstream developments in the Middle East and North Africa combined with its cost-competitive structure has enabled it to secure some US$2.8 billion of new contract awards to date in 2009 and has positioned the business well for further lump-sum opportunities over the medium term. The group's portfolio of Engineering & Construction projects is expected to deliver net margins in line with recent levels.

The group's Operations Services revenues are driven largely by customers' operational expenditure, which is expected to remain reasonably robust despite lower oil prices. The efficient operation of production facilities becomes increasingly important in such an environment, which may lead to new opportunities for the group. Nonetheless, those of the group's activities that are more reliant upon customers' discretionary spending are expected to face a more challenging environment in 2009.

In Energy Developments, the near-term focus remains the commencement of production from the West Don and Don Southwest fields, which is expected in the first half of 2009. The group has a strong balance sheet and there may be opportunities to invest in development assets as smaller independent oil companies are unable to access debt and equity markets.

Overall, our year-end backlog and new awards secured so far in 2009 give us a high degree of visibility of revenue through to 2011, which along with a healthy prospects list, should position us well to deliver strong growth in earnings in the current year and beyond.

  Commenting on the results, Ayman Asfari, group chief executive, said:

"I am delighted by our performance in 2008 and the delivery of another year of excellent growth in revenue and profit. 

"Operationally, we have continued to perform well, including successful mobilisation on new contracts secured during the year. We now have more than 11,000 employees and have developed the capacity and capability to participate in large-scale world-class projects, as demonstrated by the recent Asab field development award in Abu Dhabi. 

"We have made good progress on the West Don and Don Southwest developments and expect to commence production in the first half of 2009. Our strong balance sheet and significant cash resources mean we are well placed to take advantage of any suitable investment opportunities that present themselves.

"Our strong order book, healthy prospects list and cost-competitive structure, should position us well to deliver strong growth in earnings in the current year and beyond.

"Given the strong cash generation of the group, the Board has taken the decision to increase the percentage of earnings to be distributed by way of dividend from 30% to 35% of full year post tax profits and the proposed final dividend for 2008 is 17.90 cents per share."

Ends

Analyst presentation:

A presentation for analysts will be held at 9.30am today, which will be webcast live via http://www.investorcalendar.com/IC/CEPage.asp?ID=142024. 

Notes to Editors

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 more than 11,000 employees, Petrofac operates out of five strategically located operational centres, in Aberdeen, Sharjah, Woking, Chennai and Mumbai 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.

For further information, please contact:

Petrofac Limited                                                   [phone]

Ayman Asfari, Group Chief Executive

Keith Roberts, Chief Financial Officer

Jonathan Low, Head of Investor Relations

Bell Pottinger Corporate & Financial                         [phone]

Ann-marie Wilkinson

Olly Scott

(The attached is an extract from the group's Annual Report and Accounts for the year ended 31 December 2008.)

CHAIRMAN'S STATEMENT

2008 was another outstanding year for Petrofac, as we again delivered record revenue and profits. Not only are we maintaining the trend for growth, but we are now winning business and executing projects of significant scale. Revenue grew by 36% to US$3,330 million during the year and net profits increased by 40% to US$265.0 million.

Market overview

2008 was a year of extraordinary turbulence and uncertainty in the global economy. Fuelled by the crisis in banking and a marked fall in confidence, the downturn is impacting businesses in most sectors worldwide. 

The environment in our industry has, so far, remained broadly positive. Despite extreme volatility in the price of oil, which at one point during the year rose to US$147 per barrel before falling away to less than US$40 in December, continuing supplies of reasonably-priced energy will remain fundamental to world economic growth for many years to come.

Our progress

In the past year, we experienced strong demand for our services. Our Company is in a strong position financially with very little debt, substantial cash balances and a healthy order book that continues to position us very well for the future.

Petrofac is developing as a public company and now has the organisational capability, the leadership talent and an expanded engineering skills base to compete at the highest level.  We have now joined an exclusive list of companies capable of participating in the largest and most challenging projects in our sector and executing them with a high degree of technical and commercial success.

As you will read elsewhere in this Report, our three divisions - Engineering & Construction, Operations Services and Energy Developments - have all reported significant progress. 

This has been achieved through our proven technical capability, entrepreneurial business attitude and a focus on geographic regions where there are programmes of work in place that are not as susceptible to factors affecting the global economic environment and the cost of production is competitive. Driving our continued competitive advantage is a group-wide commitment to our people, to the environment and, crucially, to safety above all other considerations. 

Dividends

The Board is recommending a final dividend of 17.90 cents per ordinary share, equivalent to 12.57 pence per ordinary share which, if approved, will be paid on 22 May 2009 to eligible shareholders on the register at 24 April 2009. Given the strong cash generation of the group, the Board has taken the decision to increase the percentage of earnings to be distributed by way of dividend to approximately 35% of full year post tax profits (previously 30%), which will continue to be paid approximately one-third as an interim dividend and two-thirds as a final dividend. Together with the interim dividend of 7.50 cents, equivalent to 4.09 pence, this gives a total dividend for the year of 25.40 cents per ordinary share, an increase of 55% over 2007.

Corporate governance and corporate social responsibility

The Board has continued to focus on corporate governance issues, ensuring that our processes are comparable to those recognised as best practice. We have also worked hard during the year to meet our responsibilities to the wider stakeholder community. 

