Final Results for the year ended 31 December 2014

Press Release

 

25 February 2015

PETROFAC LIMITED

 

FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2014

 

·    Revenue of US$6.2 billion (2013: US$6.3 billion)

·    EBITDA⁽¹⁾⁽³⁾ of US$935 million (2013: US$1,031 million)

·    Net profit⁽²⁾⁽³⁾ of US$581 million (2013: US$650 million), consistent with our previous guidance

·    Earnings per share (diluted)⁽³⁾ of 168.99 cents (2013: 189.10 cents)

·    Full year dividend maintained at 65.80 cents per share (2013: 65.80 cents); final dividend of 43.80 cents per share (2013: 43.80 cents)

·    Backlog⁽⁴⁾ up 26% to record year-end levels of US$18.9 billion at 31 December 2014 (2013: US$15.0 billion), which together with US$3.5 billion of order intake in the year to date, gives us excellent revenue visibility for 2015 and beyond

·    Net debt position of US$0.7 billion at 31 December 2014 (2013: US$0.7 billion) reflecting success in closing a number of commercial settlements

·    Delivered overhead and operating cost savings across the Group of US$170 million in 2014 and targeting further cost savings in 2015 to help us maintain our competitive position

·    Exceptional items and certain re-measurements in relation to IES portfolio of US$461 million, predominantly due to Ticleni, Greater Stella Area, and the lower oil price environment; net book value of IES project portfolio stands at US$1.8 billion⁽⁵⁾

 

Ayman Asfari, Petrofac's Group Chief Executive commented on the final results:

"Having taken robust action to address the challenges we have faced on the Ticleni, Greater Stella Area and Laggan-Tormore projects, Petrofac enters 2015 in a much stronger position.

 

"Engineering, Construction, Operations & Maintenance (ECOM) has achieved a record backlog and Petrofac remains a leader in this market with a strong track record, longstanding client relationships and a competitive cost structure. Notwithstanding the current lower oil price environment, we continue to see an attractive pipeline of bidding opportunities in the year ahead, reflecting Petrofac's core geographies and client base.

 

"Integrated Energy Services (IES) has a renewed focus on the core competencies of the Group.  Our priority is to generate value from the existing project portfolio and we have made a clear commitment to reduce the capital intensity of this business.

 

"We are committed to delivering value for our clients and our shareholders and we are well positioned to meet the challenges presented by the lower oil price. We remain on course to deliver net profit in 2015 in line with our previous guidance⁽⁶⁾."

 

 

 

OPERATIONAL HEADLINES

 

ENGINEERING, CONSTRUCTION, OPERATIONS & MAINTENANCE (ECOM)

 

Onshore Engineering & Construction

·     Achieved order intake in 2014 of US$6.3 billion, securing major new awards in Kuwait, Oman, Algeria and Malaysia

·    Agreed capacity enhancements on the Upper Zakum field development in Abu Dhabi and fully remobilised on the In Salah southern fields development in Algeria in early 2014

·    Recognised a cumulative loss of around US$180⁽⁷⁾ million on the Laggan-Tormore project and agreed a commercial settlement which should see us recognise no further profit or loss

·    Reached final agreement on a number of other longstanding commercial settlements with our clients, in line with our expectations

 

Offshore Projects & Operations

·   Secured a number of extensions and new awards for services provided in the UK North Sea, including for BP, Total, GDF SUEZ, Maersk, Centrica, EnQuest and Chevron

·    Secured a second contract extension with South Oil Company in Iraq and awarded a three-year general construction management services contract by BP Iraq for the Rumaila field

·    Awarded our largest offshore EPCI project to date with the award of a contract from TenneT, for the BorWin3 offshore wind farm grid connection in the North Sea

·    We are marketing the Petrofac JSD6000 which will be available from mid-2017 but we retain flexibility to delay the delivery of the vessel further dependent on project awards

·     Agreed a strategic marketing alliance with McDermott to address the deepwater SURF market

 

Engineering & Consulting Services

·     Awarded largest project to date: an engineering and procurement contract to provide services for Rabab Harweel Integrated Project facility in Oman worth more than US$1 billion

·     Undertaken a wide range of studies during the year, including a FEED study for the Thamama production zone for ADCO and a development study to work with the Government of Nova Scotia to help it identify the best way forward to exploit its ultra-deepwater oil potential

 

INTEGRATED ENERGY SERVICES (IES)

·   Commenced production from Cendor phase 2 on Block PM304 with production expected to continue to increase over the near-term as facilities are fully commissioned

·     First production from the Greater Stella Area now expected by mid-2016

·    Continue to make good progress on our Production Enhancement Contracts in Mexico while engaging in contract migration discussions as part of Mexico's energy reforms

·    On Ticleni, impaired full carrying value and will be discussing exit options with OMV Petrom

·    Reached a mutually acceptable agreement with Bowleven to terminate our Strategic Alliance Agreement in respect of the Etinde Permit in Cameroon

 

 

OUTLOOK

While the operating environment remains uncertain, with the industry adjusting to a lower oil price environment, we are well positioned and will maintain our bidding discipline and focus on our areas of core strength. We enter 2015 with a very cost-effective structure and we are continuing to drive cost savings to maintain our strong competitive position.

 

At this stage, clients in our core onshore markets in the Middle East and North Africa are continuing to commit to ongoing investment in large strategic projects. Operations and maintenance activity remains robust and we see opportunities to continue to grow internationally. While the market for deepwater offshore projects is softer than when we announced the strategy two years ago, the long-term fundamentals remain attractive and we are committed to our strategy but are responding to the market changes. Our ECOM backlog stands at record levels, giving us excellent revenue visibility for 2015 and beyond, and our overall portfolio is in good shape, with built in margins consistent with guidance.

 

We have re-focused the IES strategy to improve synergies with ECOM, lower capital-intensity and will manage the portfolio to maximise value. Our balance sheet remains strong and we are focused on managing working capital and improving capital returns.

