PETROFAC ANNUAL REPORT AND ACCOUNTS 2017 ACCOUNTS AND REPORT ANNUAL
A CLEAR, FOCUSED STRATEGY… ANNUAL REPORT AND ACCOUNTS 2017 ...GIVING US CONFIDENCE FOR THE FUTURE In 2017, we delivered good operational performance, underpinned by high levels of project activity, good project execution, a recovery in new orders and strong financial discipline.
We are pursuing a clear strategy: focusing on our core, delivering organic growth, and reducing capital intensity.
With a healthy order backlog and strong credentials in promising sectors of the market, we have a resilient business that is well positioned for the future.
Revenue EBITDA 1 Net profit 1,2 US$6,395m US$730m US$343m Year ended 31 December 2016: Year ended 31 December 2016: Year ended 31 December 2016: US$7,873 million US$704 million US$320 million
Return on capital employed 1 Backlog 21% US$10.2bn Year ended 31 December 2016: As at 31 December 2016 (restated)³: 17% US$11.7 billion
Diluted earnings per share 1 Reported net (loss)/profit2 1 Business performance before exceptional items and certain re-measurements. 2 Profit attributable to Petrofac Limited 100.9¢ US$(29)m shareholders. Year ended 31 December 2016: Year ended 31 December 2016: 3 The Group no longer recognises 93.3¢ US$1 million backlog in respect of the Integrated Energy Services contracts.
2017 at a glance
• Petrofac has delivered solid • Our competitive position Backlog by reporting business performance results, has helped secure a strong segment good operational progress recovery in new orders in and strong financial discipline, 2017, particularly in the while maintaining best-in- second half of the year class and safe project execution for our clients • We are delivering our clear, focused strategy. The Group • Reported net loss of US$29 has secured awards in a broad million was impacted by range of markets during the exceptional items and certain year. Operational excellence is maintaining our competitive re-measurement of US$372 E&C US$7.5bn position and protecting our million (post-tax), of which EPS US$2.7bn approximately US$350 million margins. We are continuing were non-cash items to reduce capital intensity and enhance returns, evidenced • In a busy year, the Group has by the disposal of non-core also demonstrated its track assets and our decision to record for operational delivery exit the deep-water market with more than 239 million man-hours worked across the portfolio Strategic report
Delivering our strategy by focusing on our core strengths
FOCUS DELIVER REDUCE ON OUR ORGANIC CAPITAL CORE GROWTH INTENSITY
See page 16 See page 18 See page 20
STRATEGIC REPORT GOVERNANCE
2 Group performance at a glance 66 Chairman’s introduction 4 Our business model 68 Directors’ information 6 Chairman’s statement 70 Corporate Governance report 8 Market outlook 80 Nominations Committee report 10 Group Chief Executive’s review 82 Audit Committee report 14 Our strategy 88 Compliance and Ethics Committee report 16 Our strategy in action 90 Directors’ remuneration report 22 Key performance indicators 106 Directors’ statements 24 Our leadership team 26 Risk management FINANCIAL STATEMENTS 29 Principal risks and uncertainties 34 Segmental performance 107 Group financial statements 42 Financial review 108 Independent auditor’s report 46 Corporate responsibility 115 Consolidated income statement 116 Consolidated statement of other comprehensive income 117 Consolidated statement of financial position 118 Consolidated statement of cash flows 119 Consolidated statement of changes in equity 120 Notes to the consolidated financial statements 169 Company financial statements 170 Company income statement 170 Company statement of other comprehensive income 171 Company statement of financial position 172 Company statement of cash flows 173 Company statement of changes in equity 174 Notes to the Company financial statements 186 Shareholder information 187 Glossary
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Petrofac Annual report and accounts 2017 / 1 GROUP PERFORMANCE AT A GLANCE A leading global service provider
OUR DIVISIONS
ENGINEERING & CONSTRUCTION ENGINEERING & PRODUCTION INTEGRATED (E&C) SERVICES (EPS) ENERGY SERVICES (IES)
Group revenue contribution Group revenue contribution Group revenue contribution
75% 22% 3%
Engineering & Construction delivers onshore Engineering & Production Services brings Integrated Energy Services provides an and offshore engineering, procurement, together our services’ capability across integrated service for clients under flexible construction, installation and commissioning brownfield projects and operations, greenfield commercial models that are aligned with their services on a lump-sum basis. We have more projects through concept, feasibility and requirements. Our projects cover upstream than 35 years of expertise in this area and our front-end engineering and full project delivery developments – both greenfield and brownfield, services encompass both greenfield and as well as a range of operations, maintenance related energy infrastructure projects, and can brownfield developments. and engineering services for onshore and include investment. offshore projects.
Revenue Revenue Revenue US$4,801m US$1,392m US$228m (2016: US$5,928m) (2016: US$1,725m) (2016: US$271m)
Net profit1 Net profit1 Net loss1 US$342m US$90m US$(21)m (2016: US$311m) (2016: US$111m) (2016: US$(42)m)
1 Business performance profit attributable to Petrofac Limited shareholders before exceptional items and certain re-measurements.
Oil and gas Oil and gas Storage and pipelines Refining and Offshore production Offshore development processing facilities petrochemicals wind and production
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Design
Build
Manage & maintain
OPERATIONAL PROGRESS IN 2017
Across our portfolio of lump-sum projects, we delivered more than 217 In IES, we made good progress in re-shaping our portfolio and improving million man-hours, maintained an excellent safety record and secured performance. By the close of the year, our order backlog stood at US$4.1 billion of new orders. Meanwhile, in our reimbursable business, US$10.2 billion, giving us good revenue visibility. we secured contract awards and extensions valued at US$1.1 billion.
ABU DHABI, UAE ALGERIA IRAQ OMAN
The highlight was progress on An important milestone was the Building on our success in Iraq, On our upstream projects, we the UZ750 offshore project at the completion and commissioning securing several new contract completed Phase 1 of the Khazzan Upper Zakum oil field, our share of of the In Salah southern fields awards and extensions which, central processing facility for BP which is valued at US$3.5 billion. development. We also introduced together, are worth more than and were awarded Phase 2. At the height of the project some gas into the Reggane North US$300 million. These include We also secured a 10-year EPCm 14,000 workers were involved, Development plant and, by the close engineering, operations and framework agreement with including 5,000 onsite, and it of the year, we were ready for the maintenance services agreements Petroleum Development Oman, reached more than 58 million introduction of gas into the Alrar plant. with international oil companies, which builds on our work on the man-hours LTI free. During 2017, plus we extended our long-term Rabab Harweel Integrated project we delivered and installed all of contract with Basra Oil Company and Yibal Khuff project. In terms the modules, and contract and expanded our scope of downstream projects, the Sohar completion is set for mid-2018. of services. refinery is now in commercial operation, and we were awarded the Duqm Refinery project, in a 50/50 joint venture with Samsung Engineering.
See page 35 See page 38 See pages 35-36 and 39
MALAYSIA SAUDI ARABIA UK KUWAIT
Malaysia continues to be an In Saudi Arabia we continue In September 2017, Petrofac We successfully reached the important market for Petrofac. to build on our downstream marked 20 years since we first pre-commissioning phase of Production levels remain in line with credentials. By the close of the year pioneered the outsourced Duty the KNPC Clean Fuels Project expectations at Block PM304, which we had reached commissioning Holder model in the North Sea. for Kuwait National Petroleum. we operate on behalf of PETRONAS, phase for both the Petro Rabigh During the year, we secured a We also secured a lump-sum and we continue to make good petrochemicals plant and the number of contract awards and EPC project with Kuwait Oil progress on the US$500 million Jazan South tank farm project. extensions, including a three-year Company, valued at US$1.3 billion, Refinery and Petrochemicals extension of a maintenance for GC32, the first sour oil and Integrated Development (RAPID) services contract with BP and a gas gathering centre in the EPCC project. 12-month extension for engineering Burgan oil field. services with Chevron.
See page 36 and 56 See page 35 See page 38 See page 35
Oil and gas Oil and gas Storage and pipelines Refining and Offshore production Offshore development processing facilities petrochemicals wind and production
Petrofac Annual report and accounts 2017 / 3 OUR BUSINESS MODEL Engineering expertise is at the heart of everything we do
VALUE INPUTS CORE CAPABILITIES
OUR PEOPLE As a people-based business, we have Our values a problem-solving culture, clear values and strong leadership. er liv e d S a o f t e n e iv r D
DESIGN BUILD
RISK PROCESSES Q u
AND RISK MANAGEMENT a
l i
Identifying and managing risks are key t y ENGINEERING
to the successful delivery of our strategy. & EXPERTISE
c l
o a
s c i t h c t o E n s c io u s MANAGE OUR SUPPLY CHAIN AND MAINTAIN AND CONTRACTORS With deep knowledge of the many R businesses in our supply chain, es e po tiv we know when and how to call on ns va ive nno their respective strengths. I
FINANCIAL CAPITAL Design Manage and maintain Exerting capital discipline, we operate a balanced portfolio; we selectively co-invest, From concept to detail, we provide design We operate and maintain oil and gas assets and can facilitate third-party capital. and engineering services across the life on behalf of clients. We develop safe and cycle of oil and gas assets. effective local workforces by assessing capability needs, building facilities, designing curricula and delivering training programmes. Build
Onshore or offshore, greenfield or brownfield, upstream or downstream, we provide the full spectrum of engineering, procurement, construction and commissioning services, through a range of flexible commercial delivery models, from lump-sum turnkey to fully reimbursable.
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Working across the international oil and gas industry, we help our clients unlock the full value of their energy assets.
GROUP DIVISIONS COMMERCIAL MODELS OUTCOMES
Engineering & Construction LUMP-SUM TURNKEY CLIENT VALUE (E&C) Projects where we are remunerated Benefiting from certainty of on a fixed-price (lump-sum) basis. cost and delivery, and taking advantage of commercial 75% models that meet client needs. Group revenue contribution
SHAREHOLDER VALUE Delivering sustainable, long-term value, through dividend payments to our shareholders and the financial returns from share price growth.
Engineering & Production REIMBURSABLE SERVICES Services (EPS) Where the cost of our services is IN-COUNTRY VALUE reimbursed by the client plus an Developing local skills agreed margin. 22% and capabilities, benefiting Group revenue contribution local development, and COST PLUS KPIs stimulating productivity Reimbursable with margin linked in local economies. to the successful delivery of key performance indicators.
Integrated Energy PRODUCTION ENHANCEMENT Services (IES) CONTRACTS (PECs) Where we are paid a tariff per barrel for enhancing oil and gas production 3% above an agreed baseline. Group revenue contribution
EQUITY UPSTREAM INVESTMENTS Upstream investments made through production sharing contracts or concession agreements.
Oil and gas Storage and pipelines Refining and Offshore production Offshore processing facilities petrochemicals wind
Petrofac Annual report and accounts 2017 / 5 CHAIRMAN’S STATEMENT
Rijnhard van Tets In the face of the intense scrutiny that Non-executive Chairman followed, executive management focused successfully on the business: we retained our clients’ support, saw a good recovery in new orders, protected our liquidity, reduced our capital intensity, and continued to focus on strong execution.
Our response to the investigation Clearly, for much of 2017, the Board’s attention was dominated by the SFO investigation. In May, we took steps to ring-fence the investigation from Petrofac’s day-to-day business operations, and ensure that we responded to the SFO.
Our response included: formation of a dedicated Board Committee to govern this matter; the appointment of a senior external specialist to oversee the Company’s management of, and response to, the MAINTAINING A STRONG BOARD FOR THE FUTURE investigation; the restriction of Group Chief Executive Ayman Asfari to his operational duties; and the suspension of Group Chief How the Board spent its time during the year (%) Operating Officer Marwan Chedid, who resigned from the Board. It is important to stress that these latter actions do not in any way seek to pre-judge the outcome of the SFO’s investigation. Further details of the investigation and our response are set out on page 78. Enhancing our compliance Prior to the instigation of this external investigation, steps had been taken to further enhance the Company’s approach to compliance, including a root and branch review of all related policies and processes, Strategy Risk management and internal controls as detailed on pages 64 and 65. In August Financial matters, including external Project approvals 2017, a new Compliance and Ethics nancial reporting Leadership and people development Committee was formed. The inaugural Governance, including shareholder engagement report of this Committee is set out on pages 88 and 89. These measures ensure that we can continue to be confident in our people 2017 revealed Petrofac’s For 2017, our main intention was to deliver and processes. underlying resilience. on the themes I highlighted last year: focusing on execution, delivering organic Operational progress in 2017 We continued to execute growth, and reducing capital intensity. Operationally, 2017 was a good year. effectively, maintain The Board kept close oversight of progress our bidding discipline and By the middle of the year, however, events against the business strategy. We took a enhance return on capital. had been overtaken by the instigation of particularly close interest in the headway an investigation by the UK Serious Fraud the management team is making in Office (SFO). The Board took swift action, delivering organic growth and further formulating a strategy to run and protect differentiating the business. We also the business whilst responding to, and received regular updates on the engaging constructively, with the SFO in deployment of new digital technologies, relation to the investigation. and the role they can play in bringing Governance continual incremental improvements See pages 72 and 73 to our service offering.