Some of the countries in which we operate are facing deep-seated challenges and we are committed to being a positive force wherever possible. In practical terms, this is frequently expressed through an increasing range of community support initiatives where our focus is primarily on education and training. We believe it is extremely important that we play a part in the advancement of the people and communities who interact with Petrofac. In many locations, young people do not have the opportunity to learn and to contribute to the development of their countries. From building schools to funding scholarships, Petrofac programmes are helping young people fulfil their potential.

Our people

Attracting, retaining and developing our people is both an enduring strength and an ongoing challenge. During the year, our numbers rose from around 9,800(7) to around 11,100 as we continued to invest in the technical skills as well as the leadership talent that will maintain our market-leading position.

We operate in difficult and challenging environments and I extend the Board's thanks to all of our employees who worked so tirelessly throughout 2008 to execute our projects with great skill and intelligence and with an unyielding focus on safety at all times.

The Board

This has been a year of stability for your Board. No changes have been made to its composition since the 2007 Annual General Meeting (held on 16 May 2008).

Outlook

There is no doubting the severity of the global recession, I am confident, however, that our group is well-placed to record good performance in 2009. Our year end backlog and recent contract awards provide a sound operational and financial basis, and the prospects for the future are excellent. 

In order to turn those prospects into performance, we will continue to work closely with customers, shareholders, partners and suppliers. I thank all of these stakeholders for their support in the past and look forward to sharing our success with them in 2009 and beyond.

Rodney Chase

Chairman

  Group Chief Executive's review

I am pleased to be able to report an excellent set of financial results for the year ended 31 December 2008.

	2008	2007
	US$m	US$m
Revenue	3,329.5	2,440.3	up 36.4%
EBITDA	419.0	301.3	up 39.1%
EBITDA margin	12.6%	12.3%
Net profit	265.0	188.7	up 40.4%
Net margin	8.0%	7.7%
Backlog*	3,997	4,441	down 10.0%
* Does not include US$2.8 billion of new contract awards in 2009 to date

Group revenue increased by 36.4% to US$3,329.5 million (2007: US$2,440.3 million) due to growth in all three divisions, but primarily due to strong growth in the Engineering & Construction division, which accounted for approximately two-thirds of the group's revenue. EBITDA increased by 39.1% to US$419.0 million (2007: US$301.3 million). Net profit increased by 40.4% to US$265.0 million (2007: US$188.7 million), representing a net margin of 8.0% (2007: 7.7%). At the close of 2008, the combined backlog of the Engineering & Construction and Operations Services divisions was US$4.0 billion (2007 US$4.4 billion), though this has been augmented by US$2.8 billion of new awards in 2009 to date.

ENGINEERING & CONSTRUCTION

	2008	2007
	US$m	US$m
Revenue	2,219.4	1,414.9	up 56.9%
EBITDA	285.1	173.9	up 63.9%
EBITDA margin	12.8%	12.3%
Net profit	224.1	137.1	up 63.5%
Net margin	10.1%	9.7%
Backlog*	2,408	2,540	down 5.2%
* Does not include US$2.8 billion of new contract awards in 2009 to date

Results

The Engineering & Construction division achieved strong revenue growth in the year due to high levels of activity on the division's lump-sum EPC projects in hand at the beginning of the year and on new projects secured during the year. Revenue increased by 56.9% to US$2,219.4 million (2007: US$1,414.9 million).  Net margin increased to 10.1% (2007: 9.7%) as the division continued its strong execution performance. The strong growth in revenue and net margin improvement led to an increase in net profit of 63.5% to US$224.1 million (2007: US$137.1 million).  The main contributors to revenue in the lump-sum EPC business were: the Ebla gas plant in Syria; the Harweel project in Oman; the Hasdrubal gas plant in Tunisia; the In-Salah gas compression project in Algeria; the third oil and fourth sales gas compressor trains on the Kashagan development in Kazakhstan; the Karachaganak fourth stabilisation and sweetening train in Kazakhstan; and, the Salam gas plant in Egypt.  

During the year, the Engineering & Construction division grew its headcount by approximately 1,000 to approximately 4,900 at 31 December 2008 (31 December 2007: 3,900) due to a significant increase in the number of employees across the division's project sites and the addition of more than 250 personnel in the Chennai office, which opened in April 2007, and now has approximately 450 employees.

The division's backlog was US$2.4 billion at 31 December 2008 (31 December 2007: US$2.5 billion) and a further US$2.8 billion of contracts have been added to backlog to date in 2009.

Review of operations

The Engineering & Construction division achieved strong growth and continued to deliver good operational performance during the year.  Order intake in 2008 totalled in excess of US$2.0 billion and the division has continued to be active in bidding activity on a number of other prospects, which has resulted in securing a further US$2.8 billion of new contract awards since the year end.

