Petrofac to cut cost, conserve cash in COVID-19 response

UAE-based Petrofac, will reduce cost by US$100 million this year and by up to $200 million in 2021 as it looks to improve cost competitiveness and protect the business amidst an unprecedented market disruption related to the spread of the novel coronavirus COVID-19.

The Middle East-focused engineering, procurement and construction company, said its response includes reducing overhead and project support costs, conserving cash and liquidity by reducing CAPEX by 40 per cent ($60 million) and suspending the 2019 final dividend.

The UK-listed company said its Board is withdrawing the recommendation of a final dividend of 25.3 US cents ($85 million) announced on 25 February 2020, and will review the resumption and payment of dividends when the full impact of COVID-19 and low oil prices is known.    

“At this unprecedented time, our top priority remains the health and well-being of our people, clients and suppliers, and ensuring that we take decisive action to protect the long-term health of our business,” said Ayman Asfari, Petrofac’s Group chief executive.
“We have a resilient business model, strong competitive position and a differentiated in-country value proposition that is highly valued by our clients. Nevertheless, we are taking swift, decisive action in response to the COVID-19 pandemic and lower oil prices to reduce costs, retain our competitiveness and preserve the strength of our balance sheet. These best position us to protect our business, stakeholders and the communities we serve.”

The company’s cost cuts include:

- Reducing and structurally rebasing salaries and allowances for the Board, senior management and most of our employees by between 10-15 per cent

- Reducing personnel by c.20 per cent and furloughing staff in anticipation of a reduction in activity levels

- Reducing non-staff overhead costs by up to 25 per cent

In aggregate, these measures are expected to reduce overhead and project support costs by at least $100m in 2020 and up to $200 million in 2021, the company said in a statement.

In its market outlook, Petrofac said its order intake of $2 billion in the first quarter has increased backlog to $8.2 billion. The company said the order backlog, along with a capital light business model and a strong competitive position in the Middle East where the cost of production is low, “will protect us against near term headwinds. However, it is too early to ascertain and quantify the impact of both COVID-19 and low oil prices on financial performance or new order intake and, as a result, we are suspending our previous revenue and margin guidance. We will continue to closely monitor the developing situation and update the market as appropriate.”

Meanwhile, engineering and construction activity continues at most of its engineering and construction (E&C) project sites and offices, although progress is being impacted by supply chain disruptions, travel restrictions and the government enforced lockdowns in India and Iraq, the company said. 

Operations and maintenance activity in its Engineering & Production Services (EPS) business continues in all regions, albeit travel and social distancing restrictions are having a modest impact on activity levels.