Final Results - Part 1
Petrofac Limited
16 March 2006
16 MARCH 2006
PETROFAC LIMITED
FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005
Petrofac Limited (Petrofac, the group or the Company) is a leading international
provider of facilities solutions to the oil & gas production and processing
industry, providing project development, engineering, construction and
facilities operation, maintenance and training services to many of the world's
leading integrated, independent and national oil & gas companies. With a
strategic focus on the UK Continental Shelf (UKCS), Middle East, Africa and
Former Soviet Union, Petrofac has 17 offices worldwide and employs approximately
7,000 people.
FINANCIAL HIGHLIGHTS*
• Revenue of US$1,485 million (2004: US$952 million), up 56%
• EBITDA(1) of US$115.6 million (2004: US$96.1 million), up 20%
- Engineering & Construction EBITDA of US$63.5 million, up 52%
- Operations Services EBITDA of US$27.5 million, up 30%
- Resources EBITDA of US$32.6 million, unchanged
• Net profit(2) of US$75.4 million (2004: US$46.1 million), up 64%
• Backlog(3) at 31 December 2005 of US$3,244 million (2004: US$1,740
million), up 86%
• Return on capital employed(4) of 32.5% (2004: 31.4%)
• Earnings per share (fully diluted) of 22.41 cents (2004: 11.93 cents),
up 88%
• Final dividend of 1.87 cents (1.07 pence) per ordinary share
* continuing operations.
Commenting on the results, Ayman Asfari, Petrofac's Group Chief Executive, said:
"I am delighted to be able to report a strong set of financial results that
reflect the position Petrofac has built in our key markets. We are well placed
to address the execution challenges and resource constraints that accompany a
buoyant market and, with the strength and breadth of our service offering and
strategic positioning, to capitalise on the many opportunities it offers.
Against this backdrop, and with the significant increase in backlog, we are well
positioned for continued growth during the current year and beyond."
For further information, please contact:
Petrofac Limited +44 (0) 20 7471 3500
Ayman Asfari, Group Chief Executive
Keith Roberts, Chief Financial Officer
Robin Caiger, Head of Investor Relations
Bell Pottinger Corporate & Financial +44 (0) 20 7861 3232
Ben Woodford
Geoff Callow
Petrofac Limited
Final results for the year ended 31 December 2005
(Note: all financial information set out herein reflects the group's continuing
operations, unless stated otherwise)
Chairman's statement
Introduction
I am delighted to report on a year of significant achievements for Petrofac and
to present the financial results for the year ended 31 December 2005. These
results demonstrate the growing position and reputation we are building in our
core markets. Over the past year, we have increased revenue by 56% to US$1,485
million and net profit by 64% to US$75.4 million.
Market overview
2005 was characterised by high commodity prices with Brent oil averaging nearly
US$55 per barrel (bbl) and Henry Hub Gas average price approaching US$9 per
million British thermal unit (mmbtu), respectively over 40% and 50% above 2004
averages. Energy prices remained volatile as OPEC's surplus capacity averaged
less than 2 million bbl per day for the third year running and a series of
unrelated factors caused disruption to energy supplies across the world.
Our industry faces the challenge of meeting the world's increasing demand for
energy fuelled by good economic growth and from the still relatively low energy
intensive economies of China and the Indian Sub-Continent. In addition, the
industry is struggling with rising rates of depletion of existing production,
particularly as the "super-major" fields in the Middle East reach their
maturity. These twin challenges will require a sustained period of increased
capital investment in order to bring on more production every year. It will not
be easy to build a greater level of surplus capacity back into the world's
system but we and others are committed to this effort.
As a company that designs, builds, operates and invests in oil & gas
infrastructure, Petrofac is very much involved in helping to resolve these
challenges. While the increasing use of renewable energy sources and greater
energy conservation will both help to bring the supply and demand for energy
into balance, there remains a pressing need to develop more oil & gas reserves
every year. We are working hard to help our clients meet this need and we enter
2006 with a record backlog of approximately US$3.2 billion. We are well placed
to take advantage of new opportunities as they arise over the coming year.
Dividend
The Board is recommending a final dividend of 1.87 cents per ordinary share with
an equivalent of 1.07 pence per ordinary share being payable(5) which, if
approved, will be paid on 31 May 2006 to eligible shareholders on the register
at 28 April 2006. The final dividend proposed for 2005 reflects the fact that
the Company was listed for approximately three months of the 2005 financial year
and is approximately half the level that would have been declared had Petrofac
been listed for the whole of the 2005 financial year, having taken account of
the intention to pay two thirds of the full year dividend as a final dividend.
Our people
As a provider of facilities solutions to the oil & gas production and processing
industry, the Company's greatest resource is its people. This has been an
exceptional year, both for the Company's business performance and its corporate
development and, on behalf of the Board, I would like to thank all of our
employees for the tremendous way they have responded to the challenges of 2005.
I look forward with confidence to another challenging and exciting year ahead.
Rodney Chase
Chairman
Group Chief Executive's review
INTRODUCTION
2005 was an exciting and eventful year for Petrofac and one in which
considerable progress was made towards our goal of becoming the leading
facilities solutions provider to the oil & gas industry. During the year, we
secured a number of large and strategically important projects, extended the
scope and duration of contracts with some of our core customers and, in October,
completed Petrofac's Initial Public Offering (IPO) on the London Stock Exchange.
By working in partnership with the owners of oil & gas reserves and
infrastructure, providing innovative and cost-efficient project development,
engineering, construction and facilities operation, maintenance and training
services, we aim to create value across all aspects of an asset's development.