Middle East and North Africa

The division made good progress on its current portfolio of contracts in the Middle East and North Africa, including:

• Mobilisation activities, detailed engineering and early construction work on the In Salah gas compression project in Algeria for Sonatrach, BP and StatoilHydro, which was awarded in late 2007

• Further progress on the Harweel cluster development project for Petroleum Development Oman (PDO), which is scheduled for completion around the end of 2009

• Significant progress on the Salam and Hasdrubal gas plants in Egypt and Tunisia, for Khalda Petroleum and BG Group respectively, which are both scheduled for completion in the first half of 2009

• Substantial completion of the Kuwait Oil Company (KOC) facilities upgrade project in Kuwait

Furthermore, the division secured three new EPC awards in the region during the year:

Jihar gas plant, Syria

In March 2008, the division was awarded a US$454 million lump-sum EPC contract to build the Jihar gas treatment plant for the Hayan Petroleum Company (a joint venture between the state-owned Syrian Petroleum Company and INA Industrija Nafte d.d.-Naftaplin of Croatia), which is scheduled to be delivered in the first quarter of 2011.

Ebla gas plant, Syria

In April 2008, the division secured a further award in Syria for the US$556 million (including variation orders for novated items received shortly after award) lump-sum EPC contract to build the Ebla gas treatment plant for Petro-Canada, which is expected to be completed in the first half of 2010. 

Mina Al-Ahmadi refinery pipelines, Kuwait

In November 2008, the division announced that it has been awarded a US$543 million lump-sum EPC contract by KOC. The contract is for a new gas pipeline running from KOC's Booster Station 131 in North Kuwait to its liquefied petroleum gas plant located at the Mina Al-Ahmadi refinery. The project is expected to run for 21 months.

Commonwealth of Independent States

The division continues to be involved on both the Kashagan and Karachaganak programmes, two of Kazakhstan's multi-billion dollar multi-phase developments.  Progress during the year included:

• On the Karachaganak development, the division has largely completed the engineering and procurement contract and has undertaken early works under the construction management contract for the fourth stabilisation and sweetening train, which was awarded in January 2007

• Also on the Karachaganak development, the division has commenced the fourth stage of the Phase III development FEED study, the division's largest FEED study to date. Following BG Group and KazMunaiGas's review of alternative phasing of the full Phase III capital commitment, the division expects to continue to provide reimbursable services well into 2009, albeit with a reduced number of personnel

• On the Kashagan project, the construction management contract in relation to the oil, gas and sulphur processing facilities, which was awarded in January 2006, has been extended for a further 12 months to the end of 2009, with a further 12 month option

• Substantial progress was made on the engineering, procurement and construction management contract for the Kashagan third oil train, awarded in late 2007

• The FEED study for the Kharyaga development, awarded in late 2007, has been substantially completed

The division secured a further EPC award in the region during the year:

Kashagan fourth sales gas compressor train and debottlenecking modifications, Kazakhstan

In April 2008, the division secured further work on the Kashagan field development project with the award of a lump-sum scope US$105 million project (and a US$10 million optional scope) to engineer and procure a fourth sales gas compressor train within the Kashagan gas and liquefied petroleum gas (LPG) plant and undertake debottlenecking modifications to tranches 1 and 2 of the gas treatment plant. The project is necessary to accommodate the additional gas associated with the processing of the production from the third oil train.

Since the end of 2008, the division has been successful in securing the following new awards:

Asab field development, Abu Dhabi

In January 2009, the division secured its largest contract to date with the award of a US$2.3 billion contract with Abu Dhabi Company for Onshore Oil Operations (ADCO) for the development of the onshore Asab oil field. Under the 44-month lump-sum contract, the division will provide EPC services to upgrade the production capacity of the Asab field, upgrade the facility's capacity to accept increased production from other fields and upgrade the associated utilities and water handling facilities.

Karan utilities and cogeneration package, Saudi Arabia

In February 2009, the division was awarded an EPC contract for Saudi Aramco's Karan utilities and cogeneration package. The project forms part of the Karan gas development programme which will expand the Khursaniyah gas plant, in the Eastern Province of Saudi Arabia, to accommodate around 1.8 billion standard cubic feet per day of high pressure sour gas from the offshore Karan field. The division will also upgrade the plant's process controls, electrical systems and support facilities.

OPERATIONS SERVICES

	2008	2007
	US$m	US$m
Revenue	982.4	911.0	up 7.8%
EBITDA	53.8	51.2	up 5.1%
EBITDA margin	5.5%	5.6%
Net profit	31.8	28.9	up 10.1%
Underlying net margin*	5.1%	4.7%
Backlog	1,589	1,901
Backlog on constant currency basis	2,000	1,901	up 5.2%
* See 'Results' below for explanation

Results

Revenue for the Operations Services division increased to US$982.4 million (2007: US$911.0 million), an increase of 7.8%. Revenue excluding "pass-through" revenue(8) increased by 3.3%, though on a constant-currency basis the increase was approximately 11%(9), primarily due to: a full year contribution from the Dubai Petroleum contract; strong growth in SPD; new training facilities operated by Petrofac Training; the opening of a mechanical service centre in the Jebel Ali Free Zone in the United Arab Emirates; and, the contribution from the newly acquired Eclipse and Caltec businesses. Net profit increased by 10.1% to US$31.8 million(10) (2007: US$28.9 million), representing a net margin on revenue excluding pass-through revenue of 4.5% (2007: 4.2%). The underlying net margin, adjusted to eliminate amortisation of intangible assets and finance costs relating to deferred consideration, increased to 5.1% (2007: 4.7%) due principally to improved margins in the Facilities Management business in the UK and internationally, which more than offset slower than anticipated build-up in activity in some of the new training facilities opened during the year, where the business model is more highly operationally geared.