 

BOARD CHANGES

The Petrofac Board is recommending that shareholders approve the appointment of Matthias Bichsel at its 2015 Annual General Meeting. If approved by shareholders, Matthias, who has over 30 years' relevant experience, most recently as Director of Projects & Technology at Royal Dutch Shell plc, will join the Board as an independent Non-executive Director on 14 May 2015.  Matthias brings an extensive understanding of the oil and gas industry and the Board looks forward to working with him. In addition, Roxanne Decyk has notified the Board of her intention to step down as a Non-executive Director at the conclusion of the Annual General Meeting.  The consequential changes to Board Committee memberships following these changes will be reviewed in due course.

 

Notes

 

⁽¹⁾        EBITDA means earnings before interest, tax, depreciation and amortisation and is calculated as profit before tax, net finance costs, exceptional items and certain re-measurements, but after our share of results of associates (as per the consolidated income statement), adjusted to add back charges for depreciation and amortisation (as per note 3 to the consolidated financial statements).

 

⁽²⁾         Net profit for the year attributable to Petrofac Limited shareholders.

 

⁽³⁾         Before exceptional items and certain re-measurements.

 

⁽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, operations, maintenance and Integrated Energy Services contracts, the estimated revenue attributable to the lesser of the remaining term of the contract and five years. Backlog will not be booked on Integrated Energy Services contracts where the Group has entitlement to reserves. The Group uses this key performance indicator as a measure of the visibility of future revenue. Backlog is not an audited measure.

 

⁽⁵⁾         Includes the long-term receivable on the Berantai Risk Service Contract, our investment in Seven Energy and receivables in respect of our portfolio of Mexican Production Enhancement Contracts, and excludes oil and gas facilities held under finance leases.

 

⁽⁶⁾         On 24 November 2014, we guided to net profit in 2015 of around US$500 million based on the then prevailing average 2015 forward oil price of around US$82 per barrel and stated that a further increase/decrease of US$1 in the price of oil would impact net earnings by around US$2 million. Based on the current average 2015 forward oil price of around US$60 per barrel, we therefore currently expect net earnings to be around US$460 million. Other than the movement in the oil price the Group continues to perform in line with management expectations at the time of the November announcement. According to Company compiled consensus of 17 analysts who have published forecasts since our market update on 24 November 2014, consensus net profit for 2015 is US$470 million, based on an average oil price assumption of US$66 per barrel.

 

⁽⁷⁾         In line with our latest assessment of the schedule and cost-to-complete, and the final commercial settlement agreed with our client, we recognised a loss on the project in 2014 in Onshore Engineering & Construction of around US$200 million. A further loss of around US$30 million was recognised in Offshore Projects & Operations in 2014 on their scope of the project and around US$50 million of profits have been recognised in previous years across the Group. Overall, the Group has recorded a cumulative loss on Laggan-Tormore of around US$180 million.

 

 

Analyst presentation:

An extended full year results presentation for analysts and investors will be held at 9.30am today, which will be webcast live via: http://cache.merchantcantos.com/webcast/webcaster/4000/7464/16532/44882/Lobby/default.htm

 

 

A replay of the event will be available online for a number of months. Should you have any difficulty accessing the online broadcast or replay, an audio broadcast and replay is available:

 

Conference call

UK & International Number                               +44 (0) 20 3003 2666

Participant Pin Code                                        0808 109 0700

 

Audio Playback Numbers (available for 7 days)

UK Toll Number                                              +44 (0)20 3350 6902

Audio Playback PIN                                          9502037#

 

Ends

 

 

Disclaimer:

This announcement contains forward-looking statements relating to the business, financial performance and results of Petrofac and the industry in which Petrofac operates. These statements may be identified by words such as "expect", "believe", "estimate", "plan", "target", or "forecast" and similar expressions, or by their context. These statements are made on the basis of current knowledge and assumptions and involve risks and uncertainties. Various factors could cause actual future results, performance or events to differ materially from those described in these statements and neither Petrofac nor any other person accepts any responsibility for the accuracy of the opinions expressed in this presentation or the underlying assumptions. No obligation is assumed to update any forward-looking statements.

 

 

For further information contact:

Petrofac Limited                                                                +44 (0) 207 811 4900

Jonathan Low, Head of Investor Relations

Jonathan Edwards, Investor Relations Officer

 

Alison Flynn, Head of Media Relations                                    +44 (0) 207 811 4913

 

Tulchan Communications Group Ltd                                       +44 (0) 207 353 4200

Stephen Malthouse

Martin Robinson

[email protected]

 

 

Notes to Editors

 

Petrofac

 

Petrofac is a leading international service provider to the oil & gas production and processing industry, with a diverse client 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). 

 

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 clients' needs across the full life cycle of oil & gas assets.

 

With around 20,000 employees, Petrofac operates out of seven strategically located operational centres, in Aberdeen, Sharjah, Abu Dhabi, Woking, Chennai, Mumbai and Kuala Lumpur and has a further 24 offices worldwide.

 

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

 

 

(The attached is an extract from the Group's Annual Report and Accounts for the year ended 31 December 2014. Page number references refer to the full Annual Report when available.)

 

 

Engineering, Construction, Operations & Maintenance (ECOM)

Onshore Engineering & Construction
Onshore Engineering & Construction delivers onshore engineering, procurement and construction projects. We are predominantly focused on markets in the Middle East, Africa and Caspian region of the CIS.

Activity levels on our portfolio of engineering and construction projects increased substantially during the year and we expect activity levels to remain high throughout 2015 as we move into the execution phase on a number of projects secured over recent months. These include the Clean Fuels Project in Kuwait, the Khazzan central processing facility (CPF) in Oman and the Reggane North Development Project in Algeria.

During 2014, we substantially completed the gas sweetening facilities project in Qatar for Qatar Petroleum and the new power distribution network project for Kuwait Oil Company.

In respect of the Laggan-Tormore project in Shetland, in line with our latest assessment of the schedule and cost-to-complete, and the final commercial settlement agreed with our client, we have recognised a loss on the project in 2014 of around US$200 million. The impact of the loss on Laggan-Tormore was mitigated by a good margin performance on a number of late-life contracts and the net release of tax provisions. With a further loss of around US$30 million being recognised in Offshore Projects & Operations in 2014 on their scope of the project and around US$50 million of profits having been recognised in previous years across the Group, overall the Group has recorded a cumulative loss on Laggan-Tormore of around US$180 million.

