Shares in Petrofac, a London-listed oil services company with operations in Abu Dhabi and Sharjah, rose sharply yesterday after a bullish trading statement said its order backlog was higher despite the weaker oil price this year.
In late afternoon UAE time, the shares were up 50 pence – 5 per cent – at 919.5 pence, although they had been as high as 964.50p during the day.
The company said its order backlog was at a record US$20.5 billion, which included the award this month of a $900 million contract from Petroleum Development Oman to provide engineering, procurement and construction management (EPCM) services for its Yibal Khuff project in southern Oman.
The Oman project was the biggest so far this year out of total new orders for its main EPCM division totalling $4.7bn, the company said.
Yibal Khuff is an oilfield located approximately 350 kilometres south-west of Muscat in the Oman, and the order builds on Petrofac’s award last year of a $1bn contract for the nearby Rabab Harweel oilfield development.
The company also said yesterday that it had made progress on its troubled Laggan-Tormore project in the British sector of the North Sea, although that project has cost it hundreds of millions of dollars and led to two profit warnings this year.
“Putting the challenges we have faced on Laggan-Tormore to one side, the rest of our portfolio continues to perform well,” said Ayman Asfari, Petrofac’s chief executive.
“We have had a good start to the year … Our pipeline of bidding opportunities remains attractive, and ongoing investment by our clients in large strategic projects in our core markets, together with our strong competitive position, should see us secure a number of further awards over the second half of the year.”
Indeed, the company said that its net profit should be “significantly weighted” towards the second half of the year.
Yesterday’s statement is an update to the market ahead of the firm’s first-half results, which are expected to be released on August 25.
Petrofac’s net profit last year fell 10.6 per cent to $581m on revenue down 1.6 per cent to $6.2bn. This year, Petrofac warned the market that it expected net profit of US$460m because of the fall in prices.
That was lower than the previous November forecast of $500m, when oil prices were expected to average $82 per barrel this year.
However, benchmark North Sea Brent oil prices have since bounced back from their lowest levels in January and February, when they were about $45 per barrel, to be trading between US$60 and US$65 per barrel since April.
While the company has been successful at securing new orders, its profitability has been hurt by problems with Laggan-Tormore, a gas plant project on the Shetland Islands, off the UK’s northernmost coast, because of weather delays and other factors.
In April, Petrofac said it would take an additional pre-tax loss of $194.4m on Laggan-Tormore on top of the $230m loss it revealed in February.
In yesterday’s trading statement, Petrofac said it expects further “incremental pre-tax costs” for the project to be £30m, with first gas expected in the third quarter of this year.
It said, however, that it has yet to recognise a £20m (Dh115.6m) write-off for its losses against taxes on the project.
Some analysts see Petrofac as still vulnerable to further setbacks because of the nature of projects it is exposed to.
Although recognising that Petrofac’s shares have done better than the sector in general, Catharina Hillenbrand-Saponar, an energy analyst at Montpellier Analysis, said: “There is a chance of reversal of performance … [because] it has a good share of risky projects.”
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