Operations Services' employee numbers grew to approximately 5,800 at 31 December 2008 (31 December 2007: 5,500).

The division's backlog was US$1.6 billion at 31 December 2008 (2007: US$1.9 billion), however, the majority of the division's backlog is denominated in Sterling and on a constant currency basis (at 31 December 2007 exchange rates) increased marginally to US$2.0 billion.

Review of operations

During the year, the Operations Services division continued to make good progress on its current portfolio of projects, secured an additional Duty Holder contract for the Northern Producer floating production facility and established a number of new training centres. The acquisition of a production engineering company and a technology company in the second half of the year will position the group, in conjunction with a number of its existing businesses, to deliver solutions that enhance and improve production for its customers, particularly in mature fields.

Dubai Petroleum

The division's largest project is the Dubai Petroleum service operator contract, which commenced in April 2007. The core contract continues to progress well with particular focus on production efficiency and integrity and there were significant levels of brownfield engineering and drilling activity during the year. Furthermore, the Dubai Petroleum Training Centre (DPTC), a joint venture between Petrofac Training and Dubai Petroleum, was formally opened at the end of August 2008. The DPTC is fully equipped to meet the technical safety training needs of the energy sector throughout the Middle East and supports a full calendar of courses.

Other Facilities Management

In June 2008, the Facilities Management business was awarded a Duty Holder contract to provide turnkey operations services for the Northern Producer, the floating production facility for the Petrofac Energy Developments-operated Don fields in the UK North Sea (see page 19). The contract is worth approximately US$30 million per annum. The Northern Producer is well known to the Operations Services division as it marked the commencement of the division's pioneering Duty Holder model on the Galley field, over 10 years ago, latterly for Talisman, before the facility was demobilised from the field in late 2007. The Facilities Management business was successful in securing a two-year extension of its Duty Holder contract with Venture Production, effective from November 2008, and with BHP Billiton for the Irish Sea Pioneer, to the end of 2009.

In addition to work with Dubai Petroleum, the Brownfield engineering business secured a number of new awards during 2008, including follow-on work with Venture Production in the Greater Kittiwake area, and internationally in Abu Dhabi and Tunisia. Brownfield engineering has now developed the capability to undertake larger-scale international projects.

Petrofac Training

In addition to the Dubai Petroleum Training Centre referred to above, Petrofac Training has continued to expand the international delivery of its training services, including the opening of: a new technical training centre on Sakhalin Island; a health and safety and major emergency management training centre in Houston; a major emergency management facility in Kuala Lumpur; and, a new safety training centre in Baku, Azerbaijan. Furthermore, in June 2008, Petrofac Training secured a contract, for a minimum of three years, to manage the Chemical Process Technology Centre (CPTC) in Singapore. The CPTC is a world-class training centre, owned by the Economic Development Board of Singapore, with facilities which include a full-scale hydrocarbon processing plant and specialist equipment laboratories, which facilitates operations and maintenance training, including start-up, shutdown and emergency response exercises. Petrofac Training now manages 16 training facilities in 8 countries.

Acquisitions

In July 2008, the division completed the acquisition of Eclipse Petroleum Technology Limited (Eclipse), a production engineering specialist, for an initial consideration of £7 million. Further consideration in cash and shares will be determined by the level of future profitability of Eclipse, which could increase the total consideration up to a maximum of £16 million. Eclipse was founded in 1999 and has approximately 50 employees operating from five offices worldwide: Aberdeen, London, Stavanger, Houston and Dubai. Its life-of-field services include: field development, production modelling and optimisation, well life-cycle risk management and petroleum engineering functional consulting.

In August 2008, the division completed the acquisition of Caltec Limited (Caltec), a specialist production technology company, for an initial consideration of £15 million. Further consideration in cash and shares will be determined by the achievement of agreed milestones, with the total consideration being capped at £30 million. Caltec was founded in 2003, after some years as a part of the British Hydromechanics Research Group Limited, an independent private company with close ties to Cranfield University. The company has approximately 20 members of staff operating from both Cranfield and Aberdeen. Its technologies include a number of products aimed at the production enhancement of mature fields, including the Wellcom system which boosts production flowrates by lowering wellhead pressures, and the I-SEP system which allows the partial separation of water from high water-cut production streams. In combination, these systems are capable of significant production, recovery and longevity improvements for mature fields.

These acquisitions complement the division's well operations management business, SPD, acquired in January 2007, and will combine with SPD and other existing businesses to further broaden the group's capability, which now extends from the management of surface facilities and well operations, to the ability to deliver solutions that enhance and improve production, particularly in mature fields. Going forward, these businesses will form the foundations of the new Production Solutions business unit.

Energy Developments

	2008	2007
	US$m	US$m
Revenue	153.4	132.8	up 15.5%
EBITDA	89.1	82.8	up 7.6%
EBITDA margin	58.1%	62.3%
Net profit as reported	21.9	33.4	down 34.4%
Net margin	14.3%	25.1%
Adjusted net profit	38.5	30.8	up 25.0%
Adjusted net margin	25.1%	23.2%

Results

Divisional revenue increased to US$153.4 million (2007: US$132.8 million) due to the commencement of exports from the Chergui gas plant and improved performance at the KPC refinery. Revenue from the Cendor field and the Ohanet gas plant was broadly in line with 2007, despite the impact of higher average oil prices. Under the terms of the Cendor PSC the division only benefits from 30% of the upside above the base oil price(11) and there was lower cost oil recovery in 2008 than in the prior year (during which the balance of the initial cost of the development was recovered). Under the terms of the Ohanet RSC, the division's return is capped upon earning its share of monthly liquids production.

