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Mon 13 Apr 2009 04:00 AM

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Petrofac: Recession proof?

Oil services provider Petrofac is riding high as Gulf countries forge ahead with infrastructure plans. Claire Ferris-Lay meets group chief executive, Ayman Asfari, who talks billion-dollar deals and recruitment plans.

Petrofac: Recession proof?
Ayman Asfari is eyeing additional acquisitions for Petrofac.
Petrofac: Recession proof?
Petrofac has already secured $5bn worth of contracts for 2009. Much of this backlog of work will be in Saudi Arabia and Abu Dhabi, the company’s two key target areas for growth this year.
Petrofac: Recession proof?
Petrofac expects the current payroll of more than 11,000 staff to increase by around ten percent.

Oil services provider Petrofac is riding high as Gulf countries forge ahead with infrastructure plans. Claire Ferris-Lay meets group chief executive, Ayman Asfari, who talks billion-dollar deals and recruitment plans.

Most CEOs will be suffering as we enter the second quarter of what is widely anticipated to be one of the toughest financial years in history. But while most CEOs are forcing themselves to put on a brave face in front of the world's media, there are a certain few who don't need to desperately highlight the firm's few good assets that they hope will see them through the economic downturn.

One of those is Ayman Asfari of London-based oil services provider, Petrofac. So good were the firm's 2008 annual results that during its early morning media conference call last month, just one bewildered journalist asked a question - was Petrofac recession proof?

If we can manage to maintain the margins that we have been delivering in the past [it] would be an excellent result considering the overall market conditions.

"It was a good question," chuckles the quietly spoken group chief executive before he talks cost pressures and reductions in discretionary spends.

In March Petrofac reported a net income of $265m up from $189m a year earlier, beating the $259m median estimate of eleven analysts surveyed by Bloomberg. As a result, the oil services firm increased its dividend payment from 30 percent to 35 percent while its share price remained in positive territory with an increase of 51.73 percent year to date (as of March 24).

Petrofac was established as a domestic oil services group in Texas, America in 1981. But it is Syrian-born Asfari who has led the transformation of Petrofac into the international business it is today, employing over 11,000 people in 24 offices worldwide. Asfari also led the company's billion-dollar flotation on the London Stock Exchange as chief executive in October 2005.

Now, as a British citizen with an estimated stake worth $534.8m he often finds himself ranked alongside some of Britain's leading businessmen and top entrepreneurs.

But as we sit in the company's gleaming eighteen-storey Middle East headquarters in the unlikely emirate of Sharjah, it is clear 50-year-old Asfari doesn't want to talk about himself, looking uncomfortable when asked if he thinks his Sunday Times Rich List ranking of position 211 with an estimated fortune of $579m is accurate. It's one of the downfalls of having a public company he shrugs.

Instead, he offers his thoughts on why Petrofac seems to be one of the only companies still growing during one of the worst recessions ever.

"We are focused on markets, particularly Middle Eastern markets where the marginal cost of production in oil and gas is relatively competitive.

We've seen clients pressing ahead with their capital expenditure plans, in fact speaking publicly that they want to take advantage of the downturn in the market to build capacity whilst the prices are reasonably competitive. [So] in the markets where we are well-positioned most of our clients are continuing with their capital expenditure plans."

With $5bn worth of contracts currently secured for 2009 its already looking like another strong year for the firm. Much of this backlog of work will be in Saudi Arabia and Abu Dhabi, two of the company's target areas for growth this year.

In January Petrofac signed a $2.3bn, 44-month lump sum order to boost output by state backed Abu Dhabi Company for Onshore Oil Operations (ADCO), a subsidiary of Abu Dhabi National Oil Company (ADNOC), which will see the firm provide engineering, procurement and construction services to upgrade the capacity at the onshore Asab oil field.