Following the terrorist attack which took place in January 2013 at the In Amenas natural gas site in Algeria, at the request of our client, we evacuated our staff on a temporary basis from the In Salah southern fields development. Full remobilisation to site commenced in early 2014 and we expect to complete construction of the project during 2016.

We also agreed capacity enhancements and the commercial impact of the changes on the Upper Zakum field development in Abu Dhabi during the first half of 2014.

 

New awards
Order intake for the year totalled US$6.3 billion (2013:US$6.2 billion), including the following major awards:

Clean Fuels Project, Kuwait
In February 2014, leading a joint venture with Korean based Samsung Engineering Co Ltd and CB&I Nederland BV, we received an award notification for Kuwait National Petroleum Company's Clean Fuels Project, Mina Abdulla refinery in Kuwait. The project is worth US$3.7 billion of which Petrofac's share is US$1.7 billion and will be completed over a period of approximately four years. The lump-sum engineering, procurement and construction scope of work includes the provision of 19 new refining units at Mina Abdulla, revamping of five existing units at the Shouaiba refinery site and the accompanying inter-refinery transfer lines.

Khazzan central processing facility, Oman
In February 2014, we were awarded a contract by BP for the CPF for the Khazzan gas project in the Sultanate of Oman. This has been awarded on a convertible lump-sum basis and will convert to a full lump-sum contract worth approximately US$1.2 billion at a pre-determined point during execution. The scope of work includes engineering, procurement and construction of the CPF at the Khazzan field. The CPF will include two process trains,each having a capacity of 525 million standard cubic feet of gas per day, an associated condensate processing system, power generation plant, water treatment system and all associated utilities and infrastructure. The project is expected to be completed in 2017.

Reggane North Development Project, Algeria
In May 2014, we were awarded a three-year contract worth more than US$970 million for the gas gathering, treatment and export facilities package of the Reggane North Development Project located in the Reggane basin of the Algerian Sahara desert, 1,500 km south-west of Algiers. The scope of the project includes engineering, procurement, construction, commissioningand start-up of the gas treatment plant, gathering system and export pipeline.

Gathering Centre 29, Kuwait
In July 2014, we received an award notification for Kuwait Oil Company's Gathering Centre 29 (GC29) which is located approximately 70 km north of Kuwait City. Valued at approximately US$700 million, the project will be completed over a period of approximately three years. The competitively tendered lump-sum greenfield scope of work includes the engineering, procurement, construction, pre‑commissioning and commissioning of GC29.

RAPID project, Malaysia
In August 2014, we were awarded an engineering, procurement, construction and commissioning (EPCC) contract by PRPC Refinery and Cracker Sdn. Bhd, a subsidiary of PETRONAS, for a refinery package in the refinery and petrochemicals integrated development (RAPID) project in Pengerang, Johor, Malaysia. Worth more than US$500 million, the competitively tendered lump-sum EPCC scope of work includes three sulphur recovery units, two amine regeneration units, two sour water stripping units, a liquid sulphur storage unit and a sulphur solidification package unit.

We were also successful in securing the following project in early 2015:

Lower Fars heavy oil project, Kuwait
In January 2015, we announced that we had been awarded the Lower Fars heavy oil project in Kuwait for Kuwait Oil Company. With a project value in excess of US$4 billion, Petrofac is leading a consortium with Athens-based Consolidated Contractors Company. The award represents the first phase of the substantial Lower Fars heavy oil development programme. Our scope of work covers greenfield and brownfield facilities and includes engineering, procurement, construction, pre-commissioning, commissioning, start-up and operations and maintenance work for the main CPF and associated infrastructure as well as the production support complex. This includes a 162 km pipeline which will transport heavy crude oil from the CPF to the south tank farm located in Ahmadi, from where KOC has the option tosend it to the proposed Al-Zour refinery in the south of Kuwait.

Financial performance
Revenue for the year was lower at US$3,241 million (2013: US$3,534 million), reflecting the phasing of project delivery. In comparison with 2013, when several large projects were substantially completed, activity levels and revenue in the first half of 2014 were low while the projects were in their early stages. Activity levels and revenue increased substantially in the second half of 2014 as we moved into the execution phase on a number of projects.

Net profit for the year was US$403 million (2013 restated: US$433 million), representing a net margin of 12.4% (2013 restated: 12.3%), broadly in line with the prior year. The impact in 2014 of the loss of around US$200 million recognised on the Laggan-Tormore project noted above has been mitigated by the net release of tax provisions and other financial outperformance on late-life contracts elsewhere in the contract portfolio.

Onshore Engineering & Construction headcount stood at 5,900 at 31 December 2014 (2013: 6,100). While lower than the prior year-end, this represents a significant increase from 5,200 at 30 June 2014, reflecting an increase in activity levels as we move into the execution phase on a number of projects secured over recent months.

Onshore Engineering & Construction backlog increased by 38% over the year to stand at US$10.8 billion at 31 December 2014 (2013: US$7.8 billion), reflecting the strong order intake in 2014, as noted above. The year-end backlog has been further augmented by the award of the Lower Fars heavy oil project in Kuwait in January 2015.

 

Offshore Projects & Operations
Offshore Projects & Operations, which includes our Offshore Capital Projects (OCP) service line, specialises in both offshore engineering and construction services, for greenfield and brownfield oil and gas projects, and the provision of operations and maintenance support, onshore and offshore.

Overall, activity levels in 2014 on operations support contracts were similar to 2013. There was a significant increase in the level of activity on capital projects, such as the Laggan-Tormore gas plant on Shetland in the UK, the upgrade and modification of the FPF1 (which will subsequently be deployed on the Greater Stella Area - see Integrated Energy Services section) and the Satah Al Razboot package 3 (SARB3) engineering, procurement, construction and installation (EPCI) project in Abu Dhabi, which was awarded in April 2013.