Net profit for the year was US$21.9 million (2007: US$33.4 million), after:

• a US$8.2 million charge in relation to a currency hedge for capital expenditure on the Don area development, which, while being an economic hedge, has been deemed an ineffective cash flow hedge under International Accounting Standard 39 'Financial Instruments: Recognition and Measurement'

• an impairment provision of US$3.5 million (US$5.0 million less a tax credit of US$1.5 million) against the division's investment in Permit NT/P68 

• costs of US$4.9 million (US$9.8 million less a tax credit of US$4.9 million) in relation to the unsuccessful Prospero well in the Greater Don area.

Adjusting for these non-recurring items, net profit for the year was US$38.5 million (2007: US$30.8 million after adjusting for an impairment provision of US$8.7 million against the division's investment in Permit NT/P68 and the recognition of a net tax asset of US$11.3 million in relation to the trigger of a ring fence trade allowing UKCS pre-trading expenditure to be recognised as a deferred tax asset and the recognition of a net tax asset in relation to NT/P68 expenditure). Overall, the net profit contribution from Cendor and Ohanet was broadly consistent with 2007, while the increase in adjusted net profit was driven by commencement of the Chergui project and improved performance at the KPC refinery.  

Review of operations

The Energy Developments division's portfolio of developed assets continued to perform well throughout the year and now includes the Chergui gas plant in Tunisia, which was completed and produced first gas during the year. In addition, the division made substantial progress on the Don development, which is scheduled to commence production during the first half of 2009. Analysis of the division's oil & gas reserve entitlements is presented on page 83.

Developed assets

Cendor PM304, Malaysia

The division is operator and has a 30% interest in the Production Sharing Contract (PSC) for the Cendor field in Block PM304, offshore Peninsular Malaysia. The other partners to the Production Sharing Contract (PSC) are: Petronas Carigali; PetroVietnam E&P; and, Kuwait Foreign Petroleum Exploration Company (KUFPEC). The Cendor field averaged production of approximately 14,700 barrels per day during the year (2007: 14,300) and achieved production uptime of over 99 per cent.

Development of the conceptual design work for the second phase of the Cendor field is progressing, with a final investment decision expected during the second half of 2009. As part of the assessment of a second phase, an appraisal drilling programme was recently undertaken, which has yielded promising results.

Ohanet, Algeria

The division, in joint venture with BHP Billiton (as joint venture operator), Japan Ohanet Oil & Gas Co, and Woodside Energy (Algeria), has invested in excess of US$100 million for a 10% share in a Risk Service Contract (RSC) with Sonatrach, Algeria's national oil company. The Engineering & Construction division undertook the EPC contract for the gas processing facilities in joint venture with ABB Lummus and the Operations Services division was responsible for part of the on-site commissioning works. First gas for export began flowing in late 2003. 

The plant continued to perform well in 2008. Overall production was broadly comparable to the prior year at an average of approximately 147,000 bpd of oil equivalent (2007: 153,500 bpd of oil equivalent). On average, the division earned its share of the monthly liquids production by the 7th day of the month (2007: 8th), reflecting higher average oil & gas prices(12). It is expected that the division will earn its defined return by November 2011, at which point the contract will terminate.

KPC refinery, Kyrgyzstan

The division owns a 50% share in the Kyrgyz Petroleum Company (KPC) which is engaged in the refining of crude oil and the marketing of oil products from the KPC refinery.  The Operations Services division operates the refinery on behalf of the joint venture partners on a reimbursable basis. During 2008, the 10,000 bpd capacity refinery performed ahead of expectations, with improved access to feedstock and increased export demand, producing an average of approximately 2,800 bpd (2007: 2,500 bpd) of principally gasoline, diesel and fuel oil. 

Chergui field, Tunisia

In February 2007, the division completed its acquisition of a 45% operated interest in the Chergui concession from Entreprise Tunisienne d'Activités Pétrolières (ETAP), the Tunisian national oil company, which holds the remaining 55% interest.  Under the terms of the agreement, the division agreed to share the costs to complete the central production facility, pipeline to shore and associated infrastructure, which was managed by the Engineering & Construction division. The Operations Services division commissioned the plant and now operates the facility of behalf of the division.

First gas was achieved in June 2008, 15 months after first access to the site. Following completion of the export pipeline, the commercial export of gas commenced in August 2008, with the facility reaching and maintaining production near its nameplate capacity of 20 million standard cubic feet per day (mmscfd) shortly thereafter. Produced gas is sold to the national gas company, Société Tunisienne d'Electricité et Gaz (STEG), under a gas pricing formula fixed by existing law, in which the price of gas is linked to free-on-board Mediterranean (FOB Med) fuel oil prices.

Following commissioning of a new refrigeration unit in early 2009, the plant capacity has been increased by over 20%. As a result, it is anticipated the division will negotiate a revised higher volume gas sales contract with the offtaker. In addition, the division is currently undertaking seismic work to assess further development of the Chergui field.