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Of course, the market environment Separately, at the Annual General Meeting To ensure that the leadership team can remained competitive with clear evidence in May 2018, we will be delighted to deliver on these objectives, the Board has of overcapacity. The Board was encouraged recommend to shareholders the appointment concluded that restrictions imposed on the that we saw a strong recovery in new of David Davies as a Non-executive Director. Group Chief Executive in May 2017 are no orders while, for those projects we did bid longer appropriate. Ayman will resume full for, we maintained our bidding discipline. Reflecting on our financial performance executive duties with immediate effect and We secured more than US$5.2 billion in In the face of the challenging environment, re-join the Nominations Committee. He will new orders and extensions in 2017 from we were pleased to deliver a business continue to fully respect and support the both existing and adjacent markets. performance net profit of US$343 million. process and independence of both the Post exceptional items and certain SFO investigation and the sub-committee Once again, our safety performance was re-measurements, we reported a net loss of the Board with delegated responsibility most impressive, as further articulated in of US$29 million. With good performance for this matter. the Group Chief Executive’s statement and on capital management and net debt the Corporate Responsibility section of falling to US$612 million, we demonstrated Succession planning will remain a top this report. Even so, there is no room for our strong financial discipline and our priority. During 2017 we were reassured complacency and we must continue to determination to reduce capital intensity. that there is a strong pipeline of talent retain our focus in this area. coming through at all levels. In 2018 We also chose to re-base our dividend in we expect the business to take a more Maintaining a strong Board for the future May 2017 and this prudent approach was forensic approach to talent management. The Board aspires to lead by example broadly welcomed by investors. We are and live the Petrofac values: safe, ethical, therefore proposing a final dividend of After an 11-year tenure, I have decided to innovative, responsive, quality and cost 25.30 pence per share. stand down from the Board, and would conscious, and driven to deliver. like to thank my fellow Directors for their Against this backdrop, I do want to thank support. I know that, with René Médori It was a particularly busy year for the Board, all Petrofac shareholders for your loyalty. succeeding me, the Board will remain in and I want to thank all Directors for their During the year, we benefited from a frank safe hands. His wide international individual contributions and determination and constructive dialogue with our key experience and understanding of growing to see the Group through this challenging shareholders and, as this Annual Report multi-national businesses, the global period, whilst ensuring Petrofac continues should demonstrate, the Board is landscape, well-established governance to deliver for its stakeholders. determined to repay your confidence. and regulatory knowledge, provides an important level of continuity. As a result of The Board aims to have first-hand Looking forward to 2018 and beyond René’s change in role, Matthias Bichsel will knowledge of the business, and our visit For 2018, we expect the market assume the role of Senior Independent to Aberdeen in October reminded us of environment to remain similar to 2017. Director in May 2018. the pricing pressures we face whilst We will continue to be competitive and demonstrating the level of professional maintain our bidding discipline. However, Finally, I want to thank all our employees commitment across the Group. I also took we do benefit from good visibility of for their continued commitment during a the time to visit the Upper Zakum field projects to be awarded during the year, challenging year, and throughout my tenure development in the UAE and the Greater and will continue to ensure we maintain on the Board. In particular, I would like to Stella Area development in the UK, whilst our cost competitiveness through our pay tribute to our Group Chief Executive the full Board visited two of our Indian focus on operational excellence. Ayman Asfari and the wider leadership engineering offices in January 2017. team. It is encouraging to see how hard From an operational perspective, our he and his executive team are working There were some changes to the Board approach will continue to be characterised to deliver on our collective commitments, during the year, with the resignation of by these three themes: flawless execution, and position the Group for success over both Jane Sadowsky and Thomas Thune reduced capital intensity, and organic the longer term. Andersen. Having led the Remuneration growth. At the same time, the Board will Committee since 2010, Thomas made a ensure that we continue to engage with Rijnhard van Tets particularly strong contribution, for which the SFO. Non-executive Chairman I thank him. 28 February 2018 One of our intentions for 2017 had been I am confident that the Group will, going to review the way in which the Petrofac forward, continue to benefit from a strong, values are understood and applied across diverse, multi-disciplinary Board, with a the Group. This remains on the agenda good ratio of Non-executive to Executive for 2018, to ensure the values – and the Directors. In particular, we look forward behaviours associated with them – are to working with Sara Akbar, who joined clearly understood and consistently the Board in January. Sara’s in-depth applied every day alongside our focus knowledge of the Middle East’s oil and gas on business performance. sector promises to be a strong asset.
Petrofac Annual report and accounts 2017 / 7 MARKET OUTLOOK Petrofac is well positioned in some of the most resilient sectors of the market
The long-term market Large-scale investment in oil and gas Petrofac is well positioned fundamentals are robust infrastructure will be required to meet in some of the most promising We believe that the long-term market demand growth. The IEA anticipates sectors of the market fundamentals are robust – and Petrofac cumulative investment in the oil and gas Petrofac has an extensive track record in is well positioned to benefit. sector of US$21 trillion by 2040, which MENA, one of our core geographies. In its represents an annual investment of 2017 ranking of MENA EPC contractors, Among industry analysts, such as the US$860 billion. MEED.com named Petrofac as one of International Energy Agency (IEA) and the region’s top contractors. Meanwhile, the Organization of Petroleum Exporting In its World Oil Outlook 2017, OPEC reaches Arabian Oil and Gas Magazine ranked us Economies (OPEC), there is consensus broadly similar conclusions, and asserts as one of the top two contractors. that global energy demand is set to grow that: “OPEC Member Countries remain strongly over the long term, and that committed to supporting investments – in We expect the region’s resource holders to hydrocarbons will continue to play a new upstream capacity, in the maintenance continue to invest over the short to medium significant role. of existing fields and infrastructure, in the term. Over the longer term, according to construction of the necessary pipelines, the IEA, meeting demand will depend The most recent analysis from the IEA and in the building and expansion of oil increasingly on the larger resource-holders estimates that energy demand is set to terminals and refineries.” in the region. By 2040, for example, oil grow by almost 30% by 2040 (under the production from the OPEC members new policies scenario1), by which time the We therefore expect clients to continue located in the Middle East is forecast to world’s energy supply mix will divide into to invest in long-term strategic projects, rise by more than 6 million barrels per day four broadly equal parts: oil, gas, coal especially in regions with lower marginal (up from 30.4 million barrels per day in 2015 and low-carbon sources. This will see costs of production such as the Middle to 36.5 million barrels per day in 2040) 2. demand for oil growing by 11 million barrels East and North Africa (MENA) region. a day, or 13%, to reach almost 105 million We also see a strong trend for investment barrels a day2. Meanwhile, demand for in the downstream market in the MENA gas is estimated to grow by some 45% to region, as resource holders look to exceed 5,300 billion cubic metres per year2. industrialise their economies, create employment, and secure more of the value chain.
Global upstream capex We have seen a return to growth (US$ billion) in upstream capital spending 900 After considerable declines in 2015 and 2016, upstream capital spending is 800 showing tentative signs of a recovery. 700 In 2017, global upstream capital spending 600 is estimated to have grown by around 9%3, 500 further modest growth is forecast for 2018, and we expect a return to more significant 400 increases over the medium to longer term. 300 In the Middle East, the rebound is expected to be relatively strong, with increases of 200 14%3 predicted for 2018. We are also well 100 positioned in several other regions such 0 as the CIS, Africa and Asia Pacific, where 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 we already have a local presence, strong relationships and an extensive track record. Source data: IHS Markit
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We see good downstream opportunities – where Petrofac Global upstream opex has been extending its credentials (US$ billion) In addition to our upstream activities, 900 Petrofac is well placed to take advantage of downstream opportunities in the 800 refining and petrochemicals sectors. 700
Global refining capacity is expected to 600 3 increase by some 14% over the next four 500 years, with significant activity in the Middle East, Africa and Asia. Similarly, the global 400 petrochemicals market is poised for 300 considerable growth, with compound 200 annual growth rates of 4% over the next decade. An indication of the potential 100 comes from Abu Dhabi where the Abu 0 Dhabi National Oil Company (ADNOC) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 recently announced a five-year US$109 billion capital expenditure plan, 40% of Source data: IHS Markit which will be directed to downstream investments, lifting the Emirate’s refining We see a strengthening in upstream Tendering activity remains high, capacity by 60%. operating expenditure – with pockets but competitive of opportunity for Petrofac While tendering activity within our core Over recent years, Petrofac has built In our reimbursable business, we have markets has remained high through 2017 its credentials in the refining sector. withstood significant recent decreases and into 2018, we are facing increased We have secured several major projects in upstream operating expenditures. competition. Even so, by lowering our and, in 2017, were awarded a further In Europe the spending peak was reached cost base and focusing on operational contract worth approximately US$2 billion back in 2013 and, in the Middle East it excellence, we have shown that we from Duqm Refinery and Petrochemical was in 2014, with subsequent falls driven are able to compete effectively while Industries LLC (in a 50/50 joint venture by deflation in the supply chain and maintaining our bidding discipline. with Samsung Engineering). We are decreasing activity levels. confident that we can achieve similar success in petrochemicals. 2017 saw some modest growth, amounting to 5%3 in the Middle East and a little over We have also been successful in moving 3%3 in Europe. Across the Middle East, into other adjacent sectors such as we are confident of stronger increases in offshore wind. In 2017, for example, we the coming years, but expect conditions in made good progress with the BorWin3 Europe to remain challenging. Nonetheless, and Galloper projects, and were awarded we secured a number of contract extensions a floating wind turbine research project in 2017 and, with new operating models by the UK’s Carbon Trust. among operators, transfers of asset ownership, and increasing potential for late life and decommissioning services, we do see pockets of opportunity.
1 International Energy Agency, World Energy Outlook 2017, the new policies scenario is the main scenario which incorporates existing energy policies as well as an assessment of the results likely to stem from the implementation of announced intentions, notably those in the climate pledges for CPO21 (the 2015 United Nations Climate Change Conference, also known as the Paris Agreement). 2 International Energy Agency, World Energy Outlook 2017. 3 IHS Markit Global Upstream Spending Report 2017.
Petrofac Annual report and accounts 2017 / 9 GROUP CHIEF EXECUTIVE’S REVIEW
Ayman Asfari In the backdrop of a challenging Group Chief Executive 2017, Petrofac delivered a strong performance.
Our clients demonstrated their confidence with both new and repeat business, we saw a recovery in new orders, progressed new organic growth opportunities, reduced capital intensity, delivered an impressive safety performance, and continued to deliver high standards of execution.
As a result, the business is on the path to recovery and well-positioned for sustained long-term success.
Clearly, Petrofac’s 2017 performance was overshadowed by the investigation by the UK Serious Fraud Office (SFO), which is covered elsewhere in this Annual Report. Nonetheless, I want to thank the Board, RELENTLESS FOCUS ON OPERATIONAL EXCELLENCE our employees, our clients, and our shareholders for their support during this challenging period. Together, we demonstrated the underlying resilience 2017 OPERATIONAL PERFORMANCE of the business and continued to make progress in delivering our strategy. New order intake Kuwait I would like to provide an update on our ¹ three strategic themes, the evolving market US$5.2bn US$1.3bn environment, and my priorities for 2018 EPC contract awarded by Kuwait Oil Company and beyond. for an oil and gas sour gathering centre
Oman Oman US$800m US$1.0bn contract awarded by BP for Phase 2 at Khazzan Petrofac’s share of Duqm Refinery project
Russia Turkey US$700m €340m contract awarded by Sakhalin Energy Investment contract awarded by South Stream Transport B.V. Company Ltd for its onshore processing facility for a gas receiving terminal
1 New order intake comprises new contract awards and extensions, net variation orders and the rolling increment attributable to EPS contracts that extend beyond five years. Order intake is not an audited measure.
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Focusing on our core Delivering organic growth Reducing capital intensity Operational excellence continues to be We progressed organic growth We made significant progress in reducing a key theme for Petrofac and, in 2017, opportunities in both complementary the capital intensity of the business. we continued our focus on best-in-class geographies and adjacent sectors. project delivery. This was achieved We have concluded the sale of our interest in tandem with an excellent safety For example, we are bidding actively – in the Pánuco field in Mexico and have performance which saw us outperform and executing projects – in India, South converted Santuario, the largest of our industry averages and receive several East Asia, Turkey and Russia, where we three remaining Mexican service contracts, safety accolades from clients. have a full understanding of the risks and into a Production Sharing Contract, where we the capacity to deliver, and can build on have ownership of the underlying reserves. We completed more than 239 million existing client relationships and/or draw on We have also driven further significant man-hours across the Group, handing previous experience. Indicative successes reductions in capital spending, and are over several projects to our clients. A good include our first ever Turkish project, for a bringing increased visibility to our cash example is the Khazzan project for BP new €340 million gas receiving terminal, management. Going forward, we expect in Oman, where we celebrated first gas and a return to EPC work in Russia with to continue to divest non-core assets, on Phase 1, extended an exemplary site the award of a US$700 million contract but will be measured in our approach, safety record beyond 43 million man-hours, on Sakhalin Island by Sakhalin Energy in a way that protects shareholder value. and secured a US$800 million contract Investment Company Ltd. for Phase 2. The Board has confirmed its intention In terms of adjacent sectors, we continue to exit the deep-water market and the A highlight in our EPS East business was to extend our downstream credentials. JSD6000 installation vessel has been the securement of a 10-year Framework In recent years, we secured several reclassified as an asset held for sale. Agreement for Petroleum Development major refinery projects and, in 2017, Oman (PDO). While the market remains were awarded a US$2 billion contract A reassuring new order intake, challenging for the EPS West business, from Duqm Refinery and Petrochemical providing good revenue visibility ongoing consolidation in our sector is Industries LLC where we are a 50/50 I regard our 2017 new order intake of expected to bring new opportunities. joint venture partner with Samsung US$5.2 billion as a good outcome in a Engineering. We are confident that, by challenging environment, giving us a healthy By building on our existing strengths, replicating this approach, we can achieve order book and good revenue visibility. we are able to deepen our competitive similar success in downstream markets, position and deliver more value to clients. such as petrochemicals, and win a share Tendering activity remains high and we During 2017, we continued to reduce of the substantial capital investments that continue to maintain our bidding discipline our cost base whilst maintaining our are planned in this sector. to protect our margins in a competitive delivery capability. market. Upstream, there is the beginning We have also had some success in of a recovery in capital spending plans and, I should stress that this approach to offshore wind. In 2017, we made progress downstream, we see a flow of opportunities incremental improvement extends well with the BorWin3 and Galloper projects, and strong political will in several countries beyond our operational capability: our and were awarded a floating wind turbine to expand capacity and play a wider role environmental management systems were research project by the UK’s Carbon Trust. in the hydrocarbons value chain. further refined, we brought more discipline to the way we manage and develop our In the UK, conditions remain difficult. people, and we continued to further Contract extensions for Chevron and BP develop and highlight our compliance were welcome and our Memorandum agenda throughout the organisation. of Understanding with Danos in the US demonstrates our determination to pursue Meanwhile, the events of 2017 forced selected opportunities in those markets a refresh of the senior leadership teams, which we consider to be attractive and with several internal promotions and a have knowledge of. few external appointments, including John Pearson as Chief Corporate Development Officer and Group Managing Director, Western Hemisphere. This demonstrated the strength of our succession planning as well as our ability to attract external candidates of the very highest calibre – all without missing a beat in our delivery.