New awards and extensions:
We secured a number of extensions during the year for services provided in the UK North Sea from a range of clients including: BP, Total, Maersk, Centrica and EnQuest (in respect of duty holder services on the Kittiwake platform). In addition, we secured a second contract extension from South Oil Company (SOC) for support on its Iraq crude oil expansion project.

We also secured the following major new contracts during the year:

BorWin3 offshore wind farm grid connection, Germany
In April 2014, we secured our largest offshore engineering, procurement, construction and installation project to date with the award of a major contract from TenneT (in consortium with Siemens), the German-Dutch transmission grid operator, for the BorWin3 offshore wind farm grid connection in the North Sea. Our scope includes the construction and offshore installation of the BorWin3 platform, which will house a Siemens high voltage direct current (HVDC) station that converts the alternating current produced by the wind turbines to direct current before transmitting it onshore to the German national grid. The HVDC station will be one of the biggest of its kind with a transmission capacity of 900 megawatts. The commencement of commercial operation of Borwin3 is scheduled for 2019.

EnQuest North Sea operations and maintenance contract, UK
In May 2014, we were awarded a ten-year operations and maintenance contract with EnQuest, which supersedes an initial five year contract awarded to Petrofac in 2013, and which will see us continue to provide operations and maintenance services on the Thistle, Heather and Northern Producer assets, and the EnQuest Producer floating production, storage and offloading vessel.

GDF SUEZ Integrated Services Contract, UK
In August 2014, we announced the renewal of our Integrated Services Contract with GDF SUEZ E&P UK. The three-year multimillion dollar frame contract covers operations, maintenance and engineering services support to GDF SUEZ E&P UK throughout its operations in the UKCS, including Cygnus, the largest gas field discovery in the Southern North Sea for 25 years. The contract will initially continue to support Cygnus operational readiness, followed by the provision of operations and maintenance services for the Cygnus asset offshore. The contract combines the services previously provided under the Integrated Services Contract and Engineering Services Contract, both originally awarded in 2011.

General construction management services, Iraq
In October 2014, we were awarded a major contract in Iraq to provide general construction management services to BP Iraq NV (BP) on the Rumaila field near Basra in the south of the country. Petrofac will provide management and personnel to manage brownfield modifications to assist BP - and its partners in the Rumaila Operations Organisation, China National Petroleum Company and South Oil Company - in executing its strategy to increase production safely from one of the world's largest fields. The contract, which runs for three years, with an option for further extension of two years, has a potential value of up to US$500 million. Petrofac will provide the overall management and co-ordination of multiple construction projects, including construction management and supervision of work undertaken by third party contractors on the field.

Chevron North Sea engineering and construction support, UK
In October 2014, we were awarded a contract worth up to US$120 million to provide engineering and construction support for Chevron's three operated assets: the Captain, Alba and Erskine platforms in the North Sea. The contract, awarded under a competitive tender, is for up to three years, plus two one year options.

Awards in 2015
With the award of the Lower Fars heavy oil project in Kuwait in January 2015, Offshore Projects & Operations will book approximately US$125 million in backlog for the operations and maintenance scope of the project which will follow the EPC phase.

 

Financial performance
Revenue for the year increased 20.2% to US$2,009 million (2013: US$1,671 million) reflecting higher levels of activity, particularly on capital projects such as the Laggan-Tormore gas plant project in Shetland, the FPF1 modification and upgrade and the SARB3 project in Abu Dhabi. Around 70% of Offshore Projects & Operations' revenue was generated in the UK and those revenues are generally denominated in sterling. The average US dollar to sterling exchange rate for the year was slightly higher than the prior year. Excluding the impact of the exchange rate movement, revenue growth would have been marginally lower than reported, at approximately 16%.

 

Financial reporting exchange rates US$/sterling	Year ended 31 December 2014	Year ended 31 December 2013
Average rate for period	1.65	1.57
Year-end rate	1.55	1.66

 

Net profit for the year was lower at US$64 million (2013 restated: US$71 million), reflecting a loss of around US$30 million on Offshore Projects & Operations' scope of work on the Laggan-Tormore gas plant and no margin on the FPF1 upgrade and modification. In addition, there was a US$8 million foreign exchange loss on forward contracts on a long-term project which management considers provide effective hedges in economic terms but which do not meet the requirements to be accounted for as hedging instruments under IAS39. Consequently, net margins were lower at 3.2% (2013 restated: 4.2%).

The Group's results for the year ended 31 December 2013 included a one-off gain of US$22 million (reported within 'Consolidation adjustments & eliminations'), reflecting the recognition, on granting a finance lease over the FPF5 to the partners on the PM304 Production Sharing Contract in Malaysia, of margin from the modification and upgrade of the FPF5 by Offshore Projects & Operations which was eliminated on consolidation in prior years.

Headcount increased to 5,500 at 31 December 2014 (2013: 5,100), reflecting the significant increase in activity. Offshore Projects & Operations backlog stood at US$3.4 billion at 31 December 2014 (2013: US$3.1 billion), with a number of new awards and extensions offsetting the unwinding of backlog as we make progress on the existing portfolio of projects.

 

Engineering & Consulting Services

Engineering & Consulting Services operates as our centre of technical engineering excellence. From offices across the Middle East and North Africa, CIS, Asia-Pacific, Europe and The Americas, we provide engineering services across the life cycle of oil and gas assets. Our teams execute all aspects of engineering, including conceptual studies, frontend engineering and design (FEED) and detailed design work, for onshore and offshore oil and gas fields and facilities.

As well as supporting the rest of the Group, Engineering & Consulting Services has secured and undertaken a wide range of conceptual studies and FEED studies during the year for external customers. Engineering & Consulting Services' larger awards during 2014 included:

Thamama front end engineering design, Abu Dhabi
In February 2014, we announced the award of a US$21 million FEED contract by Abu Dhabi Company for Onshore Oil Operations (ADCO). The project, in the Thamama production zone, forms part of ADCO's Bab Integrated Facilities Project, located 150 km south-west of Abu Dhabi city. Prior to award of the FEED, we also successfully completed conceptual studies for the same development. The scope of work specifically looked at enhancing aspects of the field for its future development and expansion.