Assets under development

Don Southwest and West Don, UKCS

In the UKCS, Petrofac Energy Developments, as operator, and on behalf of its co-venturers, is managing the development of the Don fields. Field Development Programme (FDP) approval was received from the Department of Business Enterprise and Regulatory Reform (now under the remit of the Department of Energy and Climate Change) for the Don Southwest (Petrofac interest 60.0%) and West Don (Petrofac interest 27.7%) fields in May 2008. A key component of the FDP is the Northern Producer floating production facility, which the division secured on a tariff basis from Sea Production Limited, a wholly owned subsidiary of Northern Offshore Limited, in January 2008.

The Northern Producer contract has an innovative commercial arrangement, such that the division, as operator, will pay a variable tariff linked to the oil price, which will range from a minimum of US$2 per barrel (if Brent is US$30 or less) to a maximum of US$6 per barrel (if Brent is US$90 or more).  The Northern Producer has a capacity of 55,000 barrels of oil per day and associated gas compression, water injection and export processing facilities. A major campaign of fatigue life enhancement works and equipment refurbishment was undertaken on the Northern Producer, which, together with the development of the subsea infrastructure, was managed with the assistance of the group's service divisions. 

The drilling programme commenced in August 2008, with the arrival of the John Shaw semi-submersible drilling rig. A second drilling rig, the Stena Spey, is being mobilised in the first quarter 2009, to enable the drilling schedule to be maintained despite unfavourable weather conditions. First oil from the West Don and Don Southwest fields remains on target with the original schedule, with both expected to start production during the first half of 2009. The development remains on budget.

The division expects that both the West Don and Don Southwest fields would generate a positive return at current oil prices.

The division's estimate of proven reserves (net entitlement) for the Don Southwest and West Don developments is 12.2 million barrels (2007: 12.2 million barrels), while its estimate of proven and probable reserves (net entitlement) is 22.2 million barrels (2007: 23.6 million barrels). The minor revision is due principally to a lower oil price assumption, following the recent change in economic conditions. There is further development potential in the Greater Don area, where the division has interests in Blocks 211/17, 211/18 and 211/18c. 

Permit NT/P68, Australia

Energy Developments entered into a farm-in arrangement with MEO Australia Limited (MEO) in June 2007. Under the terms of the farm-in, the division is to fund 25% (subject to a cap) of the Heron-2 and Heron-3 wells in return for a 10% interest in Permit NT/P68. The division also has an option to secure an interest in any LNG or methanol project that forms part of the development.

The Heron-2 well was drilled in late 2007 and following disappointing results which gave rise to uncertainties surrounding the commercial outcome, an impairment provision of US$8.7 million was made at 31 December 2007. The partners continue to review the options for the Heron-3 appraisal well and the commerciality of an LNG or methanol project (which could depend upon the proving of reserves by other operators in the area). Following a further impairment review of the carrying value of the asset, which indicated a wide range of potential commercial outcomes, a further impairment provision of US$5.0 million was made at 31 December 2008. The carrying value of the asset is now US$4.8 million.

Other

In April 2008, the division announced in conjunction with the Engineering & Construction division's award of the lump-sum EPC contract for the Ebla gas plant in Syria (see page 11) that it had an opportunity to acquire a 10% equity interest in the Ebla development. After a thorough review of the opportunity the division decided not to invest in the development.

In addition to the prospects noted above, the division reviewed, and continues to review, several upstream and energy infrastructure opportunities.

Ayman Asfari

Group Chief Executive

  Chief Financial Officer's review

	2008	2007
	US$m	US$m
Revenue	3,329.5	2,440.3	up 36.4%
Operating profit	355.6	248.5	up 43.1%
Operating margin	10.7%	10.2%
EBITDA	419.0	301.3	up 39.1%
EBITDA margin	12.6%	12.3%
Net profit	265.0	188.7	up 40.4%
Net margin	8.0%	7.7%
Backlog*	3,997	4,441	down 10.0%
* Does not include US$2.8 billion of new contract awards in 2009 to date

Revenue

Group revenue increased by 36.4% to US$3,329.5 million (2007: US$2,440.3 million) due to growth in all three divisions, but primarily due to strong growth in the Engineering & Construction division, which accounted for approximately two-thirds of the group's revenue. The increase in the Engineering & Construction division was as a result of high levels of activity on ongoing lump-sum EPC contracts, including new projects awarded during the year.

Operating profit

Group operating profit increased by 43.1% to US$355.6 million (2007: US$248.5 million) and operating margins increased to 10.7% (2007: 10.2%). Operations Services and Energy Developments operating profit increased marginally, though Operations Services operating margins were marginally lower due to an increase in the proportion of pass-through revenue(13), while Energy Developments operating margins were lower due to an impairment charge against Energy Developments' interest in Permit NT/P68 and costs in relation to the unsuccessful Prospero well in the Greater Don area. The Engineering & Construction operating profit increased by 68.1% to US$265.9 million (2007: US$158.2 million) due to strong growth in activity levels and continued excellent operational performance.

Net profit

Net profit increased to US$265.0 million for the year ended 31 December 2008 (31 December 2007: US$188.7 million), an increase of 40.4%, driven primarily by strong growth and margin improvement in the Engineering & Construction division. The net margin for the group increased to 8.0% (2007: 7.7%), broadly in line with the increase in the group's operating margin.