Petrofac Annual report and accounts 2017 / 11 GROUP CHIEF EXECUTIVE’S REVIEW CONTINUED
DELIVERING SEAMLESSLY IN OMAN
OMAN We were then awarded a Design Build lump-sum EPCC contract, worth around US$800 million, The Khazzan gas field is a for Phase 2 of the project. significant strategic asset for This speaks for our record BP and also for the Sultanate for project execution. It also of Oman. enables us to continue the relationship with BP and Petrofac’s involvement dates build on our considerable back to 2014, when we were experience in the Sultanate. awarded the engineering, procurement, construction Read more and commissioning (EPCC) See page 36 contract valued at over US$1 billion for Phase 1 of the field’s central processing facility.
A particular challenge was the tight timescales, which put significant demands on our technical teams and entailed a total of almost 43 million man-hours.
First gas was delivered in August 2017. The project was executed safely, on time and on budget, and the creation of In-Country Value was a guiding principle throughout.
US$800m Contract awarded by BP in 2017 for the Phase 2 central processing facility, Khazzan Project.
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Continuing to re-shape Solid foundations for the IES business long-term recovery A key objective of the year was to continue Although the short-to-medium-term to deliver value from the IES portfolio and conditions remain challenging, we do position the business as a route to our anticipate healthy increased long-term wider services. demand for energy. Signs of healthy recovery, coupled with robust global Besides the Pánuco divestment, growth forecasts for the next few years, progress included the migration of our first are fuelling a growing appetite for Production Enhancement Contract (PEC) hydrocarbons and ongoing capital to a Production Sharing Contract (PSC), spending by resource holders, which which constitutes the first such migration in Petrofac is well placed to capitalise on. Mexico and a pathway for our remaining two PECs. Meanwhile production commenced The operational performance of 2017, from the Greater Stella Area development backed up by our delivery-focused in February, resumed in Tunisia in May, culture, our commitment to continuous following extensive shut-ins due to improvement, and our excellent client civil unrest, and continued in line with relationships, demonstrate that Petrofac expectations, albeit slightly lower on is well positioned to succeed as the the previous year, in Malaysia. market continues to show encouraging signs of improvement. Priorities for 2018 For 2018, you can expect us to continue to Ayman Asfari pursue faithfully our three strategic themes: Group Chief Executive focusing on our core, delivering organic 28 February 2018 growth in those markets and sectors that we know and where we can manage the execution risk very effectively, and reducing capital intensity.
A personal priority for 2018 is to pay even closer attention to the way we manage and develop our employees and plan our long-term succession. Ultimately it is our people who are the key to Petrofac’s distinctive, delivery-focused culture, and 2017 was the ultimate test. In the face of considerable pressure, our 12,500 people stepped up, worked hard, and demonstrated a remarkable level of commitment and loyalty to the Company, and for that I would like to reiterate my profound thanks.
2018 is also bringing some changes to our Board. After 11 years’ service, including three-and-a-half as Chairman, Rijnhard van Tets is stepping down and I would like to thank him for his clear sense of duty and support of the leadership team. Similarly, I pay tribute to Thomas Thune Andersen, who stepped down at the end of 2017, thank him for many years of wise counsel, and wish him well for the future.
Petrofac Annual report and accounts 2017 / 13 OUR STRATEGY A clear and focused strategy
WHAT WE DO OUR STRATEGIC PRIORITIES
We are an international service FOCUS ON OUR CORE provider to the oil and gas Build relentlessly on our existing strengths and bring continuous production and processing improvements to the way we manage the business industry, with a diverse client • Enhance our competitive position portfolio including many of the • Build on our record of operational excellence world’s leading integrated, independent and national oil and gas companies. We design, build, operate and maintain oil and gas facilities, delivered through a range of flexible commercial models, enabling us to respond to the distinct needs of each DELIVER ORGANIC GROWTH client and helping them to transform the Seek and achieve managed growth in both complementary value of their assets across the oil and gas geographies and adjacent sectors life cycle. Our service offering is underpinned • Broaden and deepen our downstream credentials by our ability to develop resource holders’ • Extend our service offerings into complementary local capability through the provision of skills sectors, where they can be differentiated training with competency development and • Extend existing service lines into new geographies assurance frameworks. where clear synergies exist At the heart of everything we do, the six Petrofac values guide our decisions and behaviours: safe, ethical, innovative, responsive, quality and cost conscious, and driven to deliver. REDUCE CAPITAL INTENSITY Improve the overall resilience, agility and financial efficiency of the business • Divest non-core assets • Maintain our focus on cash management • Protect shareholder value
ENSURING SAFETY, GOVERNANCE AND ENGAGING RESPECTING HUMAN DEVELOPING ASSET INTEGRITY ETHICAL BUSINESS WITH LOCAL RIGHTS ACROSS OUR OUR PEOPLE AND SECURITY PRACTICES COMMUNITIES SUPPLY CHAIN
OUR LICENCE TO OPERATE
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KEY PERFORMANCE INDICATORS
Revenue 19% US$6,395m
EBITDA 4% 16 US$730m Net profit 7% US$343m
Return on capital employed (ROCE ) 21%
Diluted earnings per share (EPS) 18 8% 100.9 ¢/s
Employee numbers 7% 12,500
20
GENERATING PROTECTING THE ECONOMIC VALUE ENVIRONMENT IN-COUNTRY
Key performance Directors' indicators remuneration report See pages 22-23 See page 90
Petrofac Annual report and accounts 2017 / 15 OUR STRATEGY IN ACTION
FOCUS ON OUR CORE
A CLEAR AND FOCUSED APPROACH
Over the past 35 years, we The emphasis is to bring have built a strong reputation continuous enhancements to for commitment, delivery and the way we manage our business. operational execution in our Crucially, this goes well beyond core services – delivering our operational performance, capital projects and supporting and extends to considerations our client’s operating assets. like our health and safety record, In today’s tough environment, our environmental performance, our people continue to find and our approach to ethics new ways to increase our and compliance. efficiencies, control our costs and deliver more value to our clients.
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ACHIEVEMENTS IN 2017 PRIORITIES FOR 2018
Completed and handed over Extended our value Investigate deployment of Continue to re-position several major projects, engineering capabilities, digital technologies with a IES and drive production including Sohar refinery bringing a significant view to achieving further efficiency improvements improvement project and number of design and differentiation and to take Khazzan Phase 1, in Oman cost optimisations to operational excellence Continue to secure supply each major project to a new level chain improvements through, Secured subsequent phases for example, the introduction of existing contracts in several Improved on an already Continue to focus on process of new vendors and greater markets, including Oman strong health and safety improvements and cost-base alignment with subcontractors and Iraq record and brought reductions in key markets continuous improvements such as Kuwait, Iraq, Oman Capture and apply lessons to human resources, and the UK learned from every project corporate responsibility and compliance management
Saw a strong recovery in new orders in 2017 while maintaining US$5.2bn our bidding discipline in a new order intake in 2017 across our competitive market lump-sum and reimbursable businesses Key performance indicators See pages 22-23
Petrofac Annual report and accounts 2017 / 17 OUR STRATEGY IN ACTION CONTINUED
ACHIEVEMENTS IN 2017 PRIORITIES FOR 2018
Secured US$2 billion contract in Returned to EPC work in Continue to increase our Continue to seek opportunities 50/50 joint venture from Duqm Russia with the award of visibility and bidding activity in in offshore wind Refinery and Petrochemical a US$700 million contract complementary geographies, Industries LLC in Oman on Sakhalin Island for such as India, SE Asia, the Sakhalin Energy Investment CIS and Sub-Saharan Africa Embedded an EPCm Company Ltd. operating model in Oman with Continue to position the the progress on the RHIP and Made good progress in Group to participate in the Yibal Khuff contracts and the offshore wind with the forecasted increase of Key performance award of a 10-year Framework BorWin3 and Galloper downstream investments indicators Agreement from Petroleum projects, and the award in the MENA region See pages 22-23 Development Oman of a floating wind turbine research project by the Secured our first ever project UK’s Carbon Trust in Turkey: a €340m EPC contract for a new gas Signed a Memorandum of receiving terminal for South Understanding with Danos to Stream Transport B.V. create a joint venture to bring our Asset Support Services US$2.1bn offering to the US market new contract awards in complementary geographies and adjacent sectors
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DELIVER ORGANIC GROWTH
A CLEAR AND FOCUSED APPROACH
Our traditional strengths in In terms of adjacent sectors, markets like MENA and the we continued to extend our UK provide an excellent launch downstream credentials with pad for Petrofac to move another new refinery win, progressively into both and we are poised to benefit complementary geographies from forthcoming investments and adjacent sectors. in petrochemical facilities. We also continue to gain For example, we are bidding experience in the offshore actively in India, SE Asia and wind sector. the CIS, where we have a thorough understanding of the risks and the capacity to deliver. Indicative successes included 10-year Award of a 10-year Framework our first Turkish project and a Agreement from Petroleum return to EPC work in Russia. Development Oman
Petrofac Annual report and accounts 2017 / 19 OUR STRATEGY IN ACTION CONTINUED
REDUCE CAPITAL INTENSITY
A CLEAR AND FOCUSED APPROACH
Petrofac has a strong For example, we are reputation for operating with bringing increased rigour financial efficiency and earning to cash management. differentiated margins. We are also considering the divestment of non-core In response to the challenging assets. When we do choose industry environment and our to co-invest in any additional evolved business strategy, resources, we do so against the Group is now focused on clear and disciplined criteria. reducing capital intensity – by deleveraging the balance sheet and improving cash conversion.
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ACHIEVEMENTS IN 2017 PRIORITIES FOR 2018
Net debt reduced to US$612 Divested the Pánuco Negotiate the migration of Continue to focus on cash million, reflecting strong Production Enhancement remaining Mexican operations management efficiencies working capital management Contract (PEC) in Mexico to equity contracts (e.g. PSC) We continue to pursue Reduced capital expenditure Migrated the Santuario PEC Continue to appraise the options to maximise value by 44% to US$170 million in Mexico to a Production strategic value of all assets for the JSD6000 Sharing Contract (PSC) and divest non-core assets Introduced a new Group-wide cash management system, Confirmed our intention to bringing an increased focus exit the deep-water market to cash visibility and enabling more accurate forecasting
Key performance US$612m 44% indicators net debt at 31 December 2017 reduction in capital expenditure See pages 22-23
Petrofac Annual report and accounts 2017 / 21 KEY PERFORMANCE INDICATORS
Directors’ remuneration report Petrofac sets KPI targets See page 90 and assesses performance against these benchmarks Part of 2017 Executive Directors’ remuneration. on a regular basis
Revenue
Description Measurement Measures the level of revenue of the business. Revenue for the year as reported in the 19% consolidated income statement.
US$6,844m 15 US$7,873m 16 US$6,395m 17
EBITDA1
Description Measurement EBITDA means earnings before interest, Business performance EBITDA is calculated tax, depreciation and amortisation and as profit before tax and net finance costs 4% provides a measure of the operating and income, but after our share of results profitability of the business. of associates and joint ventures (as per the US$312m 15 consolidated income statement), adjusted US$704m 16 to add back charges for depreciation US$730m 17 and amortisation (as per note 3 to the consolidated financial statements).
Net profit1
Description Measurement Provides a measure of the net profitability Business performance profit for the of the business. year attributable to Petrofac Limited 7% shareholders, as reported in the consolidated income statement. US$9m 15 US$320m 16 US$343m 17
Return on capital employed (ROCE)1
Description Measurement ROCE is a measure of the efficiency with which ROCE is calculated as EBITA (earnings before the Group is generating operating profits from interest, tax and amortisation, calculated as 21% its capital, per the consolidated statement of EBITDA less depreciation per note 3 to the financial position adjusted for gross up of consolidated financial statements) divided by 3% 15 finance lease creditors. average capital employed (being total equity 17% 16 and non-current liabilities per the consolidated 21% 17 statement of financial position adjusted for gross up of finance lease creditors).