Rabab Harweel Integrated Project (RHIP), Oman
In March 2014, we were awarded Engineering & Consulting Services' largest project to date: an engineering and procurement contract with Petroleum Development Oman (PDO) to provide services for the RHIP facility located in the Harweel Cluster of fields in the south of the Sultanate of Oman. The RHIP facility will include sour gas processing facilities and associated gathering and injection systems and export pipelines. Under the terms of the four and a half year RHIP contract, we will provide detailed engineering and construction and commissioning management support services on a reimbursable basis and procurement on an incentivised pass-through basis. The total contract value is expected to be more than US$1 billion with around one-quarter of the revenues relating to professional services (engineering, construction and commissioning management).

Shah Deniz 2 project, Azerbaijan
In July 2014, we secured a contract with the BP-operated Shah Deniz 2 project to provide maintenance build capabilities. The contract, valued at around £5 million, covers new onshore, offshore and pipeline assets in the Azerbaijan sector of the Caspian Sea for what is one of the largest gas developments in the world. Plant Asset Management, Petrofac's asset performance management consulting business, will be responsible for thedelivery of the work.

Deepwater development project, Canada
In October 2014, we secured a contract to work with the Government of Nova Scotia to help it identify the best way to exploit its ultra-deepwater oil potential. Under the terms of the contract, Petrofac will deliver a development study for a prospective oil reservoir 3,000 metres beneath the seabed, lying in 2,000 metres of water. This is a multi-discipline, integrated project, being led by Petrofac's specialist subsea engineering business, KW Subsea. Teams from across the Group will provide support to the project, ranging from process design, naval architecture, subsea engineering, cost estimating as well as a specific drilling scope. We expect to complete the project in early 2015.

Awards in 2015
In early 2015, we also announced two strategic contract agreements with Algerian state-owned Sonatrach. The first is a five year contract where we will be providing a range of multi-discipline engineering design and procurement services in support of Sonatrach's upstream hydrocarbon development programme within the procedures that govern the tenderingprocess. Under the terms of the second agreement, we signed a Memorandum of Understanding with Sonatrach, committing both parties to establish an Algerian Joint Venture to undertake engineering and project execution of selected upstream and downstream developments. The Joint Venture is expected to be finalised by mid-2015.

Financial performance
Revenue for the year increased 20.7% to US$437 million (2013: US$362 million), reflecting a substantial increase in activity levels, including: RHIP and the In Salah Gas and In Amenas consultancy contract, which was awarded in January 2013, but on which substantial activity only commenced in 2014.

Net profit for the year was marginally higher at US$33 million (2013: US$32 million). While activity levels were significantly higher than the prior year, much of the activity on RHIP is at lower margin as the procurement is undertaken on an incentivised pass through basis.

Headcount increased to 4,900 at 31 December 2014 (2013: 3,900), with significant increases in our Indian offices to support increased activity in Onshore Engineering & Construction and in Sharjah, UAE to support RHIP and other projects in the Middle East and North Africa.

Engineering & Consulting Services' backlog stood at US$1.4 billion at 31 December 2014 (2013: US$0.3 billion) following the award of the Rabab Harweel Integrated Project in Oman in March 2014.

 

Integrated Energy Services

Integrated Energy Services provides an integrated service for hydrocarbon resource holders under innovative commercial models that are aligned with their requirements. Projects cover upstream developments, both greenfield and brownfield, and related energy infrastructure projects, and can include investment.

Production Enhancement Contracts
We continue to make good progress on our PECs in Mexico, including early appraisal success on Santuario. Initial activity on Pánuco has focused on drilling new wells, undertaking new seismic studies and production optimisation initiatives with a view to agreeing a Field Development Plan in early 2015. Early activities on Arenque have focused on asset integrity studies and drilling our first offshore well to help establish a Field Development Plan later in 2015.

As part of the ongoing energy reforms in Mexico, we have the opportunity to migrate our portfolio of PECs to a new form of contract. At this stage, the detailed commercial terms of the new contractual arrangements are unknown and we cannot therefore forecast the financial impact, but anticipate being able to provide further clarity during 2015.

During 2014, we worked towards a revised Field Development Plan and contractual framework for the Ticleni PEC in Romania. However, following a review of the project in early 2015, we have decided to exit the contract. We have therefore recorded an impairment of the full carrying value of the contract and provided for anticipated exit costs to reflect the current situation and will be discussing exit options with OMV Petrom.

We earn a tariff per barrel on PECs for an agreed level of baseline production and an enhanced tariff per barrel on incremental production. During the year we earned tariff income on a total of 9.2 million barrels of oil equivalent (mboe) (2013: 7.8 mboe), reflecting improvement in average production from Magallanes and Santuario and a full year of production on Arenque and Pánuco, which offset lower production on Ticleni.

Risk Service Contracts
Production from the Berantai risk service contract continues in line with expectations and we have commenced early activities on OML119 in Nigeria but do not expect material investment until the Field Development Plan has been finalised and agreed.

Following the announcement of Bowleven's farm-out transaction on 24 June 2014, we reached a mutually acceptable agreement to terminate our Strategic Alliance Agreement in respect of the Etinde Permit in Cameroon. Under the arrangement, Bowleven has agreed to pay US$9 million to Petrofac following completion of the farm-out transaction as full and final settlement and the Strategic Alliance Agreement shall then terminate.

Equity Upstream Investments
First oil was achieved from Cendor phase 2 in early September, marking a major milestone in the development of Block PM304. We have disconnected the original Cendor phase 1 mobile offshore production unit (MOPU) and installed a bridge linking the Cendor phase 1 wells to the Cendor phase 2 wellhead platforms. The West Desaru tie-in to the Cendor phase 2 FPSO has been safely and successfully completed. Production from Block PM304is expected to continue to increase in the near term as the facilities are fully commissioned and new wells are brought on line.