EBITDA

EBITDA increased to US$419.0 million (2007: US$301.3 million), representing an EBITDA margin of 12.6% (2007: 12.3%). The Engineering & Construction division EBITDA margin increased on the back of strong operational performance, which more than offset a marginal decrease in the Operations Services division due to an increase in the proportion of pass-through revenue, and in the Energy Developments division due in part to the terms of the Cendor PSC.

While EBITDA increased marginally in Operations Services and Energy Developments, it increased by 63.9% in Engineering & Construction due to the division's excellent operational performance. Consequently, the Engineering & Construction division's share of group EBITDA, excluding the effect of corporate, consolidation and elimination adjustments, increased to 66.6% (2007: 56.5%), while the Operations Services and Energy Developments decreased to 12.6% (2007: 16.6%) and 20.8% (2007: 26.9%) respectively.

Backlog

The group's combined backlog at 31 December 2008 was approximately US$4.0 billion (31 December 2007: US$4.4 billion). A significant proportion of the Operations Services division's backlog is denominated in Sterling, which depreciated significantly against the US dollar during the second half of 2008. On a constant currency basis, the group's backlog remained broadly comparable with the prior year. While not included in the year end backlog, a further US$2.8 billion of new contracts have been secured to date in 2009.

Exchange rates

The group's reporting currency is US dollars. During the second half of 2008, there was a significant depreciation of Sterling against the US dollar and there was therefore a significant impact on the reported results of the group's UK trading activities, principally within the Operations Services division. The impact on the results of the Operations Services division is discussed further on page 13.  The table below sets out the average and year end exchange rates for the US dollar and Sterling for the years ended 31 December 2008 and 2007 as used by the group for financial reporting purposes.  

		2008	2007
US$/Sterling
Average rate for the year		1.85	2.01
Year end rate		1.46	1.99

Interest 

Net finance income, excluding finance charges in relation to hedges deemed ineffective under IAS39, for the year was US$10.9 million (2007: US$9.7 million), due principally to the group's higher average cash balances during 2008.  

Taxation

An analysis of the income tax charge is set out in note 6 to the financial statements.  The income tax charge as a percentage of profit before tax in 2008 was lower at 26.1% (2007: 26.9%).  The marginal decrease in the effective tax rate compared to the prior year is due principally to: 

• the Engineering & Construction division contributing a greater proportion of the group's profit leading to a higher proportion of the group's profits being earned in lower tax jurisdictions, which more than offset 

• an increase in the effective tax rate for the Energy Developments division due to the recognition in 2007 of a deferred tax asset in relation to UKCS pre-trading expenditure and no tax relief being available in the current year on a charge in relation to a cash flow hedge deemed ineffective under IAS39.

Earnings per share

Fully diluted earnings per share increased from 54.61 cents per share in 2007 to 77.11 cents in 2008, an increase of 41.2%, reflecting the group's significant increase in profitability in 2008.

Operating cash flow and liquidity

Cash generated from operations was US$565.7 million (2007 restated: US$371.6 million), representing 135.0% of EBITDA (2007 restated: 123.3%). The increase in net cash inflows was due principally to the increase in operating profit during the year and a reduction in net working capital utilisation. The movement in net working capital arose principally from timing differences at the year end in respect of the customer billing and supplier payment positions on long-term engineering and construction contracts.

Gearing ratio	2008	2007 (restated)
	US$ million (unless otherwise stated)
Interest-bearing loans and borrowings (A)	142.6	110.1
Cash and short term deposits (B)	694.4	581.6
Net cash/(debt) (C = B - A)	551.8	471.5
Equity attributable to Petrofac Limited shareholders (D)	558.8	522.8
Gross gearing ratio (A/D)	25.5%	21.1%
Net gearing ratio (C/D)	Net cash position	Net cash position

The group increased its levels of interest-bearing loans and borrowings to US$142.6 million (2007: US$110.1 million), resulting in an increase in the group's gross gearing ratio to 25.5% at 31 December 2008 (2007: 21.1%). The group continues to hold significant net cash balances.

The group's total gross borrowings before associated debt acquisition costs at the end of 2008 were US$148.0 million (2007: US$112.4 million), of which 45.9% was denominated in US dollars (2007: 39.3%), 51.8% was denominated in Sterling (2007: 55.3%) and the majority of the balance, 2.3%, was denominated in Kuwaiti Dinars (2007: 5.3%).

As detailed in note 31 to the financial statements, the group maintained a balanced borrowing profile with 36.8% of borrowings maturing within one year and 63.2% maturing between one and five years (2007: 25.3%, 54.5% and 20.2% maturing in more than five years). The decrease in the average duration of borrowings reflects the existing repayment terms of the group's facilities with the Royal Bank of Scotland/Halifax Bank of Scotland and an increase in the group's overdraft facilities to manage its working capital requirements. The borrowings repayable within one year include US$45.3 million of bank overdrafts and revolving credit facilities (representing 30.6% of total gross borrowings, see note 31 to the financial statements), which are expected to be renewed during 2009 in the normal course of business (2007: US$22.2 million and 19.7% of total gross borrowings).

The group's policy is to hedge between 60% and 80% of interest arising on floating rate interest bearing loans and borrowings. At 31 December 2008, 65.1% of the group's floating rate interest-bearing loans and borrowings were hedged (2007: 69.1%). An analysis of the derivative instruments used by the group to hedge its interest rate and other exposures is contained in note 31 to the financial statements.