The following month the firm won the onshore contract for the Karan gas field owned by Saudi Arabia's state firm Aramco, which aims to bridge a gap in the kingdom's growing gas supply shortage."Abu Dhabi National Oil Company (ADNOC), as well as ARAMCO, are proceeding with a number of their plans," says Asfari. "ADNOC is actually accelerating some of its developments so we are pretty focused on these markets and we are making an effort and investment to promote our business there."

He adds that the company's cost-effective structure will also stand it in good stead throughout the crisis. "We have always maintained a cost-effective structure, which again in a downturn should allow us to capture the bigger market share. We have engineering offices in the Middle East and two large Indian offices in Chennai and Mumbai, so we should be able to continue to grow whilst the overall market is possibly shrinking a bit."

While Petrofac's biggest growth is likely to come from the Middle East, Asfari is also eying growth in Algeria where he says he still sees opportunity. Last year the firm, in a consortium with Indonesian engineering company IKPT, narrowly missed out on a contract to build a liquefied petroleum gas (LNG) plant in the north African country.

But just two days after Petrofac announced its annual results, it publishes news of a new $2.2bn engineering, procurement and construction contract for El Merk, a processing facility in Algeria. The new plant, expected to be delivered in 2012, will have the capacity to process 98,000 barrels of oil per day, 29,000 barrels of condensate and 31,000 barrels of LPG.

Asfari expects to see Petrofac grow in "double digits" this year but agrees the company is not totally immune to the crisis as he notes that the UK business, where much of its Operations Services division is based, will be affected.

"Operations Services, which is predominately a UK-based business is seeing some cost pressure. Some of the oil producers are hurting quite badly and there is a general pressure in the UK now to try to find ways to optimise costs. As a result discretionary spending may be curtailed and this has potential to impact on some of our consultancy and training businesses."

The significant drop in the value of the pound has also impacted on Petrofac's UK operations. "Our earnings, which are dollar denominated, have been reduced by ten to fifteen percent as a result of the decline in the value of the pound. Having said that, we have quite a bit of corporate overhead expense in the UK and with the decline in the pound these overheads have declined as well so net we are probably hedged."

The drop in energy prices has also forced the firm to renegotiate some of its contracts. Having renegotiated its contract with ADCO Petrofac signed a $2.3bn contract with them in January. They have also renegotiated the contract for the Karan gas field in Saudi Arabia."We have seen clients delay awards and renegotiate the contracts with us," he says. "We [have] basically passed on all of the cost savings to our clients and reduced our contingencies to reflect the lower execution risk in a deflationary environment compared to one in which there is spiralling inflation."

"There is a lot more capacity in the system, whether it is from suppliers or the construction contractors in the region," he continues. "In the last few years when we were executing these jobs, we were relying on construction contractors who were terribly busy and we managed to execute very well so the execution risk for us is hopefully going to be less in this environment.

If we can manage to maintain the margins that we have been delivering in the past [it] would be an excellent result considering the overall market conditions."

With a healthy balance sheet and a number of multi-billion contracts already signed, Petrofac is also adding to its existing staff and business. Although Asfari is hesitant on exact figures, he says he expects the current payroll of more than 11,000 staff to increase by around ten percent, despite a number of retrenchments in some offices.

In July, Petrofac acquired Eclipse Petroleum Technology, a specialist production engineering company, for $13.9m. This year, Asfari says he is eyeing additional acquisitions as he seeks to broaden Petrofac's geographical coverage as well as areas of expertise such as offshore work.

"We are not looking at major acquisitions, we are looking at small to medium-sized firms that would add breadth and competency to the group. One thing we are always conscious of, with any acquisition we make, is ensuring we can integrate effectively and not change the shape and culture of our business."

In another positive note, Asfari adds that the bidding pipeline is still strong as a number of countries plough ahead with infrastructure plans to take advantage of competitive costs. "We have record backlog levels and excellent visibility of our earnings for 2009 and 2010. We also have more than $2bn of business secured for 2011, which we think is pretty exceptional in this market."

One wonders quite how Petrofac would fare during the better times.

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Abdul Rehman 10 years ago

The main reason behind this success story is that the company has no bank borrowing on its books.