On the FPF1 modification works for the Greater Stella Area project, progress has been slower than expected over the winter. While the unit is in an advanced state with all topside equipment placed, 85% of piping erected, 68% of cables run, and precommissioning check-sheets being progressed, mechanical completion is now expected in the third quarter of 2015. We have agreed an incentivised schedule with the fabrication yard to deliver mechanical completion. We have good visibility on the scope and the required resources are in place to complete the upgrade and modification. Given the lower oil price environment, we are prioritising cost optimisation, certainty of delivery and completion of all works prior to sailaway, ahead of the timing of first production. Sailaway is now expected in early 2016, following the winter weather window, with first production scheduled for mid‑2016. Petrofac, as modifications contractor, has made a number of variation requests and other claims on the field owners and we are continuing to discuss these with them.

In Tunisia, we have commenced production from a fifth well, and successfully completed debottlenecking of the plant during a short planned shutdown of the central processing facility on the Chergui gas concession.

Our net entitlement from production for 2014 from Block PM304 and the Chergui gas plant increased to 2.1 million barrels of oil equivalent (mboe) (2013: 1.6 mboe), reflecting a significant increase in production from Block PM304 following commencement of production from West Desaru in August 2013.

Petrofac Training
In March 2014, we signed an agreement with Oman Oil Company, to establish an industry-leading 'Centre of Excellence' to train Oman's energy and energy-related workforce to international standards. Also in March, we opened the INSTEP training facilities in Malaysia, through our joint venture with PETRONAS. The facilities include three high-specification training facilities that Petrofac is building to support PETRONAS' workforce capability enhancement programme.

Seven Energy
Following Seven Energy's capital raising on 15 April 2014, our equity interest has been diluted to approximately 15%. Consequently, we are no longer accounting for Seven Energy as an associate and are therefore no longer recognising our share of the results of Seven Energy from this date.

First Reserve
In June 2014, Petrofac entered into a framework agreement with First Reserve, the global energy-focused infrastructure investment firm, to create PetroFirst Infrastructure Partners.

The new venture will be funded 80% by First Reserve and its investors, with Petrofac retaining the balance of ownership. Up to US$1 billion is expected to be committed by the First Reserve Energy Infrastructure Funds and its investors and Petrofac expects to contribute up to a maximum of US$250 million in the form of existing assets and cash.

The first transaction under the agreement saw Petrofac and First Reserve establish a joint venture in respect of three of Petrofac's deployed and contracted floating production facilities. Petrofac sold 80% of the share capital of Petrofac FPSO Holding Limited to PetroFirst Infrastructure Limited, wholly owned by the First Reserve Energy Infrastructure Holdings Fund I. Through its subsidiaries, Petrofac FPSO Holding Limited owns interests in the FPSO Berantai, FPF3 (formerly Jasmine Venture) and FPF5 (formerly Ocean Legend).

The total consideration was US$341 million and US$128 million of existing project finance in relation to the Berantai FPSO was transferred to PetroFirst Infrastructure Holdings Limited. Petrofac is entitled to a share of additional future cashflows upon renewal or redeployment of the facilities at the end of their current deployment contracts.

Prior to this transaction, Petrofac had expected to recognise a net trading profit of between US$50 million and US$60 million in the full year ending 31 December 2014 from the floating production facilities that were sold. Petrofac reported 100% of the earnings from the floating production facilities up to the closing date and 20% of the earnings of Petrofac FPSO Holding Limited thereafter.

Petrofac FPSO Holding Limited has retained a put option, such that Petrofac may be required to repurchase one or more of the facilities or their holding companies for agreed aggregate consideration of between US$39 million and US$105 million at the end of their deployment or at certain other key junctures. We believe that the repurchase consideration accurately reflects the forecast residual values of the floating production facilities at the times when the put options would vest.

Financial performance
Integrated Energy Services' revenue was lower at US$782 million (2013: US$934 million), reflecting a reduction in revenue on the Berantai Risk Service Contract which is now in its operational phase; a reduction in revenue from our Production Enhancement Contracts in Mexico, due to the rephasing of certain field development activities and in Romania, as we managed field investment prudently while we sought to agree revised commercial terms on the Ticleni Production Enhancement Contract, and the sale of floating production facilities to PetroFirst (see above).

Net profit before exceptional items and certain re-measurements increased to US$131 million (2013: US$125 million). Net profit in 2014 includes a gain of US$56 million from the sale of floating production facilities to PetroFirst, which more than offset the earnings foregone following the sale of the floating production facilities to PetroFirst and a reduction in earnings on the Berantai Risk Service Contract which is now in its operational phase.

As part of our normal year-end process, we reviewed the carrying value of the IES portfolio for potential impairment. Given the decision to exit Ticleni noted above, the rapid reduction in oil prices and the anticipated outcome of the Greater Stella Area project, we have recorded a provision for impairment, re‑measurement and exit costs totalling US$461 million after tax at 31 December 2014, as detailed in the Financial review on page 44.

Headcount increased marginally to 3,300 at 31 December 2014 (2013: 3,200).

Integrated Energy Services backlog stood at US$3.3 billion at 31 December 2014 (2013: US$3.9 billion), reflecting the anticipated exit of the Ticleni Production Enhancement Contract and the sale of floating production facilities to PetroFirst.

 

Financial review

Revenue
Group revenue was marginally lower at US$6,241 million (2013: US$6,329 million), with good growth in Offshore Projects & Operations and Engineering & Consulting Services more than offset by lower revenue from Onshore Engineering & Construction and Integrated Energy Services. Activity levels, revenue and net profit in Onshore Engineering & Construction increased substantially in the second half of 2014 as we moved into the execution phase on a number of projects. Revenue from Integrated Energy Services was lower due to lower levels of activity and lower average commodity prices.

Operating profit^1,2
Group operating profit for the year was lower at US$691 million (2013: US$793 million), representing an operating margin of 11.1% (2013: 12.5%). The lower operating profit is predominantly due to Onshore Engineering & Construction, where activity levels were lower in 2014 and the Group recognised an operating loss of around US$230 million on the Laggan-Tormore project on Shetland, UK. This was partially offset by financial outperformance elsewhere in the Onshore Engineering & Construction portfolio and a gain of US$56 million in Integrated Energy Services from the sale of floating production facilities to PetroFirst, which more than offset the earnings foregone following that sale.

¹ Before exceptional items and certain re-measurements.