I am pleased to be able to report a strong set of financial results for the year
ended 31 December 2005.
2005 2004
US$m US$m
Revenue 1,485.5 951.5 up 56.1%
EBITDA 115.6 96.1 up 20.3%
Net profit 75.4 46.1 up 63.6%
Backlog 3,244 1,740 up 86.4%
Group revenue increased by 56.1% to US$1,485.5 million (2004: US$951.5 million)
reflecting significant growth in our Engineering & Construction and Operations
Services divisions. EBITDA increased by 20.3% to US$115.6 million (2004: US$96.1
million). Net profit increased by 63.6% to US$75.4 million (2004: US$46.1
million). At the close of 2005, the combined backlog of the Engineering &
Construction and Operations Services divisions was US$3,244 million (2004:
US$1,740 million), representing a year on year increase of 86.4%.
We have sought to ensure that our Engineering & Construction business is
positioned where there are significant medium and long-term investment
programmes, in particular the Middle East, Former Soviet Union and Africa. The
scale of the hydrocarbon resources in these areas is substantial and there is
considerable commitment on the part of both the international and national oil
companies to develop these assets. Through positioning at an early stage in
these developments and executing to the highest standard, there are good
prospects for sustained growth and, with the operational expenditure that should
follow, the opportunity to provide operations management and support and
training services.
Our Operations Services business has performed well this year with considerable
activity in its core market of the UKCS. Our longstanding presence in the UK has
demonstrated our operations services and training capability in a very
discerning and demanding market. We have successfully expanded into Kuwait, Iran
and Sudan, and look forward to continuing this growth by leveraging the
international network of our Engineering & Construction and Resources divisions.
A key area of focus across much of our business is the need to increase the use
of local resources and improve the technical skills of national workforces,
thereby ensuring our clients achieve their local content goals. In this regard,
Petrofac has two key differentiators - we have considerable experience of
working with the leading local subcontractors in our core markets and we have a
leading presence and focus on providing health, safety and operational training
services. With a diverse mix of nationalities and cultures within our own
business, we are well placed to deliver international competence to our clients
with local capability.
Our Resources business made a strong contribution to the financial performance
of the group and its existing investments and projects under development
continued to meet our expectations. Notwithstanding the level of competition for
asset investments, we are confident that our strong service platform will
continue to provide attractive and differentiated investment opportunities
where, alongside our partners, we are able to leverage our engineering and
operational skills and unlock an enhanced return.
Overall, Petrofac has had another successful year. In acknowledging these
achievements, I would like to extend my thanks to all of our employees for their
dedication, hard work and commitment. We enter the current year with a record
backlog and I am confident that our strategy will deliver sustainable growth in
value in 2006 and beyond.
OUTLOOK
After an extended period of relative under-investment by the oil & gas industry
and with increasing demand for energy and rising rates of depletion of existing
production, we believe the capital investment, both brownfield and greenfield,
necessary to enable the industry to build the required capacity is substantial
and will continue over a number of years.
Each of our three divisions achieved a strong financial performance in 2005 and,
on entering 2006 with record backlog, the group is well positioned to deliver
further growth.
Our Engineering & Construction division finished 2005 with backlog of
approximately US$2.1 billion, of which approximately US$1 billion was awarded as
recently as December 2005. With good progress having been made on those
contracts that were in an early phase of execution during much of 2005 and on
contracts that are entering their final stages, in the absence of unforeseen
circumstances and subject to the scale and timing of further contract awards,
the Directors expect to see some positive progression in profit margins in this
division during the year ahead.
Our Operations Services division secured a number of significant contract
renewals, extensions and wins during 2005 and revenue increased significantly as
a result. At 31 December 2005, the backlog for the division was approximately
US$1.1 billion with a further US$0.3 billion in new awards which, at the time,
remained subject to final contract. Revenue for the current year should benefit
from a full year's impact from the new business secured during 2005. The
Directors expect that, in the absence of unforeseen circumstances, the
division's profit margins will be maintained in the year ahead.
The Ohanet investment continued to dominate the financial contribution from our
Resources division's investment portfolio and is expected to produce relatively
stable revenues and cash flows throughout the year. We expect our investment in
the Cendor field to commence production in late 2006, which is anticipated to
result in increased revenues and profitability for the division in accordance
with the terms of the Cendor production sharing contract.
We are well placed to address the execution challenges and resource constraints
that accompany a buoyant market and, with the strength and breadth of our
service offering and strategic positioning, to capitalise on the many
opportunities it offers. Against this backdrop, and with the significant
increase in backlog, we are well positioned for continued growth during the
current year and beyond.
Ayman Asfari
Group Chief Executive
ENGINEERING & CONSTRUCTION
2005 2004
US$m US$m
Revenue 858.2 473.5 up 81.3%
EBITDA 63.5 41.9
EBITDA margin 7.4% 8.8%
Net profit 55.1 33.1 up 66.4%
Net margin 6.4% 7.0%
Backlog 2,121 739 up 187.0%
Engineering & Construction enjoyed a year of substantial growth, successful
project execution and a record level of new orders.
The division reported significant growth in revenue, increasing to US$858.2
million (2004: US$473.5 million). The increase was largely attributable to the
execution of projects secured in 2004, including significant progress on the
Kashagan engineering and procurement contract and substantial completion of
projects for Qatar Petroleum, Crescent Petroleum and Kuwait Oil Company, and the
completion of the BTC pipeline (with significant progress being made on the SCP
pipeline).