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Group Chief Executive's review See page 10
Group financial statements See page 107
Diluted earnings per share (EPS )1
Description Measurement EPS provides a measure of net profitability of the Business performance EPS as reported in the 8% Group taking into account changes in the capital consolidated income statement and calculated structure, for example, the issuance of additional in accordance with note 8 to the consolidated 2.6¢/s 15 share capital. financial statements. 93.3¢/s 16 100.9¢/s 17
Employee numbers
Description Measurement Provides an indication of the Group’s service For the purposes of the Annual Report, 7% capacity. employee numbers include contract staff and the Group’s share of joint venture employees. 19,000 15 13,500 16 12,500 17
Free cash flow and cash conversion
Description Measurement US$351m 15 These KPIs measure both the absolute Free cash flow, as per the Financial review, US$386m 16 amount of cash generated from operations page 44. US$281m 17 and the conversion of EBITDA to cash. Cash conversion is cash generated from operations divided by business 265% 15 performance EBITDA. 114% 16 79% 17
Lost time injury and recordable injury frequency rates per 200,000 man-hours
Description Measurement 0.019 15 Provides a measure of the safety performance of Lost time injury (LTI) and recordable injury (RI) 0.013 16 the Group, including partners and subcontractors. frequency rates are measured on the basis 0.009 17 of reported LTI and RI statistics for all Petrofac companies, subcontractors and partners, expressed as a frequency rate per 200,000 0.16 15 man-hours. We aim continually to improve 0.10 16 our safety record, but our target for these 0.05 17 measures is zero.
Backlog
Description backlog in respect of the IES division. The Group uses this KPI as a measure of the Backlog at 31 December 2017 includes visibility of future revenues. US$1.0 billion for Petrofac’s share of the Duqm Refinery project in Oman. The full % Measurement 13 notice to proceed is expected shortly Backlog consists of: the estimated revenue following formal contract signature on US$17.6bn 2 15 attributable to the uncompleted portion of 15 February 2018. The Group uses backlog US$11.7bn 2 16 Engineering & Construction division projects; as a measure of the visibility of future revenue. and, for the Engineering & Production Services US$10.2bn 17 Backlog is not an audited measure. division, the estimated revenue attributable to the lesser of the remaining term of the contract and five years. The Group no longer recognises
1 Business performance before exceptional items and certain re-measurements. 2 Restated as the Group no longer recognises backlog in respect of the Integrated Energy Services’ contracts.
Petrofac Annual report and accounts 2017 / 23 OUR LEADERSHIP TEAM Responsibilities and experience
LEADERSHIP TEAM SKILL SET 1. AYMAN ASFARI Group Chief Executive
Responsibility Works with the Board to set Oil and gas Engineering Operational/strategic the strategy of the Group, and management takes ultimate responsibility for the operational and financial performance of Petrofac. He also has a close involvement in the approach to corporate responsibility, including health, safety, ethical standards, security and the environment.
Experience Joined the Group in 1991 to establish Petrofac International, 1 5 9 before which he led a major civil and mechanical construction business in Oman. He has a wealth of oil and gas industry knowledge, a clear strategic vision, and an entrepreneurial track record.
2. ALASTAIR COCHRAN Chief Financial Officer
Responsibility 2 6 10 Heads up the financial management of the Group, and also plays a significant role in setting its business strategy, including the drive to reduce capital intensity. He is also responsible for managing the Company’s relationships with financiers and investors.
Experience Joined Petrofac in 2016 from BG Group plc, where his responsibilities included corporate finance, M&A, 3 7 11 strategy and business development. He began his career with KPMG before moving into investment banking with Barclays de Zoete Wedd, Credit Suisse First Boston and Morgan Stanley.
3. MATTHEW BARTON Group General Counsel
Responsibility 4 8 Has responsibility for all Legal, Compliance and Company Secretariat functions. Ensuring that all colleagues have access to relevant, timely and commercially valuable legal advice, he also ensures that the Group’s business is conducted in accordance with all applicable laws and regulations.
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Experience 6. E S SATHYANARAYANAN 8. ELIE LAHOUD 10. CRAIG MUIR Joined Petrofac in 2018 with Group Managing Director, Senior Vice President, Group Managing Director, more than 20 years’ experience, Engineering & Construction Operations Engineering Engineering & Production 13 of which are in General Counsel & Construction Services, Eastern Responsibility roles, both in the UK and the Hemisphere Middle East. He began his legal Has full operational and P&L Responsibility career in private practice, working responsibility for Petrofac’s With a background as a design Responsibility in London and Hong Kong before Engineering, Procurement and engineer, and strong project Focuses on leading and growing moving into the engineering and Construction portfolio in its core experience, he leads the the EPS business in geographies construction industry. geographical markets including the operational teams across Oman, such as MENA, CIS and Asia Pacific. UAE, Kuwait, Oman, Saudi Arabia, Saudi Arabia and Iraq. In this role, His remit includes: engineering, Algeria and Iraq. He also heads he ensures that Petrofac identifies procurement and construction 4. DES THURLBY up the Group’s Offshore Capital and implements opportunities management (EPCm); operations Group Director of Projects business and is for incremental enhancements and maintenance; training; and all Human Resources responsible for all Group technical to its operational capabilities. consultancy services. resources, including the three Responsibility Indian engineering centres. Experience Experience Has overall responsibility for Joined Petrofac in 1997 and has Joined Petrofac in 2012 as MD advising on all people aspects Experience held several key operations and of Engineering & Consulting of the business. This includes Joined Petrofac in 1995, and has engineering roles. From 2014 he Services, where his responsibilities developing a business-focused held various key roles covering led the delivery of the strategically included the management of our people strategy, including diverse geographical locations significant BP Khazzan project in engineering service centres, and succession planning, talent such as India, CIS and MENA, and Oman and, from 2016 was SVP the creation of the new EPS Group. management, leadership led the Company’s entry into Iraq. and Sponsor for Oman operations. He has over 30 years’ industry development, compensation, He has more than 30 years of He has more than 20 years’ experience with companies such key hires, performance culture experience in the oil and gas sector. industry experience. as AMEC, KBR and AOC. and employee engagement.
Experience 7. SUNDER KALYANAM 9. JOHN PEARSON 11. ROB JEWKES Joined Petrofac in 2017. He started Group Managing Director, Chief Corporate Chief Operating Officer, his career as a graduate trainee with Engineering & Construction Development Officer and Integrated Energy Services Ford Motor Company and spent Growth Group Managing Director, 25 years in the automotive sector, Western Hemisphere Responsibility including six years as HR Director Responsibility Heads up the IES business, for Jaguar Land Rover. He was also Has full P&L and stakeholder Responsibility and has full responsibility for its interim President of IMI China and responsibility for delivering the As Chief Corporate Development business portfolio. Most recently Senior Vice President of Seadrill, E&C portfolio in Petrofac’s strategic Officer, he manages relationships he has been charged with the an offshore drilling contractor. growth regions. These include with international and independent re-shaping of this portfolio, complementary geographies, oil companies, and leads the including a number of divestments identified for organic growth, such implementation of Group strategy. and contract migrations and the 5. GEORGE SALIBI as India, Southeast Asia, Sub- As Group Managing Director, re-positioning of IES as a route Group Chief Saharan Africa, and CIS, where the Western Hemisphere, he is to the wider Petrofac services. Commercial Officer Group has a good understanding responsible for the long-term Experience of risks and the capacity to deliver. growth of the EPS West business. Responsibility Joined Petrofac in 2004 to build a Works with both the E&C and Experience Experience Europe-based engineering services EPS businesses, with an emphasis Joined Petrofac in 1992, and has Joined Petrofac in 2017, prior to business, before moving into IES on strategic partnerships, held a range of operational and which he spent 28 years with AMEC where his emphasis has been business development and management roles across the Foster Wheeler and five years with leveraging our engineering and acquisition, operational support Group. Most recently, he was Chevron, in the UK and US. His project management capability. and business assurance. Regional Managing Director, previous roles have included He has over 35 years’ experience E&C with responsibility for all president of global oil, gas and in oil and gas and was previously Experience Petrofac’s onshore operations chemicals, and multi-market roles CEO of Clough Engineering. Joined Petrofac in 1998 and has in Kuwait, Iraq and Oman. running the Americas, Northern held a variety of management and Europe and CIS regions. He has also operational roles. He headed up been a Co-Chair of Oil & Gas UK. some of the Company’s most prestigious projects, including the US$3.7 billion Upper Zadco-750 contract in UAE. Most recently he was Regional MD, covering the UAE, Oman, Algeria and Asia.
Petrofac Annual report and accounts 2017 / 25 RISK MANAGEMENT
Identifying and managing risks and PETROFAC OPERATES IN A opportunities is key to the successful delivery of our strategy. We operate in a challenging CHALLENGING ENVIRONMENT. environment and understand that risks are WITH CAREFUL MANAGEMENT, an inherent part of our business. RISKS CAN OFFER OPPORTUNITIES AS WELL AS CHALLENGES. We believe our risk management framework provides us with the structure to identify the risks and uncertainties that may impact our business, thereby underpinning our Risk Governance Framework ability to achieve our objectives and assess opportunities as our business evolves. Sets risk appetite Approves Key Risk Register BOARD In 2017, there was a particular focus on Approves significant projects strengthening the Group’s compliance framework, in particular the anti-bribery and corruption controls that are in place across the Group.
Risk governance Reviews Key Risk Register Petrofac’s overall system of risk governance Provides assurance AUDIT centres on a number of committees and on framework COMMITTEE management processes, which bring together reports on the management of risk at various levels. Oversight of Key Risk The risk governance process is supported Register. Senior management GROUP RISK by regular risk assessments and reviews consider risk on significant COMMITTEE projects and investments of existing and new opportunities, by for formal consideration considering the risk exposure and risk by the Board appetite of each division, service line and function. The diagram on the left sets out Divisional management the risk governance structure in operation, oversight and review DIVISIONAL RISK showing the interaction between the various of projects REVIEW COMMITTEE risk review and management committees.
The Group Risk Committee (GRC) is responsible for the assurance of the Risk management Enterprise Risk Management Framework is embedded within SERVICE agreed by the Board, including the each service line LINES recommendation of Group policies and the application of the Group’s Delegated Authorities. Assurance to management GROUP INTERNAL The GRC reviews all material new business and the Board FUNCTIONS AUDIT opportunities and projects (including bid submissions, new country entries, joint ventures, investments, acquisitions and disposals) and is responsible for providing direction as to the management and mitigation of risk exposure. No proposal is presented to the GRC without first being reviewed and supported at the divisional level.
