Oil services firm Petrofac (PFC) slumps 12.2% to 890.5p as it reveals it expects to recognise a further $195 million loss on the Laggan-Tomore gas plant project in Shetland in 2015– effectively amounting to a substantial profit warning. But beyond the loss perhaps more relevant to investors’ view of the stock is what it says about execution.
A $230 million loss had already been recognised on Laggan-Tormore – which is being developed for Total (FP:PA) - in 2014 and the company had said it did not expect to recognise any further profit or loss on the contract ahead of completion in the third quarter of 2015. While the timetable remains on track Petrofac blames adverse weather conditions, industrial action and lower productivity requiring additional man hours for the additional financial hit.
The project is different from the rest of Petrofac’s engineering, procurement and construction (EPC) developments where the group typically uses sub-contractors to handle the construction element. It took direct responsibility this time because of failures on the part of sub-contractors.
Chief executive Ayman Asfari pledges to learn the lessons from the episode noting: ‘Our lack of experience of operating a direct construction model in a wholly new geography for our Onshore Engineering & Construction business, particularly in a location where labour costs are much higher and productivity much lower than we are used to, has cost us dearly.’
However, the market appears to have lost patience after a series of mis-steps from the company including a number of profit warnings – most recently in November 2014. At that stage the company had guided for a 2015 net profit of $500 million but that will have to be downgraded to reflect today’s news.