With the exception of Petrofac International Ltd, which undertakes the majority of the group's lump-sum EPC contracts and which, under its existing banking covenants, is restricted from making cash payments to Petrofac Limited in excess of 70% of its net profit in any one year, none of the Company's subsidiaries are subject to any material restrictions on their ability to transfer funds in the form of cash dividends, loans or advances to the Company.

Capital expenditure

Capital expenditure on property, plant and equipment during the year was US$255.5 million (2007: US$117.2 million). The principal elements of capital expenditure were:

• additions to oil & gas assets in relation to Energy Developments' interest in the Don assets of US$167.3 million

• completion of the group's new office building in Sharjah of US$40.5 million

• completion of the Chergui gas plant in Tunisia of US$21.9 million

Capital expenditure on intangible oil & gas assets during the year was US$37.0 million (2007: US$49.7 million) which was principally in respect of capitalised expenditure on near field appraisal wells in relation to Energy Developments' interest in Block PM304, offshore Malaysia, of US$24.7 million and costs of US$9.8 million in relation to the unsuccessful Prospero well (which were subsequently written-off).  

Shareholders' funds

Total equity at 31 December 2008 was US$559.0 million (2007 restated: US$523.0 million).  The main elements of the net movement were the increase in retained earnings for the year of US$200.3 million, less the net gain on the maturity of cash flow hedges recognised in the income statement of US$32.1 million, a loss on foreign currency translation of US$84.2 million and the net change in fair value of derivatives of US$25.9 million, plus an increase in the share-based payments reserve of US$16.0 million and a net increase in the cost of treasury shares held by the Company in relation to employee share scheme awards of US$39.5 million.

Return on capital employed

The group increased its return on capital employed for the year ended 31 December 2008 to 52.7% (2007 restated: 45.7%).

Dividends

The Company proposes a final dividend of 17.90 cents per share for the year ended 31 December 2008 (2007: 11.50 cents), which, if approved, will be paid to shareholders on 22 May 2009 provided they were on the register on 24 April 2009. Shareholders who have not elected (before 9 March 2009) to receive dividends in US dollars will receive a Sterling equivalent of 12.57 pence per share.  Given the strong cash generation of the group, the Board has taken the decision to revise the Company's dividend policy, increasing the percentage of earnings to be distributed by way of dividend to approximately 35% of full year post tax profits (previously 30%), which will continue to be paid approximately one-third as an interim dividend and two-thirds as a final dividend.

Keith Roberts

Chief Financial Officer

End notes:

1. EBITDA means earnings before interest, tax, depreciation, amortisation and is calculated as profit from operations before tax and finance costs adjusted to add back charges for depreciation, amortisation and impairment charges (as set out in note 3 to the financial statements).
2. Net profit (for the group) means profit for the year attributable to Petrofac Limited shareholders.
3. Net profit for the year was US$21.9 million (2007: US$33.4 million), after: a US$8.2 million charge in relation to a currency hedge deemed an ineffective cash flow hedge under IAS39; an impairment provision of US$3.5 million against the division's investment in Permit NT/P68; and, net costs of US$4.9 million in relation to the unsuccessful Prospero well in the Greater Don area. Adjusting for these non-recurring items, net profit for the year was US$38.5 million (2007: US$30.8 million, after an impairment provision of US$8.7 million in relation to the division's interest in Permit NT/P68 and the recognition of a net tax asset of US$11.3 million).
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. To the extent work advances on these contracts, revenue is recognised and removed from the backlog. Where contracts extend beyond five years, the backlog relating thereto is added to the backlog on a rolling monthly basis. Backlog includes only the revenue attributable to signed contracts for which all pre-conditions to entry have been met and only the proportionate share of joint venture contracts that is attributable to Petrofac. Backlog does not include any revenue expected to arise from contracts where the client has no commitment to draw upon services from Petrofac. Backlog is not an audited measure. Other companies in the oil & gas industry may calculate these measures differently.
5. Return on capital employed is defined as the ratio of earnings before interest, income tax and amortisation (i.e. operating profit plus goodwill and other amortisation and impairment charges) (EBITA) and average capital employed, being average total assets employed less average total current liabilities.
6. 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 2008 final dividend from US dollars into Sterling is based upon an exchange rate of US$1.4235:£1, being the Bank of England Sterling spot rate as at midday on 6 March 2009.
7. Employee numbers include the group's share of joint venture employees.
8. Pass-through revenue refers to the revenue recognised from low or zero-margin third-party procurement services provided to customers.
9. The majority of the Operations Services division's revenues are denominated in Sterling. The average US dollar to Sterling exchange rate for 2008 was 1.85 compared to 2.01 in 2007.
10. On a constant currency basis (at 31 December 2007 exchange rates) net profit would have increased by 22.8% to US$35.5 million. Note that the majority of the division's net profits are earned in the second half of the year (due to the timing of recognition of incentive income).
11. The base price for 2008 averaged approximately US$37 per barrel.
12. For example, Brent, a benchmark crude oil, averaged US$97 per barrel for 2008 (2007: US$72 per barrel).
13. Pass-through revenue increased to 28.1% of Operations Services revenue in 2008 (2007: 24.9%).

 

END

 

 

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