Net profit increased by 66.4% to US$55.1 million (2004: US$33.1 million)
representing a net margin of 6.4% (2004: 7.0%). The reduction in net margin in
2005 was due primarily to a decrease in operating margin. Profit recognition on
lump sum contracts in the Engineering & Construction division is significantly
impacted by the number and timing of projects reaching completion during the
year. Typically, profits are not recognised on such contracts in the early
stages of completion and it is therefore not unusual for profit recognition to
lag revenue recognition. In 2004 and 2005, a number of projects reached
completion toward the end of the year, however, in 2005, early stage contracts
generated a greater proportion of revenue with correspondingly lower recognition
of margin. Furthermore, a large proportion of revenue in 2005 was generated by
the Kashagan engineering and procurement contract which, since it does not
involve construction management, was bid at a lower profit margin than typical
EPC contracts. The dilution in margin due to these factors was partially offset
by the inclusion of a net credit relating to the BTC/SCP project, a decrease in
depreciation costs as a percentage of revenue, a lower effective tax rate and
higher finance income. The net credit relating to the BTC/SCP project amounted
to US$2.5 million and followed a favourable reassessment of the expected loss on
the project. At 31 December 2005, the group had cumulatively provided US$17.5
million in respect of its share of the loss in relation to this project (30 June
2005: US$27.5 million; 31 December 2004: US$20.0 million). The $10.0 million
partial write-back since the position at 30 June 2005 reflects the current
status of ongoing negotiations with the customer regarding claims for
reimbursement of cost overruns and associated costs.
The division's staff numbers increased by one-third in 2005 to approximately
2,400 personnel, with the majority of this growth in the Mumbai and Woking
offices, where we have now achieved critical mass to carry out large-scale
projects. Our Woking office has broadened its service offering to include
project management contracts (PMC) and, selectively, brownfield and greenfield
engineering, procurement and construction (EPC) execution. Our Mumbai office now
offers a truly world-class engineering capability that we expect to continue to
grow through 2006.
While there is increasing competition for experienced engineers in our sector,
we strive to ensure that we attract and retain the best talent and reward and
incentivise our employees appropriately while maintaining a competitive cost
structure. In addition, Petrofac has continued its focus on graduate recruitment
with great success. There is no doubt that the future of our business growth and
further success will depend on successfully attracting first-rate, motivated
young engineers.
In terms of project execution, there were a number of highlights during 2005.
These included the completion of the BTC pipeline and pumping stations in
Georgia and Azerbaijan; entering the final stages, ahead of schedule, of
engineering and procurement for the three process plants for the Kashagan Field
Development project in Kazakhstan; the mechanical completion of the Crescent Gas
Plant in the UAE; and entering the final phase of a major upgrade project for
Qatar Petroleum. These achievements have been accomplished while maintaining a
good HSE record.
New order intake during the year was in excess of US$2.1 billion (2004: US$0.9
billion), with major awards in Oman, Kuwait, Russia and Kazakhstan, and smaller
awards in the UKCS, Africa and the UAE. In addition to a buoyant market that is
yielding significant opportunities, our success in securing new business has
been achieved through Petrofac's reputation for execution excellence. Our focus
on Project Development Services has achieved strong growth during the year,
underpinned by the successful award of several PMC type contracts and a larger
flow of consultancy work and studies. It is pleasing to note that these recent
successes have created opportunities for major contracts in our Operations
Services division for both Facilities Management and Training services. The
significant order intake achieved in 2005 took the division's backlog to
US$2,121 million at 31 December 2005, an increase of 187.0% from US$739 million
at 31 December 2004.
The Engineering & Construction division's strategic focus is on customers and
regions that will create a platform for sustained growth through significant
medium and long-term investment programmes. In particular, we are well placed
for future phases and expansion opportunities on our current projects in Oman
and the north Caspian region. The challenges ahead remain in finding and
developing the resources required to support growth.
The outlook in our core regional markets of the UKCS, Middle East, Africa and
Former Soviet Union is expected to remain positive through 2006. Our main focus
will be to maintain our track record of safe, high quality and cost effective
project development and execution and continue to meet our customers'
expectations.
OPERATIONS SERVICES
2005 2004
US$m US$m
Revenue 605.3 440.1 up 37.5%
EBITDA 27.5 21.1
EBITDA margin 4.5% 4.8%
Net profit 15.6 9.6 up 61.5%
Net margin 2.6% 2.2%
Backlog 1,123 1,001 up 12.2%
Operations Services had a successful 2005, aided by a buoyant core market, the
UKCS, driven by sustained high oil prices. Overall, key contracts were renewed,
competence was extended, both organically and through acquisition, major
projects were mobilised and significant new business was secured. All of these
achievements were accomplished while maintaining high safety standards.
The division experienced strong growth with revenue up 37.5% to US$605.3 million
(2004: US$440.1 million). A large proportion of the growth was attributable to a
new service operator contract with Lundin Petroleum in the UK, which contributed
significant revenues. Growth was also generated by the new brownfield service
offering and, internationally, by the commencement of the maintenance management
contract with Kuwait Oil Company (KOC). Notwithstanding the dilution effect of
increased pass-through revenues (which attract no margin), which resulted in the
lower EBITDA margin, the operating margin increased due primarily to the
cessation of goodwill amortisation. Net profit increased to US$15.6 million
(2004: US$9.6 million) with the net margin higher at 2.6% in 2005 (2004: 2.2%)
due primarily to an increase in the operating margin and a lower effective tax
rate.