In addition to the Group’s regular risk review meetings, the Executive Committee increased the frequency of their meetings during 2017. Safety, compliance, operational, commercial and finance matters are now
26 / Petrofac Annual report and accounts 2017 Strategic report
discussed weekly, with any emerging risks Risk appetite • Revision of the Group’s organisational and opportunities being identified and The Group’s risk appetite is largely governed structure, with changes designed to addressed as appropriate. through the Delegated Authorities and Risk provide clear accountability, drive growth Review Committees, that are embedded and maintain our focus on execution and As with all aspects of good governance, across the Group. Risk appetite is managed improve oversight and control within the effectiveness of risk management through a series of limits and parameters, the business and internal control also depends on which are regularly monitored in each • We carried out significant work on the individuals responsible for operating business service line and aggregated succession planning and talent the systems that are put in place. for review at Group level. development • We added further controls to our Group Risk management framework One of our intentions in 2017 was to assess risk reviews and increased the attendees to The Group’s risk management framework the risk appetite for each of the Group’s ensure we have cross-management input is designed to underpin the Group’s principal risks. This remains on the agenda • We continued to implement findings longer-term sustainability. It is based on and the Board will undertake this exercise from lessons learned reviews, and we the principles and guidelines of BS ISO during 2018. conducted regular ‘cold eye reviews’ 31000/2009 and encompasses the across our E&C projects to support policies, culture, organisation, behaviours, 2017 review them in identifying additional risks and processes, systems (and other aspects During the year we continued to enhance mitigating potential impacts of the Group) that, taken together, facilitate our processes and controls to improve both • We continued to develop and expand our its effective and efficient operation. the consistency and transparency of our ‘stage gate’ approach to our E&C projects The framework supports the Board in approach to risk management. The following with additional improvements introduced exercising its overall responsibilities and to: improvements were made: through project controls and operational processes becoming more systematic • Regulate the entry of appropriate • The Compliance and Ethics Committee • We reviewed our Group functional risks opportunities and risks into the Group was formed and we have captured these within our • Develop our understanding of the most • The Third Party Risk Committee risk reporting system significant threats and opportunities was established • Internal audit completed its transformation • Promote active management of risk • Development of a compliance charter programme with a number of second exposures down to acceptable levels • Review and enhancement of existing line of defence assurance reviews, • Assist the Group in delivering business plan policies and processes embedding a risk-based approach objectives and operational performance • Enhancement of our compliance e-learning throughout the Group programme to further promote our key • We launched a controls improvement During 2017, the framework continued to compliance requirements programme, a broad-reaching initiative mature and we have produced detailed to improve our financial controls and guidance to support its application to provide enhanced assurance. It is ensure it is followed consistently across building on existing best practices the business. and will improve the way we work
RISK MANAGEMENT FRAMEWORK
Infrastructure Risk management process Risk integration
Company vision and strategy o icate a co t Strategic planning Company values Medium term planning Group policies and standards Prospect phase
Risk appetite and Go/No-go process delegated authorities Proposal phase Asset integrity framework Risk Risk Risk Risk Risk Design identification assessment treatment monitoring reporting Code of Conduct Procurement Risk management process Execution Risk Review Committees Operation Global insurance programme Hand over Emergency preparedness ra ce Management support processes
Company values and culture
Enterprise Risk Management system (and other tools)
Leadership, communications and engagement
Petrofac Annual report and accounts 2017 / 27 RISK MANAGEMENT CONTINUED
• We continued to expand our intrusion detection monitoring of cyber-security VIABILITY STATEMENT threats and tighten our controls • A number of HSSEIA deep dives were The Board regularly reviews the funding • A material financial loss resulting conducted across the business to identify position of the Group, its projected from poor execution of a major and address key related concerns liquidity requirements and factors that lump-sum project • There has been a continued focus on could adversely affect the Group’s future • A significant decline in the operating evacuation and emergency response long-term viability. In doing so Directors and financial performance of with mock exercises regularly planned assess the prospects of the Group by Engineering & Production Services and conducted reference to its current financial and • An increase in working capital driven • A number of new HSSEIA standards operational position, its recent and by a deterioration in contractual terms, have been published and a driving safety historical financial performance, its future weak cash management or delays policy video was circulated globally financial plans and the potential impact in commercial settlements of the principal risks and mitigating • Adverse commercial settlements Principal risks factors described on pages 30 to 33. resulting in a significant financial loss The Board defines principal risks as those risks that, given the Group’s current position, The Directors have assessed the viability In considering the impact of these could materially threaten the business of the Group over a three-year period to stress-test scenarios, the Board has model, future performance, prospects, 31 December 2020. The Board believes reviewed realistic mitigating actions that solvency, liquidity, reputation, or prevent that this is an appropriate time horizon could be taken to avoid or reduce the us from delivering our strategic objectives. given its business portfolio, order backlog impact or occurrence of the underlying and business development pipeline risks. These include reducing operating The Key Risk Register (KRR) is the means by offers limited visibility beyond three years. expenditure, cutting discretionary capital which the Group’s principal risks are reported The Board reviews its prospects over expenditure, lowering dividends and to the Audit Committee and the Board for a longer term horizon and prepares a disposing of non-core assets. review. It includes business, compliance, five-year business plan that is dependent financial, hazard and operational risks, on the external market environment, The Board has also reviewed and together with external factors over which securing new orders at sustainable approved the Group’s funding plan, the Group may have little or no direct control, margins, operational performance and long-term liquidity forecasts and risk such as market conditions and worsening capital discipline. The Group’s business management policies, which monitor and political risks in key geographies. The GRC model aims to deliver sustainable, mitigate the risk of a change in our financial reviews the KRR quarterly prior to submission long-term value to shareholders through position. In certain scenarios, we may to the Audit Committee. dividend payments and financial returns need to access capital markets to raise from share price growth. additional funds to supplement cash flow The KRR is designed to provide the Board from operations or to provide additional and Audit Committee with clarity around the The Directors considered the following liquidity headroom. The Group has an Group’s principal risks and uncertainties, principal risks as the most important established track record of successfully ownership, accountability and mitigation in their assessment of the viability of raising capital from a diverse range of strategies, to promote active engagement, the Group: sources and the Directors believe the informed debate and constructive Group should continue to have access to • Market conditions challenge, and to keep under review the capital markets at commercially acceptable • Worsening political risks in effectiveness of decision making processes. rates throughout the assessment period. key geographies • Failure to meet projected order targets As reported on page 78 in the Annual Whilst the principal risks all have the • Operational and project performance Report, the Serious Fraud Office (SFO) potential to affect future performance, • Loss of licence to operate began a formal investigation in May 2017. none of them are considered likely either • Loss of financial capacity individually or collectively to threaten We have also considered the potential the viability of the business over the The Group’s business plan forecasts have impact of the EU referendum result and assessment period. Based on the results been stress tested against a number of the triggering of Article 50 in March 2017. of this detailed assessment, the Directors severe but plausible risks to the business The Board believes that as an international have a reasonable expectation that that could potentially impact the Group’s Group, we have little exposure to the the Group will be able to continue in ability to fund its future activities and European continent and do not expect that operation and meet its liabilities as they adhere to its banking covenants: the United Kingdom leaving the EU would fall due over the next three years. have any significant impact on our business. • A material decline in oil price relative to both our and market expectations • A substantial reduction in forecast new orders in Engineering & Construction
28 / Petrofac Annual report and accounts 2017 Strategic report PRINCIPAL RISKS AND UNCERTAINTIES
Principal risks are those risks that, given the Group’s current position, could materially threaten the business model, future performance, prospects, solvency, liquidity, reputation, or prevent us from delivering our strategic objectives.
In terms of managing these risks, our systems of risk management and internal control are founded upon deployment of our Enterprise Risk Management Framework (based upon ISO 31000:2009); and our Internal Control Framework. Details of these are included in the Audit Committee report on pages 82 to 87.
MARKET CONDITIONS Description and impact Mitigation and management Low oil and gas prices impact the capital The oil and gas market is showing signs of improvement. Oil prices have improved and the majority expenditure plans of our key clients and of forecasts expect a rise in price in the medium term. We expect clients in our core markets will the demand for our services, limiting our continue to invest in long-term strategic projects, especially regions with lower costs of production. profitability and growth. Over the longer New investment decisions are now being taken and capital investment is edging upwards. term, volatility in oil and gas prices could We achieved US$5.2 billion of new order intake, providing us with good revenue visibility and we influence and change the industry’s continue to see high levels of tendering activity. business models and investment trends. We are pushing forward with organic growth initiatives. During 2017, we established E&C Growth The financial performance of IES is directly and we plan to grow our EPS business through the expansion of existing services, new geographies impacted by oil and gas price volatility. and EPCm opportunities. We have maintained strong relationships with our clients over the recent downturn, working with them to ensure we have strong commercial and contract management on our projects. We continue to focus on operational excellence to remain competitive. Significant movements in exchange rates The majority of Group revenues are denominated in US dollars or currencies pegged to the US dollar. could impact our financial performance. Where we procure equipment or incur costs in other currencies, we use forward currency contracts to hedge any related exposure.
Links Change Assessment For more information see: pages 8-9; We expect the 2018 market environment to remain broadly similar to 2017. It will The risk has and 161 continue to be competitive and bidding discipline will continue to be important. decreased We will continue our focus on organic growth initiatives and we will maintain our in 2017 cost competitiveness through our focus on operational excellence.
WORSENING POLITICAL RISKS IN KEY GEOGRAPHIES
Description and impact Mitigation and management The Group’s backlog is heavily concentrated The Board actively monitors political developments and seek to avoid or minimise our exposure on business activities in the Middle East to jurisdictions with unacceptable risk levels. which may increase our vulnerability. We have good experience in project execution and maintain positive relationships with key Recent global economic conditions have stakeholders. Careful consideration is given to contractual terms and security conditions through had a significant impact on countries whose our detailed risk review process and we seek external advice on specialist issues as required. economies are exposed to the downturn The delivery model is modified to suit each project and we limit exposure to single sources of supply in commodities, placing greater pressure and service. We limit our fixed asset commitment within each contract and closely monitor and on governments to find alternative means manage our cash flow and commitments. There is continued focus on evacuation and emergency of raising revenues and increasing the risk response and operations are assessed and executed in accordance with our security policy and of social and labour unrest. security standards. The impacts include risks to the successful delivery of our operations and associated impact on margins, the safety of our people, security issues, material logistics and travel restrictions.
The risk of over-concentration in a We are actively pursuing projects in new geographies and we carry out detailed risk analysis before particular market or geography. entering any new country.
Links Change Assessment For more information see: pages 19; 46-50; To mitigate the risk of geographical concentration, a new business line to focus The risk has and 58-59 on growth of lump-sum business into new geographies has been established. decreased Dedicated leadership and resources have been assigned to identify opportunities in 2017 and assess the risks and mitigations for business delivery.
Petrofac Annual report and accounts 2017 / 29 PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED
FAILURE TO MEET PROJECTED ORDER INTAKE
Description and impact Mitigation and management The risk is that our clients continue to In our MENA region, the source of the majority of our backlog, we see a good pipeline of bidding exercise capital discipline and the demand opportunities in 2018 and 2019. New investment decisions are now being taken and capital for our services may be impacted with investment is edging upwards. the cancellation or delay of planned We saw a strong recovery in new orders in 2017, including projects in adjacent markets such as investments. The potential impact is Russia and Turkey. We are also reviewing a number of potential opportunities in India as we seek that the Group could fail to deliver its to further expand our geographic footprint. anticipated backlog and growth targets.
The Group wins most of its work Our service lines work together to review and identify prospects and regularly analyse bid-to-win through a competitive bidding process, ratios and our competition. We expect the market for our services to remain very competitive and and as competition increases, there is continue our focus on operational excellence to support our competitive bidding performance by a risk that we could fail to maintain protecting, and where possible, enhancing margins. We have dedicated resources to support clients’ differentiated margins. financing requirements in our bids. We have been able to further reduce our project support costs in 2017. These savings allow us to be more competitive in the market, deliver projects for our clients more cost-effectively and help to support our margins going forward.
Links Change Assessment For more information see: pages 8-9 During 2017 we saw a strong recovery in new orders and we have a healthy The risk has bidding pipeline for 2018 and 2019. decreased in 2017
DELIVERING OUR STRATEGY
Description and impact Mitigation and management To build enterprise value, we need to The challenging events of 2017 demonstrated our underlying resilience. We executed our projects assure shareholders and opinion formers effectively, reduced our debt and maintained our bidding discipline. We saw a strong recovery in that we are pursuing an appropriate new orders, securing US$5.2 billion in new order intake from both existing and adjacent markets. strategy capable of delivering shareholder Developing opportunities for organic growth is a strategic priority and recognising the importance value. The impact is reflected in the of this, we established a new service line in June to focus on E&C growth in new geographies. appetite for new investors to buy into We are also planning to grow our reimbursable business in the western hemisphere through the Group and consequently our geographic and service line expansion, and we are exploring longer-term opportunities. relative valuation multiple. The Board regularly assesses our strategic plan to satisfy itself that the right mix of risk, capability and reward is established. We conduct detailed sensitivity analysis to assess the robustness of our plans. The GRC reviews all material new business opportunities and projects, new country entries, joint ventures, investments, acquisitions and disposals.
The Group may be unable to complete its We are committed to a capital light business model going forward, we will continue to focus on divestment programme within the desired strong cash management across the Group, and we will release capital from investments which timescales or achieve the expected values. are not strongly linked to our core competence.
Links Change Assessment For more information see: pages 6-11; Our approach will continue to be characterised by three themes: focus on our The risk has and 14-21 core, organic growth and reduce capital intensity. decreased in 2017
OPERATIONAL AND PROJECT PERFORMANCE
Description and impact Mitigation and management Our portfolio typically includes a relatively The main project risks are the application of contractual liquidated damages by clients and failure small number of large value contracts. to secure assessed variation orders. We regularly review these exposures and are satisfied that the Cost or schedule overruns on any of risks are balanced across the E&C portfolio. We work closely with our clients to resolve contractual these projects could negatively impact elements for our substantially completed and ongoing projects. the Group’s profitability, cash flows and Key risks to delivery are initially identified at the tender stage, through the risk review process. relationships with key stakeholders. On award, detailed execution strategies are further developed and during the execution phase, emerging risks and opportunities are managed through assurance and operational reviews. Lessons learned are cascaded through leadership lines and our quality initiatives are focused on a ‘right first time’ approach.
30 / Petrofac Annual report and accounts 2017 Strategic report
OPERATIONAL AND PROJECT PERFORMANCE continued
If we are unable to transfer certain risks to We maintain a Group-wide insurance programme to mitigate against certain significant losses. the insurance market (due to the availability The programme is consistent with general industry practice. We continually review the coverage or cost of cover, for example), we could be of our policies. exposed to material uninsured losses.
Links Change Assessment For more information see: pages 3; 10-13; We continued to operate effectively throughout 2017. Project delivery remained a No change and 85 significant area of focus for the Board and executive management to ensure that we continued to implement lessons learned from prior projects.
LOSS OF LICENCE TO OPERATE
Description and impact Mitigation and management Formal investigations by regulatory A sub-committee of the Board has been established to be solely responsible for the Company’s authorities could result in a loss in share engagement with the SFO and to oversee the Company’s response to their investigation. price value and/or a loss in business. The investigation by the Serious Fraud Office (SFO) into Petrofac is ongoing. The Company continues Other consequences could include to engage with the SFO and is devoting significant resources to this matter. It is unclear when or the prosecution of the Company and how the investigation will be concluded. The consequences of this investigation will be determined of individuals; imprisonment and/or fines by the regulatory authorities and it remains therefore too early for Petrofac to predict their outcome. for individuals; and fines, penalties or other Since the instigation of the investigation, shareholder confidence has been impacted resulting in consequences, including reputational a material fall in the market value. However, the award of new business has demonstrated that it damage, to the Group. There may also is a ‘business as usual’ approach and that our clients remain supportive. be considerable cost and ongoing disruption in responding to allegations or investigations and taking remedial action.
