Shares of oil services companyPetrofac(LSE: PFC) have jumped by nearly 10% in early trading today after the company issued what seems to be an upbeat trading update.
The company said this morning that theend of costly problems at its flagship gas project in the North Sea was in sight. However, the company is still booking an additional 30m on its North SeaLaggan-Tormore project, which is owned by French oil majorTotal.
So far, losses stemming from theLaggan-Tormore project have hit$425mand severely damaged Petrofacs reputation. The market seems to be relieved that an end to Petrofacs troubles is in sight or is it?
Petrofacs management has blamed harsh operating conditions and strike threats by workers for the delays at Laggan-Tormore. But workers have laid the blame squarely with Petrofacs management.
And it seems as if Petrofacs management should shoulder the responsibility. The Laggan-Tormore project has been an enormous red herring for the company.
Initialcost estimates grossly underestimated the vast numbers of skilled workers needed to construct such a large complex, high level of specification gas plant in such testing weather conditions.
Petrofac only hired 850 workers for theLaggan-Tormore project but since, this number has more than doubled to 2,000. The company has been forced to hire barges, hotels, and cruise ships to accommodate additional workers.
Losses stemming from theLaggan-Tormore project have hit Petrofacs shares hard over the past 12months. Even after this mornings gains, the companys shares have fallen 23% year to date excluding dividends.
At one point earlier this year, Petrofacs shares had slumped by 50% over a 12-month period.
Unfortunately, its not just the Laggan-Tormore project that has held Petrofac back.
The company has been struggling with its Integrated Energy Services division, which produces oil and gas, for some time.
The IES division was part of Petrofacs plan to diversify. Putting capital into theoil & gas projects Petrofac was working onprovided the potential for bigger gains, and higher risks.
However, the IES division has turned out to be nothing but a thorn in Petrofacs side. Along with theLaggan-Tormore troubles, the group has also booked losses on itsGreater Stella Area oil project in the North Sea.
According to plan
Nevertheless, while IES struggles, the rest of Petrofacs business appears to be performing according to plan.
The group has booked $4.7bn worth of new business so far this year. And at the end of May, Petrofacs order backlog stood at a record $20.5bn.
Whats more, Petrofac is now in the process of winding down its IES division. The company is focused ongenerating value from the existing IES project portfolio and reducing the capital intensity of this business. This should help minimize the number of mistakes in the future.
Troubles at Petrofacs IES division have torn the companys reputation with shareholders to shreds over the past 12months.
During the 12months to April this year, Petrofac issued no fewer than three profit warnings.Managements primary task will now be to prove that the company can be trusted once again and meet analysts forecasts.
At present Petrofac is trading at a forward P/E of 15.2 and supports a trailing dividend yield of 4.4%.
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