Key contract renewals included five year operations support contracts with
ExxonMobil and CNR, a two year extension to our training management solutions
contract for Shell, and one year extensions with Maersk Oil for the Gryphon,
Janice and Global Producer III installation operations support contract, and
with Sea Production for the duty holder contract on Talisman Energy's Galley
field.
A number of significant new contract awards were secured during the year
including the five year Marathon engineering, construction, operations and
maintenance contract won in competitive tender and now being delivered in
conjunction with our Engineering & Construction division. We also extended our
relationship with Tullow Oil, taking responsibility for the Schooner & Ketch and
Horne & Wren facilities.
The year also saw excellent progress with project execution. We successfully
mobilised two major projects, the Heather & Thistle service operator contract
for Lundin Petroleum and the maintenance services contract for KOC in Kuwait,
our largest international contract so far. These projects demonstrate Petrofac's
ability to mobilise rapidly and to execute large-scale operations and
maintenance projects, both in the UKCS and internationally, at a time when the
industry is facing a shortage of skilled people.
Backlog for the Operations Services division increased 12.2% to US$1,123 million
at 31 December 2005 (2004: US$1,001 million). On a constant currency basis, the
year on year increase was 24.6% (2004: US$901 million). In addition, at the year
end, the division was providing services under letters of award which, had
formal contracts been entered into at that time, would have added approximately
US$0.3 billion to backlog at 31 December 2005.
Sustained high oil prices had mixed effects on the business. Our specialist
manpower services and survival training businesses saw particular benefit from
these economic conditions. However, the price environment led to something of a
hiatus in mature UK field asset trading. It has typically been in periods of
increased asset trading activity that Petrofac has been able to secure service
operator contracts with new entrant independent oil companies. During the year,
major oil companies largely postponed asset divestment programmes due to
improved economic viability and potentially reflecting a relative shortage of
available reserve replacement opportunities.
During the year, we saw the ownership of two of our clients change. Paladin
Resources was acquired by Talisman Energy and Kerr McGee's UK oil & gas assets
were acquired by Maersk Oil. In both cases, we continue to work on the same
assets for the new owners although, with regard to the Montrose & Arbroath
facilities, now owned by Talisman Energy, in line with their established
operating strategy, we expect to transition duty holder responsibility during
the course of this year. Such events require Petrofac to be agile and responsive
to changing customer needs but they also create opportunities to demonstrate our
capabilities to new customers of scale.
Petrofac Facilities Management supported National Oil Companies (NOCs) and their
subsidiaries, directly and in consortia, in Iran, Sudan and Kuwait, while
Petrofac Training continued to expand and service our target markets of NOCs,
major oil companies and independents.
Petrofac Training acquired Rubicon Response, a specialist provider of critical
incident/emergency response, training and consultancy services, in January 2005.
This acquisition has positioned Petrofac as a world leader in the provision of
this specialised capability and is an excellent fit with our overall service
offering.
We are confident in the growth potential of our businesses as we continue to
develop our capabilities and project them internationally.
RESOURCES
2005 2004
US$m US$m
Revenue 46.3 45.0 up 2.9%
EBITDA 32.6 32.3
EBITDA margin 70.4% 71.7%
Net profit* 18.3 7.0
Net margin 39.5% 15.4%
* 2005 net profit includes recognition of a tax credit of US$8.9 million from
tax losses in Petrofac (Malaysia-PM304) Limited
Our Resources division enjoyed another successful year with an increase in our
business development capability allowing access to a greater number of
opportunities. In particular, we expanded our presence in Malaysia and
established a representative office in Indonesia, bringing South East Asia into
our areas of core focus. Our existing investments performed well during the year
and we made good progress with those that are under development. Furthermore, we
expanded the investment portfolio with the acquisition of an interest in the
West Don field in the UKCS.
The division's revenues increased marginally to US$46.3 million (2004: US$45.0
million) reflecting the portfolio of investments remaining largely as it was
through 2004. The increase in revenue is primarily attributable to higher
product prices for sales from our refinery joint venture in Kyrgyzstan. The
EBITDA and operating margins were broadly comparable to 2004. Net profit
increased significantly from US$7.0 million to US$18.3 million primarily
reflecting the impact of an income tax credit of US$8.9 million from tax losses
in Petrofac (Malaysia-PM304) Limited (the division's investment in Cendor PM304)
and a reduction in finance costs due to the repayment of project finance loans
relating to the Ohanet investment.
Our Upstream group aims to identify and develop opportunities in producing and
proved or probable but undeveloped reserves through, for example, participation
in large onshore field developments, onshore and offshore field developments
that major oil companies may consider to be marginal and late life producing
assets, particularly those offshore. The investment in the undeveloped Cendor
field offshore Peninsular Malaysia in Block PM304 is an excellent example of
this and, following approval of the field development plan early in 2005, the
year saw considerable activity on this project with the establishment of a full
project team. First production is currently scheduled for the second half of
2006. In late 2005, we reached agreement to acquire Centrica's interest in the
Hewett field in the UKCS. However, following the exercise of pre-emption rights
by the existing partners, this investment did not proceed. While this was a
disappointment, we continue to seek opportunities to achieve greater alignment
with our partners. As announced in early 2006, we completed the acquisition of
an interest in the West Don field, alongside FirstOil and Valiant Petroleum, and
the field development plan is currently being prepared. We also secured a 50%
interest in the adjoining block in the UK's 23rd oil & gas licensing round.