There are several factors that could impact Safety is a core value and the risk is governed largely by our operating framework, Group policies, our ability to operate safely, ethically and systems and various monthly forums (such as the asset integrity review board). During the year we effectively. These include safety and asset carried out a number of safety deep dives and introduced a number of global standards for HSSEIA. integrity risks and extend to a range of We continued our focus on crisis management training with exercises being held at the Group and environmental and regulatory risks. The risk project levels. We reviewed our business continuity plans and digital media response. is the potential harm to our people, and the Ethical risks are covered under compliance and controls. commercial and/or reputational damage that could be caused.
Links Change Assessment For more information see: pages 78; 46-50; Our safety performance improved with 70 million man-hours worked without a No change and 77 LTI at the end of December 2017.
IT RESILIENCE
Description and impact Mitigation and management The Group’s performance is increasingly Breach or failure of our IT systems due to integrity failings, negligence or attacks on cyber-security dependent on the ongoing capability and could seriously disrupt our operations and could result in the loss or misuse of sensitive information. reliability of our IT platforms. Such breaches in IT security could adversely impact the Group’s ability to operate and lead to We (as with all companies) continue to be financial loss, damaged reputation, loss of client and shareholder confidence and regulatory fines. exposed to external cyber-security threats. We have adopted a ‘cloud’ strategy and increasingly use secure internet connectivity. We have a number of intrusion detection and prevention tools so we can quickly respond to alerts and suspicious activity. We have moved to a greater standardisation of our IT systems in an effort to replace our legacy systems. The Group recognises the increased incidence of cyber-security threats and has recently reviewed its policies, procedures and defences to mitigate associated risks, engaging market-leading specialists where appropriate.
Links Change Assessment For more information see: page 73 We continually develop our IT infrastructure to ensure we are resilient to existing No change and emerging threats.
Petrofac Annual report and accounts 2017 / 31 PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED
LOSS OF FINANCIAL CAPACITY
Description and impact Mitigation and management Failure to adequately forecast, manage or We always maintain an adequate level of liquidity in the form of readily available cash, short-term maintain sufficient liquidity and credit could investments, or committed credit facilities. The Audit Committee has defined a minimum level of impact our ability to operate and result in liquidity that must be maintained. financial loss and/or ability to comply with our financial covenants.
Debt costs may arise owing to rating A funding plan was approved by the Board in February and November 2017 to employ a agency downgrades and the possibility conservative and flexible funding strategy, robust across a range of business plan scenarios. of restricted access to funding. We made good progress in 2017, securing an extension of our revolving credit facilities and refinancing US$300 million of term-loan maturities.
Access to multiple sources of funding is We prepare quarterly cash flow forecasts, aligned to our financial reforecasts, to identify any critical to our sustainability and future growth. funding requirements well in advance. Failure to obtain financing could hamper the We introduced a global cash management tool and increased our focus on working capital Group’s growth, prevent us from taking on management during 2017. new projects and could adversely affect the Group’s financial performance.
The risk of financial or commercial We perform financial due diligence on new and existing clients. We closely monitor all receivables exposure if counterparties (such as key and seek to minimise the risk of exposure through contractual terms. We have regular, senior level financial institutions, clients, partners, dialogue with our major clients to understand and pre-empt any concerns that they may have. subcontractors or vendors) default Bank ratings are monitored to ensure security of counterparty for both deposits and lending. on their commitments. The risk is managed by Group Treasury and the Audit Committee.
Links Change Assessment For more information see: pages 20-21; We improved our net debt position over the year and adopted a new funding No change 45; 85; 161-165; and 182-185 strategy. A key component of our strategy is to reduce capital intensity.
DILUTION OF COMPANY CULTURE AND/OR CAPABILITY
Description and impact Mitigation and management An inability to respond quickly and The Group’s organisational structure was revised in May 2017. The changes were designed to effectively to unplanned changes in provide clear accountability, drive growth and maintain focus on execution, and improve oversight the leadership structure could have an and control within the business. adverse impact on the delivery of our The focus on succession planning remains an important priority for the Board and we continue strategy and day-to-day operations. to review and update succession plans for all our critical roles across the top three tiers of the organisation. The overall senior talent pipeline is reviewed on a quarterly basis. We are developing a cadre of future leaders and providing them with the opportunities to demonstrate their potential and accelerate their progression. We have identified our high performing employees who we see as having the potential to be longer-term successors; and we also focus on the emerging talent who are viewed as high potential individuals and we manage their development in terms of on the job training, rotations and training events to accelerate their progression. Over 50% of graduates hired since 2004 have been retained within the Group. Our aim is to always place our most effective people into our most important roles.
Failure to attract and retain the right level We review future headcount requirements as part of our planning process to assess whether of skilled and experienced personnel to reduce our overall headcount in response to tighter market conditions or to invest in retaining could negatively impact our distinctive, capability. Five-year capability plans have been collated across the Group, linked to the annual delivery-focused culture, and prevent business plan process. us from maintaining our operational A new integrated learning management system was launched in 2017 to capture individual capability and relationships with clients. performance objectives and is being used to support mandatory employee performance reviews. We remain confident that our policies to attract, retain, train, promote and reward our people are appropriate for the Group – and will enable us to meet our strategic goals.
Links Change Assessment For more information see: pages 4; 6-7; Succession planning at Board and senior management level was a core focus in No change 10-11; 14-15; 51-52; and 66 2017. A principal objective is to continue to build a strong talent pipeline.
32 / Petrofac Annual report and accounts 2017 Strategic report
Group Chief Executive's review See page 10
Corporate responsibility See page 46
COMPLIANCE AND CONTROLS
Description and impact Mitigation and management The management of agency relationships A Third Party Risk Committee was established during 2017 to review all high risk relationships and represents one of the largest risks of further progress was made to develop the compliance-related internal controls framework. reputational damage that companies face.
The potential financial and reputational The Code of Conduct sets out the behaviours expected of our employees and those people risk that would arise from failure to who work with us. Our employees at supervisory level and above are required to complete an annual comply with law and regulation and/or mandatory declaration to confirm they have complied with the Code of Conduct, have declared non-conformance with relevant Group any actual or potential breach of our Code and any potential conflict of interest. Our Group Finance standards, policies and procedures. function launched a controls improvement programme during the year to enhance the financial controls framework.
The Group faces risks associated with the The Group must ensure a broad understanding of, and compliance with, the sanctions regime. management of trade sanctions as it As part of the risk review process, sanctions implications are reviewed with the business and develops business in Russia. specialised external counsel before entering any territory that may be impacted.
Links Change Assessment For more information see: pages 6-7; 46; During the year the Company revised a number of compliance related controls. The risk has 64-65; 66-67; 70; 77; 82-85; and 88-89 The Board approved the formation of the Compliance and Ethics Committee. increased in 2017
Petrofac Annual report and accounts 2017 / 33 SEGMENTAL PERFORMANCE
A review of our segmental performance
The Group’s business performance divisional results were as follows:
US$ million Revenue Net profit1 EBITDA
For the year ended 31 December 2017 2016 2017 2016 2017 2016 Engineering & Construction 4,801 5,928 342 311 522 463 Engineering & Production Services 1,392 1,725 90 111 123 140 Integrated Energy Services 228 271 (21) (42) 97 99 Corporate, others, consolidation adjustments & eliminations (26) (51) (68) (60) (12) 2 Group 6,395 7,873 343 320 730 704
Growth/margin analysis % Revenue growth Net margin EBITDA margin
For the year ended 31 December 2017 2016 2017 2016 2017 2016 Engineering & Construction (19.0) 23.0 7.1 5.2 10.9 7.8 Engineering & Production Services (19.3) (0.8) 6.5 6.4 8.8 8.1 Integrated Energy Services (15.9) (28.5) (9.2) (15.5) 42.5 36.5 Group (18.8) 15.0 5.4 4.1 11.4 8.9
1 Profit attributable to Petrofac Limited shareholders.
34 / Petrofac Annual report and accounts 2017 Strategic report
We delivered good progress across our portfolio of lump-sum engineering and construction projects during the year. On our upstream projects, we completed the Khazzan central processing facility in Oman. We also commissioned the In Salah southern fields development, introduced gas into the Reggane North Development plant and were ready for the introduction of gas into the Alrar gas plant, all in Algeria. Several other projects are now in the pre-commissioning or commissioning phase. On our downstream projects, the ENGINEERING & Sohar refinery in Oman is in commercial operation, the Petro Rabigh and Jazan CONSTRUCTION (E&C) south tank farm projects in Saudi Arabia are in the commissioning phase, and The Engineering & Construction (E&C) division pre-commissioning activities have started delivers onshore and offshore engineering, on the KNPC Clean Fuels Project in Kuwait. procurement, construction, installation and New awards commissioning services on a lump-sum basis. New order intake for the year totalled We have more than 35 years of expertise in US$4.1 billion, including: this area and our services encompass both Gathering Centre 32 (GC 32), Kuwait greenfield and brownfield developments. In March, we secured a lump-sum engineering, procurement and construction (EPC) project with Kuwait Oil Company, Revenue (US$) Net profit/(loss) (US$) valued at approximately US$1.3 billion, for the first oil and gas sour gathering 19% 10% centre to be developed in the Burgan oil field. The scope of work for GC 32 includes greenfield activities with tie-in works to ,928 US$4,801m US$342m existing brownfield infrastructure, and US$ 5 will have the capacity to produce around US$4,821 US$342m US$4,801
US$311m 120,000 barrels of oil per day together with associated water, gas and condensate. Work is scheduled to be completed in mid-2020. US$(1)m 15 16 17 15 16 17 Duqm refinery, Oman In September, in a 50/50 joint venture with Samsung Engineering, Petrofac received Net margin (%) Group revenue contribution notification of intent to award a contract worth approximately US$2 billion with 7.1% Duqm Refinery and Petrochemical Industries LLC (DRPIC). Work on the 7.1% 47-month project is expected to commence .2%
5 shortly, following formal contract signature on 15 February 2018. Petrofac’s and Samsung’s scope of work includes engineering, procurement, construction, 0.0% commissioning, training and start-up 15 16 17 operations for all the utilities and offsites.
Petrofac Annual report and accounts 2017 / 35 SEGMENTAL PERFORMANCE CONTINUED
Onshore processing facility, Sakhalin Island, Russia In September, we were awarded a contract RAPID worth more than US$700 million by Sakhalin DELIVERY IN Energy Investment Company Ltd (Sakhalin Energy) for its onshore processing facility MALAYSIA (OPF). The project comprises a lump-sum engineering, procurement and offshore fabrication component, as well as a reimbursable element for construction and site services. The scope of work includes inlet separation and feed gas compression facilities, a new flare system, utilities, substations and associated buildings, as well as brownfield tie-ins to the existing OPF. With early engineering work already underway, the project will support Sakhalin Energy in maintaining its export gas capacity.
Khazzan Phase 2 central processing facility, Oman In December, we were awarded a lump-sum contract worth approximately US$800 million by BP for the Phase 2 central processing facility (CPF) at the Khazzan Phase 2 gas development. This follows completion of the US$1.4 billion Phase 1 CPF Khazzan project in late 2017. The project comprises the addition of a third gas train, which will help increase total production capacity from the CPF to 1,500 million standard cubic feet per As covered on page 56, the project day (mmscfd). The scope of work also MALAYSIA is a good indication of our commitment includes liquid and compression trains to worker welfare and, despite the and associated infrastructure, as well Design Build frequent downpours of tropical rain, as brownfield work associated with the congested site has maintained an connecting the Phase 1 and 2 facilities. excellent safety record. The RAPID project in Malaysia is strategically significant in several respects. As ever, local delivery has been a key consideration. Based on our knowledge Awarded by PRPC Refinery and Cracker of the domestic supply chain, Petrofac Sdn Bhd (a subsidiary of PETRONAS), has chosen to work exclusively with the US$500 million EPCC project is a locally-based subcontractors and has perfect Petrofac example of organic growth. helped them to source, recruit and train a high proportion of Malaysian workers. As one of the first refinery projects to be secured by the Company, it By the year-end, more than 90% of the builds our downstream credentials construction work had been completed, and demonstrates our ability to move and the focus of the project was into adjacent sectors. beginning to shift to systems completion.
It is also our first major onshore project in Malaysia, showing our ability to extend into complementary geographies, where US$500m we have a full understanding of the risks Contract value of EPCC project as well as the capacity to deliver.
36 / Petrofac Annual report and accounts 2017 Strategic report
Our business model See page 4 6,750 E&C headcount at 31 December (2016: 7,500)
Results Exceptional items and certain re- Revenue for the year was down 19% from measurements in the Engineering & record levels in 2016 to US$4,801 million Construction division totalled US$155 (2016: US$5,928 million) reflecting million after tax (2016: US$35 million; project phasing. see note 5 to the consolidated financial statements), predominantly due to an Business performance net profit for the impairment charge of US$176 million year increased 10% to US$342 million (post-tax) in relation to the JSD6000 (2016: US$311 million), reflecting lower installation vessel which has been revenue, but higher reported net margin. reclassified as an asset held for sale Net margin increased to 7.1% (2016: 5.2%), reflecting our intention to exit the with an improvement in project mix partly deep-water market. offset by higher deferred tax. The net margin in 2016 was impacted by the Engineering & Construction backlog stood final commercial settlement on the at US$7.5 billion at 31 December 2017 Laggan-Tormore project. (31 December 2016: US$8.2 billion), reflecting progress delivered on the existing project portfolio and new order intake of US$4.1 billion in 2017.
Engineering & Construction headcount decreased to 6,750 at 31 December 2017 (31 December 2016: 7,500).