² Profit from operations before tax and finance (costs) / income and our share of results of associates.

 

Net profit
Reported profit for the year attributable to Petrofac Limited shareholders was lower at US$120 million (2013: US$650 million) predominantly due to exceptional items and certain re-measurements in relation to the Integrated Energy Services portfolio.

As part of our normal year-end process, we reviewed the carrying value of the IES portfolio for potential impairment. Given the decision to exit Ticleni noted above, the rapid reduction in oil prices and the anticipated outcome of the Greater Stella Area project, we have recorded a provision for impairment, re‑measurement and exit costs totalling US$461 million after tax at 31 December 2014. Of this amount US$167 million relates to Ticleni and represents a write-off of the entire book value of our Ticleni assets totalling US$137 million and a provision of US$30 million for the anticipated costs we expect to incur over the period to final exit. A further US$207 million charge has been recorded in respect of the Greater Stella Area project due to cost over-runs and schedule delays on the FPF1 modification contract and the field development as well as lower commodity prices, and the balance of US$87 million represents impairment as a result of the impact of lower commodity prices across the rest of the IES assets including provisions against the carrying value of Berantai in Malaysia, the FPSO Opportunity, OML119 in Nigeria, warrants held by the Group over shares in Seven Energy International Limited and IES goodwill of US$18 million.

Excluding exceptional items and certain re-measurements, reported profit for the year attributable to Petrofac Limited shareholders was lower at US$581 million (2013: US$650 million) predominantly due to lower net profit from Onshore Engineering & Construction and higher net corporate and other costs. As noted above, activity levels in Onshore Engineering & Construction across the full year were lower in 2014 compared with 2013. The net profit in Onshore Engineering & Construction is after recognising a loss of around US$200 million on the Laggan-Tormore project (a further loss of around US$30 million was recorded in Offshore Projects & Operations), although this was largely offset by the lower effective tax rate and the gain of US$56 million in Integrated Energy Services from the sale of floating production facilities to PetroFirst. Net corporate, consolidation and elimination costs were lower in 2013 due to the gain of US$22 million on the FPF5 transaction (see page 37) and net finance costs were higher in the current year due to higher average levels of net debt.

The net margin1 for the Group decreased to 9.3% (2013: 10.3%), reflecting lower net margin in Offshore Projects & Operations and Engineering & Consulting Services, partially offset by higher net margin in Integrated Energy Services due to the gain from the PetroFirst transaction. Offshore Projects & Operations net margin was lower in 2014 due to the recognition of the loss on the Laggan-Tormore project and the recognition of a foreign exchange loss of US$8 million. Engineering & Consulting Services net margin was lower due to low margin 'pass-through' revenue (see note 4a to the financial statements) in relation to procurement activities on the Rabab Harweel project in Oman (see page 39).

Earnings before Interest, Tax, Depreciation, Amortisation (EBITDA)^1,3
EBITDA was lower at US$935 million (2013: US$1,031 million), representing an EBITDA margin of 15.0% (2013: 16.3%). Onshore Engineering & Construction, Offshore Projects & Operations and Engineering & Consulting Services' EBITDA margins were lower than in the prior year due to the reasons outlined above. These were partly offset by a higher EBITDA margin in Integrated Energy Services, predominantly due to the PetroFirst transaction (see page 42), which resulted in a gain of US$56 million (for both EBITDA and net profit).

³ Including our share of results of associates.

Backlog
The Group's backlog increased 26% to a record year-end level of US$18.9 billion at 31 December 2014 (2013: US$15.0 billion), reflecting a strong intake of new orders in Onshore Engineering & Construction, Offshore Projects & Operations and Engineering & Consulting Services.

Exchange rates
The Group's reporting currency is US dollars. A significant proportion of Offshore Projects & Operations' revenue is generated in the UK (around 70%) and those revenues and associated costs are generally denominated in sterling. The table below sets out the average and year-end exchange rates for the US dollar and sterling as used by the Group for financial reporting purposes.

Financial reporting exchange rates US$/sterling	Year ended 31 December 2014	Year ended 31 December 2013
Average rate for period	1.65	1.57
Year-end rate	1.55	1.66

 

Interest
Net finance costs for the year were US$57 million (2013: US$4 million), predominantly reflecting higher average net debt balances.

Taxation
Our policy in respect of tax is to:

·     operate in accordance with the terms of the Petrofac Code of Conduct

·     act with integrity in all tax matters

·     work together with the tax authorities in jurisdictions that we operate in to build    positive long-term relationships

·     where disputes occur, to address them promptly

·     manage tax in a pro-active manner to maximise value for our customers and shareholders

Management responsibility and oversight for our tax strategy and responsibility and governance over our tax policy, which is approved by the Board and Audit Committee, rests with the Chief Financial Officer and the Group Head of Tax who monitor our tax activities and report regularly to the Board and the Audit Committee. The Group's tax affairs and the management of tax risk are delegated to a global team of tax professionals.

The Group's effective tax rate for the year ended 31 December 2014 was 18.4% (2013: 18.0%). The Group's effective tax rate, excluding the impact of exceptional items and certain remeasurements, for the year ended 31 December 2014 was 5.2% (2013: 18.0%).

A number of factors have impacted the effective tax rate, excluding the impact of exceptional items and certain re-measurements, this year, principally being the net release of tax provisions held in respect of income taxes which is partially offset by the impact of tax losses created in the year for which the realisation against future taxable profits is not probable.

In line with prior years, the effective tax rate was also driven by the mix of profits in the jurisdictions in which profits are earned. The adjustments in respect of prior periods include the utilisation of tax losses which were previously unrecognised, in addition to the tax provision release mentioned above.

Earnings per share
Fully diluted earnings per share before exceptional items and certain re-measurements was 168.99 cents per share (2013: 189.10 cents), in line with the Group's decrease in profit for the year attributable to Petrofac Limited shareholders. Fully diluted earnings per share after exceptional items and certain re-measurements was 34.81 cents per share (2013: 189.10 cents).