The Energy Infrastructure Solutions group aims to identify and develop
brownfield and greenfield opportunities in oil & gas midstream and downstream
infrastructure, for example, refineries, pipeline transmission, tolling process
plants and utilities. Typically, these will be structured either as the direct
acquisition of an asset or in a turnkey project development structure, including
Build Operate Transfer (BOT), Build Own Operate Transfer (BOOT) and Build Own
Operate (BOO) development arrangements. During the year, we established an
alliance with First Reserve, a US private equity firm specialising in the energy
industry. The alliance brings together First Reserve's financing and transaction
structuring expertise, with Petrofac's project identification and assessment
capabilities, particularly in relation to assets and regions where our
Engineering & Construction and Operations Services businesses have experience.
In addition to our development investments, our portfolio comprises two assets
that have been cash flowing for some time; the operational performance of the
Ohanet gas field in Algeria during the year was very satisfactory, with a 24%
increase in production levels over 2004, while in Kyrgyzstan, our refinery joint
venture also performed well through the year.
While we continue to see competition for asset investments, we are confident
that our experienced business development team and our enhanced ability to
assess and manage risk through accessing the wider group's capabilities, should
enable us to secure suitable investment opportunities.
Chief Financial Officer's review
2005 2004
US$m US$m
Revenue 1,485.5 951.5 up 56.1%
Operating profit(7) 88.6 68.3 up 29.8%
Operating margin 6.0% 7.2%
EBITDA 115.6 96.1 up 20.3%
EBITDA margin 7.8% 10.1%
Net profit 75.4 46.1 up 63.6%
Net margin 5.1% 4.8%
Backlog 3,244 1,740 up 86.4%
Group revenue increased by 56.1% to US$1,485.5 million (2004: US$951.5 million)
reflecting significant growth in the Engineering & Construction and Operations
Services divisions. The Resources division reported slightly higher revenues
from a similar portfolio of investments to that held in 2004.
Operating profit increased from US$68.3 million in 2004 to US$88.6 million in
2005, an increase of 29.8%, reflecting the strong growth in revenue within
Engineering & Construction and Operations Services. As a percentage of revenue,
operating profit decreased from 7.2% in 2004 to 6.0% in 2005, primarily
reflecting the stage of completion, and, therefore, timing of profit
recognition, and risk profile of major projects executed by the Engineering &
Construction division and the impact of US$6.3 million of one-off costs
associated with the IPO. These dilutive factors were partially offset by a
decrease in depreciation costs as a percentage of revenue and the cessation of
goodwill amortisation.
Net profit increased by 63.6% to US$75.4 million (2004: US$46.1 million).
Notwithstanding the decrease in operating margin, the net margin increased from
4.8% in 2004 to 5.1% in 2005. The increase in net margin was due primarily to
the group's low effective tax rate in 2005 and a decrease in net finance costs.
EBITDA increased to US$115.6 million (2004: US$96.1 million), representing 7.8%
(2004: 10.1%) of revenue. The decrease in EBITDA margin was largely attributable
to lower operating margins for the reasons noted above. Engineering &
Construction division accounted for 51.4% (2004: 43.9%) of group(6) EBITDA,
Operations Services 22.2% (2004: 22.2%) and Resources 26.4% (2004: 33.9%).
At the close of 2005, the combined backlog of the Engineering & Construction and
Operations Services divisions was US$3,244 million (2004: US$1,740 million),
representing an increase of 86.4% on the comparative figure at 31 December 2004.
Net losses from the group's discontinued operation in the US were US$0.8 million
(2004: US$13.2 million). The loss for the year includes a small impairment
provision against the operation's remaining freehold property. Operational
activities in the US are now largely complete.
Earnings per share
Fully diluted earnings per share on continuing operations increased in 2005 to
22.41 cents per share (2004: 11.93 cents per share), reflecting primarily the
group's improved profitability and, to a lesser extent, the lower weighted
average number of shares outstanding.
Interest and taxation
Net interest payable on continuing operations decreased during the year to
US$5.3 million (2004: US$5.5 million) despite increases in LIBOR interest rates
for both US dollar and Sterling denominated borrowings. The reduction in net
interest payable was largely attributable to the group's higher average cash
balances, a reduction in borrowings relating to the Ohanet investment and the
conversion of 3i's loan notes.
The group had interest cover of 16.9 times (2004: 12.3 times) based on profit
from continuing operations. The significant improvement in interest cover was
attributable to an increase in operating profit and lower interest costs.
The income tax charge on continuing operations as a percentage of profit before
tax in 2005 was 9.5% (2004: 26.6%). The tax rate in 2005 was affected by the
following factors:
- the recognition of a tax credit of US$8.9 million from tax
losses in Petrofac (Malaysia-PM304) Limited within the Resources division
following the approval of the company's field development plan for Cendor PM304
(2004: nil);
- the improved profitability in various projects resulting in the
utilisation of US$3.1 million of tax losses brought forward that had not been
previously recognised as deferred tax assets (2004: nil), net of unrecognised
tax losses of US$1.5 million related to tax losses in various jurisdictions
(2004: US$3.1m); and
- expenditure not allowable for tax purposes of US$2.3 million
(2004 : US$0.2 million).
Adjusting for these factors, the underlying effective tax rate was 19.3% for
2005 (2004: 21.4%), as set out in the table below:
2005 2004
US$'000 (unless otherwise stated)
Reported tax charge 7,951 9.5% 16,699 26.6%
Tax credit re Cendor PM304 8,943 10.7% - -
Net project losses utilised / 1,538 1.9% (3,087) (4.9%)
(unrecognised)
Expenditure not allowable for tax (2,328) (2.8%) (174) (0.3%)
purposes
-------- --------
16,104 19.3% 13,438 21.4%
Operating cash flow and liquidity
The net cash flow from all operating activities in 2005 was US$108.2 million
(2004: US$80.9 million); net cash flow from continuing operating activities was
US$108.9 million in 2005 compared with US$89.8 million in 2004, representing
94.1% of EBITDA (2004: 93.5%).