Key E&C/EPS1 projects Percentage of completion at December 20172
NOC/NOC led company/consortium Joint NOC/IOC company/consortium
Original contract value to Petrofac RAPID project, Malaysia >US$0.5bn
Upper Zakum eld development, UAE US$2.9bn
Clean Fuels Project, Kuwait US$1.7bn
Manifold Group Trunkline, Kuwait US$0.8bn
Rabab Harweel Integrated Project, Oman1 US$1.0bn
Jazan North tank farm, Saudi Arabia US$1.1.bn
Lower Fars heavy oil project, Kuwait >US$3.0bn
Yibal Khuff project, Oman1 US$0.9bn
Borwin 3, German North Sea Undisclosed
Fadhili sulphur recovery plant, Saudi Arabia Undisclosed
Salalah LPG, Oman US$0.6bn
Turkstream, Turkey1 US$0.4bn
Gathering Centre 32, Kuwait US$1.3bn
Sakhalin onshore processing facility, Russia US$0.7bn
0% 25% 50% 75% 100%
1 EPS division projects. 2 Excludes projects < 5% and > 95% complete and < US$250m.
Petrofac Annual report and accounts 2017 / 37 SEGMENTAL PERFORMANCE CONTINUED
Engineering & Production Services delivered solid operational performance in a challenging market environment. Continued good performance in our international operations and maintenance contracts and engineering, procurement and construction management (EPCm) projects largely offset lower new order intake, activity and utilisation in EPS West.
We secured awards and extensions worth approximately US$1.1 billion during 2017, predominantly in the UK, Iraq and Kuwait, ENGINEERING as well as our first project in Turkey: • Through the year, we secured several & PRODUCTION awards and extensions in the UK, including a three-year extension of a SERVICES (EPS) maintenance services contract with The Engineering & Production Services (EPS) BP and a 12-month extension for engineering services with Chevron division brings together our services’ capability across brownfield projects and operations, • During the first quarter of 2017, we secured a series of contract awards worth greenfield projects through concept, feasibility more than US$70 million for engineering, and front-end engineering and full project delivery operations and maintenance services as well as a range of operations, maintenance in Iraq with two major International Oil and engineering services for onshore and Companies (IOCs) and South Oil Company (now Basra Oil Company (BOC)) offshore projects. • In June, we signed a five-year agreement, valued at more than US$35 million, with Kuwait Oil Company for the Revenue (US$) Net profit (US$) provision of specialist technical training and competency development services 19% 19% • In July, we secured a contract extension and a new award with a combined US$1,392m US$90m value of more than US$100 million for 739m , ,725m construction management, engineering,
US$111m commissioning and start-up services US$ 1 US$ 1 US$90m for two IOCs in Iraq US$1,392m
US$58m • In September, we were awarded a contract valued at approximately €340 million, with South Stream 15 16 17 15 16 17 Transport B.V., a wholly owned subsidiary of GAZPROM, for the development of onshore pipelines Net margin (%) Group revenue contribution and a gas receiving terminal in Turkey • In December, we secured a two-year 6.5% extension, worth US$160 million,
6.4% 6.5% with BOC for its Iraq Crude Oil Export Expansion Project
3.3% In addition, in June 2017, we signed a 10-year framework agreement with Petroleum Development Oman for the
15 16 17 provision of EPCm support services for major oil and gas projects. The framework agreement will add to backlog as projects are sanctioned.
38 / Petrofac Annual report and accounts 2017 Strategic report
Our business model See page 4 4,950 EPS headcount at 31 December (2016: 5,200)
In October 2017, Petrofac and Danos, a US-based family-owned and managed integrated oilfield services provider, signed FLEXING OUR a Memorandum of Understanding (MoU) to progress towards a joint venture agreement DELIVERY for the pursuit of opportunities to deliver services across the oil and gas asset life MODEL TO cycle in the US. The proposed joint venture SUIT OUR will focus on supporting operations and asset management solutions. CLIENTS
Results Revenue for the year decreased 19% to US$1,392 million (2016: US$1,725 million). The decrease was predominantly due to the phasing of EPCm projects and lower new order intake, activity and utilisation in EPS West.
Business performance net profit for the year was US$90 million (2016: US$111 million), reflecting the phasing of EPCm projects and lower activity, utilisation and order intake in EPS West. Net margin was stable at 6.5% (2016: 6.4%), with improved project profitability largely offset by lower overhead recovery and deferred tax charges.
Exceptional items and certain re-measurements in the Engineering capability of our LSTK business, and & Production Services division totalled OMAN sharing the savings with our client. US$22 million after tax (2016: US$4 million; Petroleum Development Oman (PDO), see note 5 to the consolidated financial Design Build has seen some significant benefits statements), primarily in relation to an as a result. onerous leasehold property provision of US$12 million (post-tax) and office One thing that characterises the flexibility Across both projects our procurement closure and redundancy costs of of Petrofac is the range of commercial leverage returned savings of more than US$4m (post-tax). models we offer. US$300m to PDO. Project execution has been extremely good and has so Engineering & Productions Services backlog At one end of the scale, we have the fully far achieved all the key milestones set. was US$2.7 billion at 31 December 2017 reimbursable contract. At the other, we By sharing learnings between the two (31 December 2016: US$3.5 billion). have lump-sum turnkey (LSTK) contracts. projects we’ve created more certainty Headcount stood at 4,950 at 31 December And, in between, a growing range of on delivery and nurtured a culture of 2017 (31 December 2016: 5,200). services which combine the best of continual learning. both approaches designed to align to a client’s needs. The quality of the teamwork between Petrofac and PDO has been a particular In our core Middle Eastern markets, highlight. PDO’s Managing Director has clients often favour the lump-sum turnkey publicly praised the effectiveness of the solution, but there are some who prefer partnership: 80 members of the Yibal more integration and control. Khuff team have been singled out for a PDO Shukran award and we received The Rabab Harweel Integrated Project two Gold awards in PDO’s internal and Yibal Khuff projects in Oman are awards programme. being executed on an Engineering, Procurement and Construction Management (EPCm) basis. This model is KPI-led and enables us to procure the materials, leveraging the purchasing
Petrofac Annual report and accounts 2017 / 39 SEGMENTAL PERFORMANCE CONTINUED
Production Enhancement Contracts In August 2017, the Group sold its 50% interest in the Pánuco PEC to Schlumberger. The total potential cash and deferred consideration is in line with the carrying amount.
In December, we completed the migration of the Santuario PEC into an interest in a PSC as part of the ongoing energy reforms in Mexico. With effect from 18 December 2017, Petrofac owns a 36% equity interest in the PSC, with PEMEX Exploration & Production Mexico (PEMEX) having a 64% interest. INTEGRATED ENERGY The PSC will run for 25 years, with two optional five-year extensions. Petrofac will be the Operator SERVICES (IES) of the block and will carry PEMEX’s share of cash calls for the first year. Integrated Energy Services (IES) provides an integrated service for clients under flexible The Group earns a tariff per barrel on PECs for an agreed level of baseline production and an commercial models that are aligned with their enhanced tariff per barrel on incremental production. requirements. Our projects cover upstream During the year, the Group earned tariff income on developments – both greenfield and brownfield, a total of 4.8 million barrels of oil equivalent (mboe) related energy infrastructure projects, and can (2016: 6.4 mboe). The 25% decrease in production reflects our exit from the Ticleni PEC during the second include investment. IES deploys the Group’s half of 2016 and the Pánuco PEC in August 2017, and capabilities using a range of commercial lower production from our remaining PECs in Mexico frameworks, including Production Enhancement as we prepared for migration into equity contracts. Contracts (PECs) and traditional Equity Equity Upstream Investments Upstream Investment models including both The Greater Stella Area (GSA) development Production Sharing Contracts (PSCs) and commenced production in February 2017 and concession agreements. we entered the licence in September 2017.
Net entitlement production for the year from our Revenue (US$) Net (loss)/profit (US$) equity upstream investments increased to 2.5 mboe (2016: 2.1 mboe). The increase reflects GSA development licence entry and recommencement 16% 50% of production from the Chergui gas plant towards the end of May 2017, after extensive shut-ins due to US$228m US$(21)m civil unrest. The increase was partly offset by lower
1m production from Block PM304 in Malaysia, in line US$379m with expectations. US$2 7 US$7m US$228m US$(42)m US$(21)m Risk Service Contract We reached mutual agreement with PETRONAS in July 2016 for the cessation of the Berantai RSC, 15 16 17 15 16 17 offshore Malaysia. As part of the agreement, the Berantai FPSO, which was held as an asset under finance lease, was transferred to PETRONAS during Net margin (%) Group revenue contribution the second half of 2016.
(9.2%) Results Revenue for the year decreased 16% to US$228 million (2016: US$271 million). Excluding asset sales (our exit from the Berantai, Ticleni and Pánuco
.8% contracts), revenue was up 8%, reflecting GSA 1 (15.5)% (9.2)% development start-up and licence entry and higher average realised hydrocarbon sales prices, partly offset by lower cost recovery in Mexico, reflecting 15 16 17 lower investment.
40 / Petrofac Annual report and accounts 2017 Strategic report
700 IES headcount at 31 December (2016: 800)
Business performance net loss for the Summary of IES key projects year was lower at US$21 million (2016: US$42 million net loss), with lower revenue 2017 2018 2019 2020 2021 Production Enhancement and higher taxes more than offset by lower Contracts (PEC) operating costs, overheads, depreciation End date and finance costs. Magallanes, Mexico 2037
Pánuco, Mexico1 2043 Exceptional items and certain re- measurements in the IES division totalled Arenque, Mexico 2043 US$179 million after tax (2016: US$271 Equity Upstream Investments million; see note 5 to the consolidated financial statements), predominantly in Santuario, Mexico2 2042 relation to the Greater Stella Area Block PM304, Malaysia 2026 development, following re-assessment of production profiles, including a lower Chergui gas concession, Tunisia 2031 oil to gas ratio, Block PM304, due to a Greater Stella Area development, UK Life of eld rephasing of future production, and Santuario, reflecting the terms secured 1 Exited Pánuco PEC in August 2017. on migration to a PSC. 2 Migrated from PEC to PSC on 18 December 2017.
The Group no longer recognises backlog IES carrying amount¹ 31 December 2017 31 December 2016 in respect of the IES division. (excluding working capital balances) Country US$ million US$ million Santuario, Magallanes, Arenque Mexico 382 336 Headcount in the IES division was 700 at PM304 Malaysia 286 378 31 December 2017 (31 December 2016: 800). Greater Stella Area development United Kingdom 255 276 Chergui gas development Tunisia 47 50 Other (PetroFirst, and FPSO Opportunity and Pánuco in 2016 only) – 61 168 Total 1,031 1,208
1 Includes balances within property, plant and equipment, intangible assets, interest in associates and other financial assets.
into equity Production Sharing Contracts UNLOCKING MEXICO (PSCs) – because, if we have a direct equity interest in the reserves, we get an VALUE IN Manage & maintain increased incentive to develop the assets.
MEXICO The first major development came in We took some big strides forward in August, with the sale of our 50% interest Mexico in 2017 as we made progress in the Pánuco PEC to Schlumberger, on the repositioning of our portfolio who already held the other 50%. It was of IES assets and unlocking value. recognised by both parties that a simplified ownership structure would best position We have been operating in Mexico the Pánuco PEC for migration. since 2012 through a series of Production Enhancement Contracts Then, by December, we announced (PECs). Thanks to reinvestment in the the migration of the Santuario PEC fields and improved operational efficiency, to a PSC, and we are now committed our first two contracts, Magallanes and to unlocking value in the block through Santuario, soon increased their output a new field development plan in by more than 50%. But, with the falling conjunction with PEMEX. oil price and the prospect of Mexico’s energy reforms, everything changed. The fact that this was the first contract migration in Mexican history meant that it Since then, our focus has been on working had been a long and complex negotiation. with our client PEMEX, our partners and However, with the precedent set, we are Mexico’s regulators to migrate our PECs optimistic that it provides a model for the migration of our remaining PECs.
Petrofac Annual report and accounts 2017 / 41 FINANCIAL REVIEW
Alastair Cochran The Group delivered good Chief Financial Officer operational performance in 2017, underpinned by high levels of activity, good project execution and strong financial discipline. Revenue Revenue for the year was US$6,395 million (2016: US$7,873 million), down 19% from record levels in 2016. Revenue in Engineering & Construction (E&C) declined 19%, reflecting project phasing, while Engineering & Production Services (EPS) revenue declined 19% due to the phasing of EPCm projects and lower new order intake, activity and utilisation levels in EPS GROUP FINANCIAL HIGHLIGHTS West. Integrated Energy Services’ (IES) revenue fell 16%, predominantly reflecting asset sales. At a glance Backlog The Group’s backlog decreased 13% Revenues down 19% to US$6.4 billion Cash conversion of 79%3 to US$10.2 billion at 31 December 2017 EBITDA up 4% to US$730 million 1 Capital expenditure down 44% (31 December 2016 (restated): US$11.7 to US$170 million billion), with progress delivered on the Net profit up 7% to US$343 million 1,2 existing project portfolio more than Net debt down 1% to US$612 million offsetting US$5.2 billion of new order intake Reported net loss of US$29 million secured during 2017. Reported backlog New sustainable dividend policy – full year excludes the framework agreement signed Fully diluted EPS of 100.9 cents 1 dividend at 38.0 cents per share with Petroleum Development Oman in June 2017, which will add to backlog as Group backlog down 13% projects are sanctioned. The Group no to US$10.2 billion longer recognises backlog in respect of the IES division.