Operating cash flow and liquidity
Cash generated from operations was US$790 million (2013 US$5 million). The substantial improvement in operating cash flow reflected a much smaller outflow from working capital movements than the prior year resulting from the finalisation of a small number of long-outstanding commercial settlements with our clients, a step-up in the level of cash advances received on our long-term contracts and ongoing tight management of working capital. The Group's net debt stood at US$0.7 billion at 31 December 2014 (2013: US$0.7 billion) as the net result of:

·     operating profits before working capital and other non-current changes of US$913 million

·     net working capital outflows of US$60 million, including:

-    a significant increase in trade and other receivables and trade and other payables, which broadly offset each other

-    a cash inflow from a decrease in other current financial assets of US$131 million, predominately in relation to cash received on the Berantai Risk Service Contract

·     an increase in work in progress of US$129 million as activity increased on our Onshore Engineering & Construction portfolio as a number of projects won in recent months entered the execution stage

·     net investing activities of US$528 million, including cash capital expenditure of US$537 million on Integrated Energy Services projects and US$167 million on the Petrofac JSD6000 installation vessel, net of US$259 million of cash consideration

in relation to the PetroFirst transaction (see note 4 (f) to the financial statements)

·     transfer of US$128 million of project finance in relation to the PetroFirst transaction (see note 4 (f) to the financial statements)

·     financing activities, in particular, payment of the 2013 final dividend and 2014 interim dividend totalling US$225 million and financing the purchase of shares for US$25 million for the purpose of making awards under the Group's share schemes

·     net taxes paid of US$76 million and interest paid of US$66 million

Gearing ratio	2014	2013
	US$ millions (unless otherwise stated)
Interest-bearing loans and borrowings (A)	1,719	1,344
Cash and short term deposits (B)	986	617
Net (debt) (C = B - A)	(733)	(727)
Equity attributable to Petrofac Limited shareholders (D)	1,861	1,989
Gross gearing ratio (A/D)	92%	68%
Net gearing ratio (C/D)	39%	37%
Net debt/EBITDA	78%	71%

 

The Group's total gross borrowings less associated debt acquisition costs and the discount on senior notes issuance at the end of 2014 were US$1,719 million (2013: US$1,344 million). The Group entered into a US$500 million two-year committed facility in August 2014, which is available for general corporate purposes (see note 26 to the financial statements). 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 totalled US$668 million in the year ended 31 December 2014 (see note 10 to the financial statements; 2013: US$597 million), comprising:

·     oil and gas assets and oil and gas facilities in Integrated Energy Services of US$397 million (see table opposite), predominantly in relation to the Group's four production enhancement contracts in Mexico and the capitalisation of a finance lease for an FPSO deployed on Block PM304, offshore Malaysia

·     US$167 million on the construction of the Petrofac JSD6000 installation vessel

Capital expenditure on intangible oil and gas assets during the year was US$97 million (2013: US$43 million), predominantly in respect of pre-development activities on Block PM304, offshore Malaysia.

Total additions to Integrated Energy Services' Production Enhancement Contracts, Equity Upstream Investments and floating production facilities in the year were US$693 million, including US$184 million in relation to a FPSO acquired under a finance lease for Block PM304 in Malaysia and US$199 million increase in the receivable in respect of the Greater Stella Area project.

		Oil and gas assets per note 10 (Block PM304, Chergui and   PECs) US$m		Oil and gas facilities per note 10 (Ohanet (fully depreciated) and floating production facilities)  US$m		Intangible oil and gas assets per note 13 (Block PM304, OML119 and other pre-development costs) US$m		Greater Stella Area per note 16 US$m		Total US$m
Cost
At 1 January 2014		828		448		290		200		1,766
Additions		172		225		97		199		693
Disposals		-		(48)		-		-		(48)
Increase in provision for decommissioning		-				47		-		47
Transfers		269		-		(264)		-		5
Write-off		-				(9)				(9)
Exchange difference		(13)		-		-		-		(13)
At 31 December 2014		1,256		625		161		399		2,441
Depreciation
At 1 January 2014		(200)		(175)		-		-		(375)
Charge for the year		(116)		(24)		-		-		(140)
Charge for impairment		(99)		(15)		(5)		(207)		(326)
Disposals		-		17		-		-		17
At 31 December 2014		(415)		(197)		(5)		(207)		(824)
Net carrying amount: At 31 December 2014		841		428		156		192		1,617
At 31 December 2013		628		273		290		200		1,391
Less floating production facilities held under finance leases within 'oil and gas facilities'										(393)
Add Berantai long-term receivable (see note 16)										381
Add investment in Seven Energy International Limited (see notes 14 and 15)										185
TOTAL										1,790

 

Note: the above table excludes working capital balances.

 

Total equity

Total equity at 31 December 2014 was US$1,871 million (2013: US$1,992 million). The main elements of the net movement were: profit for the year of US$140 million, less dividends in the year of US$224 million and other comprehensive loss of US$57 million in relation to foreign currency translation losses, net changes in the fair value of derivatives and financial assets designated as cash flow hedges and net gains on maturity of cash flow hedges recycled in the year.

Return on capital employed
The Group's return on capital employed for the year ended 31 December 2014 was lower at 18% (2013: 28%), reflecting lower EBITA (earnings before interest, tax, amortisation and impairment) and due to an increase in capital employed, reflecting investment in Integrated Energy Services and the Petrofac JSD6000.

Dividends
The Company proposes a final dividend of 43.80 cents per share for the year ended 31 December 2014 (2013: 43.80 cents), which, if approved, will be paid to shareholders on 22 May 2015 provided they are on the register on 17 April 2015 (the 'record date'). Shareholders who have not elected to receive dividends in US dollars will receive a sterling equivalent, based on the exchange rate on the record date. Shareholders have the opportunity to elect by close of business on the record date to change their dividend currency election.

Together with the interim dividend of 22.00 cents per share (2013: 22.00 cents), this gives a total dividend for the year of 65.80 cents per share (2013: 65.80 cents), in line with the prior year.

 

Click on, or paste the following link into your web browser, to view the Group financial statements of Petrofac Limited for the year ended 31 December 2014:

 http://www.rns-pdf.londonstockexchange.com/rns/7811F_1-2015-2-24.pdf