The significant cash generation from operations together with the conversion of
the loan notes held by 3i prior to listing enabled the group to reduce its level
of interest-bearing loans and borrowings to US$106.9 million (2004: US$161.5
million) and restore a net cash position.
The group's gross gearing ratio decreased to 54.8% at 31 December 2005 (2004:
116.5%) reflecting the strong cash generation in 2005 and the conversion of 3i's
loan notes. The group's net cash position at the end of 2005 compared with a
13.0% net gearing ratio at 31 December 2004.
Gearing ratio 2005 2004
US$'000
Interest-bearing loans and 106,870 161,478
borrowings
Cash and short term deposits 208,896 143,534
Net cash/(debt) 102,026 (17,944)
Total net assets 195,127 138,558
Gross gearing ratio 54.8% 116.5%
Net gearing ratio Net cash 13.0%
The group's total gross borrowings before associated debt acquisition costs at
the end of 2005 were US$108.3 million (2004: US$166.8 million), of which 49.5%
was denominated in US dollars (2004: 65.9%), 44.7% was denominated in Sterling
(2004: 34.1%) with the balance of 5.8% denominated in Kuwaiti Dinars (2004:
nil).
The group maintained a balanced borrowing profile with 28.3% of borrowings
maturing within one year, 56.1% maturing between one and five years and the
remaining 15.6% maturing in more than five years (2004: 30.4%, 51.9% and 17.7%
respectively). The borrowings repayable within one year include US$15.0 million
of bank overdrafts and revolving credit facilities (representing 13.8% of total
gross borrowings), which are expected to be renewed during 2006 in the normal
course of business (2004: US$19.0 million and 11.4% of total gross borrowings).
The group's general policy is to hedge between 60% and 80% of variable interest
rate loans and borrowings. At 31 December 2005, 84.7% of the group's term
interest-bearing loans and borrowings were hedged (2004: 67.6%).
Capital expenditure
Capital expenditure on property, plant and equipment during 2005 was US$17.6
million (2004: US$17.1 million). The main elements of the expenditure included
investment in, and replacement of, vehicles and equipment to support the growth
in Engineering & Construction and Operations Services divisions and Resources'
investment in Cendor PM304 in Malaysia.
Shareholders' funds
Total equity increased from US$138.6 million at 31 December 2004 to US$195.1
million at 31 December 2005. The main elements of the increase were the retained
profits for the year, net of dividends paid, and the conversion of 3i's loan
notes to equity, partly offset by the movement in the group's unrealised
position on derivative instruments.
Currency
Petrofac's functional currency for financial reporting purposes is the US
dollar. However, there are a number of group subsidiaries with non-US dollar
functional currencies. In particular, the group's main trading subsidiaries with
activities in the UK use Sterling as their functional currency. During 2005,
there was only a slight change in the average US$/Sterling exchange rate
compared to 2004 and therefore the year on year impact of currency fluctuation
on the group's UK trading activities was not significant. The impact on backlog,
which is reported using year end exchange rates, was more significant with an
appreciation in the relative value of US dollars against Sterling of
approximately 11%.
The table below sets out the average and year end exchange rates for US dollars
and Sterling for the years ended 31 December 2005 and 2004 as used by Petrofac
for its financial reporting.
2005 2004
US$/Sterling
Average rate for the period 1.81 1.83
Year end rate 1.72 1.93
Keith Roberts
Chief Financial Officer
End notes:
(1) EBITDA means earnings before interest, tax, depreciation and
amortisation and is calculated as profit from continuing operations before tax
and finance costs adjusted to add back charges for depreciation, amortisation
and impairment (see note 3 to the financial statements).
(2) Net profit (for the group) means profit for the year from continuing
operations attributable to Petrofac Limited shareholders.
(3) Backlog consists of the estimated revenue attributable to the
uncompleted portion of lump sum engineering, procurement and construction
contracts and variation orders plus, with regard to engineering services and
facilities management contracts, the estimated revenue attributable to the
lesser of the remaining term of the contract and, in the case of life of field
facilities management contracts, five years. The group uses this key
performance indicator as a measure of the visibility of future earnings. Backlog
is not an audited measure. Other companies in the oil & gas industry may
calculate this measure differently.
(4) 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 losses) (EBITA) and average capital employed,
being average total assets employed less average total current liabilities.
(5) The group reports its financial results is 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 2005 final dividend from US
dollars into Sterling is based upon an exchange rate of US$1.7457:£1, being the
Bank of England Sterling spot rate as at midday, 15 March 2006.
(6) Excluding the effect of consolidation and elimination adjustments.
(7) Operating profit means profit from continuing operations before tax and
finance costs.