1 Business performance before exceptional items and certain re-measurements. 31 December 31 December 2 Profit for the year attributable to Petrofac Limited shareholders, as reported in the consolidated income statement. 2017 2016 3 See page 23. US$ billion US$ billion Engineering 7.5 8.2 & Construction Year ended 31 December 2017 Year ended 31 December 2016 Exceptional Exceptional Engineering 2.7 3.5 items and items and & Production Business certain re- Business certain re- Services US$ millions performance 4 measurements Total performance measurements Total Revenue 6,395 – 6,395 7,873 – 7,873 Group 10.2 11.7 EBITDA 730 n/a n/a 704 n/a n/a Net profit/loss 5 343 (372) (29) 320 (319) 1
4 Business performance before exceptional items and certain re-measurements. 5 Profit attributable to Petrofac Limited shareholders.
42 / Petrofac Annual report and accounts 2017 Strategic report
Group financial statements See page 107
Company financial statements See page 169
Earnings Before Interest, Tax, Depreciation Operating cash flow and Amortisation (EBITDA) Net cash flows from operating activities were US$422 million in Business performance EBITDA increased 4% to US$730 million the year (2016: US$651 million). The key components were: (2016: US$704 million). EBITDA margin increased to 11.4% • An increase in operating profits before changes in working (2016: 8.9%). The increase in the EBITDA margin was due to: capital and other non-current items to US$789 million • Project mix in E&C, including the final commercial settlement (2016: US$739 million), predominantly due to an increase on the Laggan-Tormore project in the first half of 2016 in business performance profit before tax • Business mix, including the phasing of EPCm projects, in EPS • Net working capital outflows of US$213 million (2016: US$85 million inflow), including: • In IES, lower operating costs and overheads –– A decrease in trade and other payables of US$272 million, Finance costs/income due primarily to a net unwinding of advances received from Finance costs for the year declined 21% to US$80 million customers of US$167 million (2016: US$101 million) reflecting a reduction in finance lease –– An increase in billings in excess of cost and estimated earnings interest cost following our exit from the Berantai RSC in 2016. of US$154 million, driven by favourable billing terms on a small Finance income for the year increased to US$10 million number of projects (2016: US$3 million) due to the unwinding of the discount on long-term receivables from customers. –– A decrease in accrued contract expenses of US$113 million due to actual costs incurred on E&C projects exceeding their Taxation percentage-of-completion based costs Business performance effective tax rate for the year ended • A reduction in interest paid on borrowing and finance leases to 31 December 2017 was 28.6% (2016: 20.3%). Included within US$70 million (2016: US$94 million) following our exit from the the tax charge for the year is the deferred tax asset derecognition Berantai RSC in 2016 of US$38 million resulting from a combination of the previously announced changes in UK tax loss relief rules, which were • An increase in net income taxes paid to US$69 million enacted in October 2017, and a reduction in UK profit forecasts. (2016: US$40 million)
A number of factors have increased the overall effective tax rate, Capital expenditure with key drivers being changes in the recognition of tax losses Group capital expenditure for 2017, on a cash basis, decreased and expenditure that is not deductible for tax purposes. In line with 44% to US$170 million (2016: US$303 million), principally reflecting prior years, the effective tax rate is also driven by tax laws in the decreases in capital expenditure relating to the Greater Stella Area jurisdictions where the Group operates and generates profits. development, the Petrofac JSD6000 installation vessel and temporary camps for E&C projects. Net profit Business performance net profit increased 7% to US$343 million 31 December 31 December 2017 2016 (2016: US$320 million). The reported net loss was US$29 million US$ million US$ million (2016: US$1 million net profit), reflecting an increase in exceptional Purchase of property, plant and equipment 108 165 items and certain re-measurements. Payments for intangible oil and gas assets 9 2 Additional investment made in available- – 12 Group net margin increased to 5.4% (2016: 4.1%), predominantly for-sale investment due to project mix in the E&C division, including the final Investments in associate and joint ventures – 5 commercial settlement on the Laggan-Tormore project in the Net loans paid to associates/joint ventures 2 – first half of 2016, partly offset by higher tax. Loan in respect of the Greater Stella Area 51 119 development Earnings per share Group capital expenditure 170 303 Business performance diluted earnings per share for the year was 100.9 cents per share (2016: 93.3 cents per share), reflecting Balance sheet capital expenditure, including accruals, on property, the increase in business performance net profit. Total reported plant and equipment for 2017 decreased 20% to US$115 million diluted earnings per share was a loss of 8.5 cents per share (2016: US$143 million). (2016: profit of 0.3 cents per share), reflecting an increase in exceptional items and certain re-measurements. Capital expenditure on intangible oil and gas assets during the year was US$8 million (2016: US$3 million).
Petrofac Annual report and accounts 2017 / 43 FINANCIAL REVIEW CONTINUED
Free cash flow Balance sheet Free cash flow decreased to US$281 million in the year (2016: IES carrying value US$386 million), primarily due to a net working capital outflow The carrying amount of Integrated Energy Services’ portfolio of US$213 million within net cash flows from operating activities is US$1,031 million (2016: US$1,208 million; see page 41). (2016: US$85 million net inflow), partly offset by a 47% reduction in net cash flows used in investing activities: Working capital 1 The net working capital balance at 31 December 2017 increased 31 December 2017 31 December 2016 to US$422 million (31 December 2016: US$277 million). The key US$ million US$ million movements in working capital during the year were: Net cash flows from operating activities 422 651 Net cash flows used in investing (141) (265) • A decrease in trade and other receivables of US$142 million activities to US$2,020 million (31 December 2016: US$2,162 million) Free cash flow 281 386 predominantly reflecting the derecognition of US$128 million of trade receivables relating to the Santuario PEC (see note 21 The Group defines free cash flow as net cash flows from operating to the consolidated financial statements) activities less net cash flows used in investing activities. • A decrease in trade and other payables of US$299 million to US$1,675 million (31 December 2016: US$1,974 million), primarily Dividends due to reductions in trade payables of US$119 million and a net In August 2017, the Board approved a new sustainable dividend unwinding of advances received from customers of US$167 policy that targets a dividend cover of between 2.0x and 3.0x million (see note 29 to the consolidated financial statements) business performance net profit as the Group transitions back towards a low capital intensity business model. Going forward, • A decrease in accrued contract expenses of US$104 million it is proposed that the interim payment each year will be to US$1,956 million (31 December 2016: US$2,060 million) approximately 33% of the prior year total dividend. due to actual costs incurred on E&C projects exceeding their percentage-of-completion based costs In line with the policy, the Board is proposing a final dividend of • An increase in billings in excess of estimated earnings of 25.3 cents per share (2016: 43.8 cents). The final dividend will be US$154 million to US$198 million (31 December 2016: paid on 25 May 2018 to eligible shareholders on the register at US$44 million), driven by favourable billing terms on a small 27 April 2018 (the ‘record date’). Shareholders who have not elected number of projects to receive dividends in US dollars will receive a sterling equivalent. Shareholders can elect by close of business on the record date to Finance leases change their dividend currency election. Together with the interim Net finance lease liabilities decreased 9% to US$166 million at dividend of 12.7 cents per share (2016: 22.0 cents), this gives a total 31 December 2017 (2016: US$182 million; see note 18 to the dividend for the year of 38.0 cents per share (2016: 65.8 cents). consolidated financial statements) and predominantly relate to two The dividend is covered by free cash flow. leased floating production facilities on Block PM304 in Malaysia.
Employees Total equity At 31 December 2017, the Group had approximately 12,500 Total equity at 31 December 2017 was US$948 million employees (including long-term contractors) (2016: 13,500). (2016: US$1,123 million), primarily reflecting the reported loss for the year of US$27 million and other comprehensive income of US$50 million, less dividends paid in the year of US$195 million and treasury shares purchased of US$39 million, which are held in the Petrofac Employees Benefit Trust for the purpose of making awards under the Group’s share schemes.
Return on capital employed The Group’s return on capital employed for the year ended 31 December 2017 increased to 21% (2016: 17%), reflecting improved profitability and a decrease in capital employed.
1 Inventories, work in progress and trade and other receivables, less trade and other payables, accrued contract expenses and billings in excess of costs and estimated earnings.
44 / Petrofac Annual report and accounts 2017 Strategic report
Capital, net debt and liquidity Exceptional items and re-measurements The Group’s net debt decreased to US$612 million at The following items, described as ‘exceptional items and certain 31 December 2017 (2016: US$617 million) reflecting strong re-measurements’ are excluded from business performance capital management. as exclusion of these items provides a clearer presentation of the underlying performance of the Group’s ongoing business. The Group’s total gross borrowings less associated debt For further details of amounts comprising exceptional items acquisition costs and the discount on senior notes issuance and certain re-measurements, see note 5 to the consolidated at 31 December 2017 decreased 11% to US$1,579 million financial statements. (2016: US$1,784 million). Exceptional items and certain re-measurements for 2017 amounted 31 December 2017 31 December 2016 to a post-tax loss of US$372 million (2016: US$319 million loss), US$ million (unless otherwise stated) of which approximately US$350 million were non-cash items: Interest-bearing loans and • The Board has confirmed its intention to exit the deep-water borrowings (A) 1,579 1,784 market triggering an impairment charge of US$176 million Cash and short-term deposits (B) 967 1,167 (post-tax) in relation to the JSD6000 installation vessel, which Net debt (C = B – A) (612) (617) has been reclassified as an asset held for sale. We continue Equity attributable to Petrofac to pursue options to maximise value for the JSD6000. Limited shareholders (D) 912 1,097 EBITDA (E) 730 704 • Impairments and exceptional items in relation to the IES division Gross gearing ratio (A/D) 173% 163% totalled US$179 million after tax, predominantly in relation to the Net gearing ratio (C/D) 67% 56% Greater Stella Area development, re-assessment of production Net debt/EBITDA (C/E) 84% 88% profiles, including a lower oil to gas ratio, Block PM304, due to a rephasing of future production, and Santuario, reflecting the None of the Company’s subsidiaries are subject to any material terms secured on migration to a PSC. restrictions on their ability to transfer funds in the form of cash dividends, loans or advances to the Company. Alastair Cochran Chief Financial Officer Excluding bank overdrafts, the Group’s total available borrowing 28 February 2018 facilities were US$2,210 million at 31 December 2017 (2016: US$2,393 million). Of these facilities, US$645 million was undrawn as at 31 December 2017 (2016: US$631 million). Combined with the Group’s cash balances of US$967 million (2016: US$1,167 million), the Group had substantial sources of liquidity available.
In May 2017, Petrofac and its lenders agreed to extend US$1.0 billion of its US$1.2 billion revolving credit facility by one year to June 2021. During the year, the Company repaid a US$100 million term facility and refinanced a further US$200 million of term loans, extending their maturity by up to two years.
Petrofac Annual report and accounts 2017 / 45 CORPORATE RESPONSIBILITY A safe, ethical and responsive business
To achieve sustained commercial In 2017, we continued to report in Understanding what matters success, it is essential for Petrofac to accordance with the Global Reporting most to our stakeholders have a strong commitment to corporate Initiative (GRI) G4 (core) guidelines, We work with a number of CR advisors to responsibility (CR). We remain acutely and introduced several new understand the issues that are of most aware of the changing political, social performance indicators. interest to our stakeholders (including clients, and economic environment, and we suppliers, NGOs, government representatives, We also improved our CR reporting at see that our CR capability has a direct employees and industry associations). www.petrofac.com with the publication impact on our ability to: of more of our policy statements. In 2017, we continued this process via formal discussions with a range of our • Deliver sustainable value to Enhancing our compliance senior managers. Based on this programme our stakeholders To be effective, our CR policies and of engagement, we produce a materiality standards must be clearly understood • Maintain strong employee engagement matrix (opposite), which sets out the CR and actively implemented. During 2017 issues that are important to our stakeholders • Bid for challenging projects we therefore extended our CR awareness and have the potential to impact our programmes and enhanced our • Optimise the performance of our assets business. This matrix is updated annually compliance processes. to reflect feedback from both internal and • Operate safe and secure projects Supporting local suppliers external stakeholders, taking account of • Manage our risks and contractors changing attitudes and priorities. It is used One thing that sets Petrofac apart is to inform our approach to CR and guide During 2017, we continued to formalise the extent to which we work with and the quality of our CR programmes. our approach to CR, with several new support local suppliers and nurture local initiatives, greater rigour, and improved The remainder of this section of the report supply chains. Importantly, these partners reporting standards. is structured around many of the topics are expected to abide by all of our CR highlighted in the matrix. policies. They are therefore covered Raising our reporting standards by many of our related awareness and The better we measure our CR performance, compliance programmes. the better we can manage it.
46 / Petrofac Annual report and accounts 2017 Strategic report
22 Zero 0.05 Awards in recognition of Fatal accidents Recordable HSSEIA and worker welfare incident rate
To be successful in the long term, it is vital for any business to take a disciplined approach to Corporate Responsibility. Policies and processes are important. However, to be effective, they need to be actively managed and monitored. At Petrofac, the quality of our compliance is just as important as the strength of our commitment.
Ayman Asfari Group Chief Executive
THE PETROFAC MATERIALITY MATRIX AND ISSUES FOR 2017
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G9 w IMPORTANCE TO EXTERNAL STAKEHOLDERS o L F5
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IMPORTANCE TO PETROFAC