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2005
2005 2004
Notes US$'000 US$'000
Restated
Continuing operations
Revenue 4a 1,485,472 951,530
Cost of sales (1,324,673) (829,081)
_______ _______
Gross profit 160,799 122,449
Selling, general and administration expenses 4d (74,928) (58,825)
Other income 4b 5,223 6,246
Other expenses 4c (2,491) (1,587)
_______ _______
Profit from continuing operations before tax
and finance costs 88,603 68,283
Finance costs 5 (8,448) (7,544)
Finance income 5 3,193 1,997
_______ _______
Profit before tax 83,348 62,736
Income tax expense 6 (7,951) (16,699)
_______ _______
Profit for the year from continuing operations 75,397 46,037
Discontinued operations
Loss for the year from discontinued operation 7 (815) (13,162)
_______ _______
Profit for the year 74,582 32,875
_______ _______
Attributable to:
Petrofac Limited shareholders 74,582 32,921
Minority interests - (46)
_______ _______
74,582 32,875
_______ _______
Earnings per share (US cents) 8 Restated
From continuing and discontinued operations:
- Basic 24.52 9.43
- Diluted 22.17 8.70
From continuing operations:
- Basic 24.79 13.19
- Diluted 22.41 11.93
The attached notes 1 to 31 form part of these consolidated financial statements.
CONSOLIDATED BALANCE SHEET
At 31 December 2005
2005 2004
Notes US$'000 US$'000
Restated
ASSETS
Non-current assets
Property, plant and equipment 10 120,431 123,413
Goodwill 12 49,183 49,653
Intangible assets 13 2,982 6,721
Available-for-sale financial assets 15 2,413 4,104
Other financial assets 16 680 11,205
Deferred income tax assets 6 5,576 782
_______ _______
181,265 195,878
_______ _______
Current assets
Inventories 1,156 1,702
Work in progress 17 235,047 109,037
Trade and other receivables 18 325,716 216,796
Due from related parties 28 28,402 20,889
Other financial assets 16 4,501 37,843
Cash and short-term deposits 19 208,896 143,534
_______ _______
803,718 529,801
_______ _______
Assets of discontinued operation classified as 7 1,667 3,678
held for sale
_______ _______
TOTAL ASSETS 986,650 729,357
_______ _______
EQUITY AND LIABILITIES
Equity attributable to Petrofac Limited
shareholders
Share capital 20 8,629 7,166
Share premium 66,210 28,553
Capital redemption reserve 10,881 10,881
Treasury shares (17) -
Other reserves 21 (12,426) 27,047
Retained earnings 121,850 64,911
_______ _______
Total equity 195,127 138,558
_______ _______
Non-current liabilities
Interest-bearing loans and borrowings 22 76,187 110,787
Provisions 23 8,284 5,912
Other financial liabilities 24 1,222 6,877
Deferred income tax liabilities 6 3,121 1,535
_______ _______
88,814 125,111
_______ _______
Current liabilities
Trade and other payables 25 219,425 157,934
Due to related parties 28 1,335 1,453
Interest-bearing loans and borrowings 22 30,683 50,691
Other financial liabilities 24 15,810 1,275
Income tax payable 2,210 3,172
Billings in excess of cost and estimated 17 69,776 72,155
earnings
Accrued contract expenses 26 363,470 179,008
_______ _______
702,709 465,688
_______ _______
TOTAL LIABILITIES 791,523 590,799
_______ _______
TOTAL EQUITY AND LIABILITIES 986,650 729,357
_______ _______
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2005
2005 2004
Notes US$'000 US$'000
Restated
OPERATING ACTIVITIES
Net profit / (loss) before income taxes:
Continuing operations 83,348 62,736
Discontinued operation 7 (815) (13,162)
_______ _______
82,533 49,574
Adjustments for:
Depreciation, amortisation and impairment 27,281 27,888
Share-based payments 4d 897 -
Difference between end-of-service benefits
paid and amounts recognised in the
income statement 2,372 1,513
Finance costs, net 5,195 5,512
Gain on disposal of investments 4b (2,390) (2,932)
Other non-cash items, net (2,026) 78
_______ _______
Operating profit before working capital
changes 113,862 81,633
Trade and other receivables (106,794) (101,187)
Work in progress (126,010) (6,196)
Due from related parties (7,513) 746
Inventories 546 (113)
Current financial assets 15,121 1,776
Trade and other payables 61,010 19,746
Billings in excess of cost and estimated
earnings (2,379) 60,773
Accrued contract expenses 184,462 28,489
Due to related parties (118) 1,345
Current financial liabilities 4,261 (6,363)
_______ _______
136,448 80,649
Other non-current items, net (4,022) 19,206
_______ _______
Cash generated from operations 132,426 99,855
Interest paid (9,097) (5,695)
Income taxes paid, net (15,085) (13,278)
_______ _______
Net cash flows from operating activities 108,244 80,882
_______ _______
Of which discontinued operations (619) (8,903)
2005 2004
Notes US$'000 US$'000
Restated
INVESTING ACTIVITIES
Purchase of property, plant and equipment (17,556) (17,142)
Acquisition of business assets 11 - (695)
Acquisition of subsidiary, net of cash 11
acquired (4,073) (9,119)
Purchase of minority interest 11 (1,644) -
Acquisition of interest in joint venture 11 - (1,000)
Purchase of intangible oil & gas assets (3,079) (4,480)
Purchase of available-for-sale financial
assets (691) -
Proceeds from disposal of property, plant and 647 804
equipment
Proceeds from disposal of assets of
discontinued operation
classified as held for sale 1,832 -
Proceeds from disposal of available-for-sale
financial assets 4,545 2,344
Net foreign exchange difference (135) (1,659)
Interest received 3,442 1,665
_______ _______
Net cash flows used in investing activities (16,712) (29,282)
_______ _______
Of which discontinued operations 1,892 39
FINANCING ACTIVITIES
Proceeds from issue of share capital - 1,511
Proceeds from interest-bearing loans and
borrowings 28,339 45,722
Repayment of interest-bearing loans and
borrowings (32,026) (35,684)
Purchase of derivative financial instruments (689) (62)
Shareholders loan note transactions, net 4,968 (1,581)
Transactions with employee share plan, net 537 3,016
Exercise of option to acquire group shares 11 (2,400) -
Repurchase of shares 20 - (30,760)
Equity dividends paid (15,243) (1,315)
_______ _______
Net cash flows used in financing activities (16,514) (19,153)
_______ _______
Of which discontinued operations - -
NET INCREASE IN CASH AND CASH EQUIVALENTS 75,018 32,447
Cash and cash equivalents at 1 January 127,823 95,376
_______ _______
CASH AND CASH EQUIVALENTS AT 31 DECEMBER 19 202,841 127,823
_______ _______
The attached notes 1 to 31 form part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2005 (Restated)
Attributable to Shareholders of Petrofac Limited
______________________________________________________________
Issued Capital
share Share redemption Treasury Other Retained Minority Total
capital premium reserve shares reserves earnings Total interest equity
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Balance at 1
January 2004 9,066 52,592 8,634 - (1,803) 35,552 104,041 2,241 106,282
Change in
accounting policy
(note 2) - - - (106) - - (106) - (106)
_______ _______ _______ _______ ________ _______ _______ _______ _______
Balance at 1
January 2004
(restated) 9,066 52,592 8,634 (106) (1,803) 35,552 103,935 2,241 106,176
Foreign currency
translation - - - - 3,598 - 3,598 - 3,598
Net loss on
maturity of cash
flow hedges recognised
in income statement - - - - 486 - 486 - 486
Net changes in
fair value of
derivatives - - - - 23,498 - 23,498 - 23,498
Changes in the
fair value
of
available-for-sale
financial assets - - - - 1,268 - 1,268 - 1,268
_______ _______ _______ _______ ________ _______ _______ _______ _______
Total income and
expenses
for the year
recognised
in equity - - - - 28,850 - 28,850 - 28,850
Net profit for the
year - - - - - 32,921 32,921 (46) 32,875
_______ _______ _______ _______ ________ _______ _______ _______ _______
Total income and
expenses
for the year - - - - 28,850 32,921 61,771 (46) 61,725
Shares issued
during the year 115 1,396 - - - - 1,511 - 1,511
Shares repurchased
during the year (2,247) (28,513) 2,247 - - (2,247) (30,760) - (30,760)
Petrofac ESOP
transactions, net 232 2,784 - 106 - - 3,122 - 3,122
Increase in value
of
stock warrants - 294 - - - - 294 - 294
Elimination of
minority interest - - - - - - - (2,195) (2,195)
Dividends - - - - - (1,315) (1,315) - (1,315)
_______ _______ _______ _______ ________ _______ _______ _______ _______
Balance at 31
December 2004 7,166 28,553 10,881 - 27,047 64,911 138,558 - 138,558
_______ _______ _______ _______ ________ _______ _______ _______ _______
For the comparative year ended 31 December 2004 a capital redemption reserve
resulting from shares repurchased was not disclosed separately from retained
earnings. This comparative data has been restated to reflect this separate
disclosure.
As restated, a capital redemption reserve of US$8,634,000 is reflected as at 1
January 2004. Retained earnings has been reduced by this amount at this date.
During 2004, the capital redemption reserve increased as a result of further
shares repurchased during the year (US$2,247,000). This movement has been
reclassified from retained earnings. As at 31 December 2004, a capital
redemption reserve is separately disclosed of US$10,881,000 with a corresponding
reduction in retained earnings. There is no impact on basic or diluted earnings
per share.
The attached notes 1 to 31 form part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
For the year ended 31 December 2005 (Restated)
Attributable to Shareholders of Petrofac Limited
______________________________________________________________
Issued Capital
share Share redemption Treasury Other Retained Minority Total
capital premium reserve shares reserves earnings Total interest equity
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$' 000 US$'000 US$'000
Balance at 1
January 2005
(Restated) 7,166 28,553 10,881 - 27,047 64,911 138,558 - 138,558
Foreign currency
translation - - - - (4,248) - (4,248) - (4,248)
Net gain on
maturity of cash
flow hedges
recognised in
income statement - - - - (5,628) - (5,628) - (5,628)
Net changes in
fair value of
derivatives - - - - (28,549) - (28,549) - (28,549)
Changes in the
fair value of
available-for-sale
financial assets - - - - (1,048) - (1,048) - (1,048)
_______ _______ _______ _______ ________ _______ _______ _______ _______
Total income and
expenses
for the year
recognised
in equity - - - - (39,473) - (39,473) - (39,473)
Net profit for the
year - - - - - 74,582 74,582 - 74,582
_______ _______ _______ _______ ________ _______ _______ _______ _______
Total income and
expenses
for the year - - - - (39,473) 74,582 35,109 - 35,109
Petrofac ESOP
transactions, net 65 1,398 - (17) - - 1,446 - 1,446
Conversion of debt
instruments 1,398 36,259 - - - - 37,657 - 37,657
Exercise option to
acquire group
shares (note 11) - - - - - (2,400) (2,400) - (2,400)
Dividends - - - - - (15,243) (15,243) - (15,243)
_______ _______ _______ _______ ________ _______ _______ _______ _______
Balance at 31
December 2005 8,629 66,210 10,881 (17) (12,426) 121,850 195,127 - 195,127
======= ======= ======= ======= ======== ======= ======= ======= =======
The attached notes 1 to 31 form part of these consolidated financial statements.
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