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In a trading update released early this morning, Petrofac (LSE:PFC) announced that it expects to close the year with a backlog of some $11.6 million USD and a growth in net profit growth in excess of 15%. Petrofac’s share price increase from 1684.00 at 08:00 to 1707.00 at 09:20. From thence it began slipping downward, reaching 1653.00 by 14:00. on very light trading of 713,000 shares. This is almost inexplicable. Unless, perhaps, some investors are misunderstand backlog.
Many companies report backlog as orders that the company has been unable to fill due to increased demand, decreased capacity, production interruptions, or supply chain disruptions. Petrofac is keen to note in its updates how it defines backlog.
“Backlog consists of the estimated revenue attributable to the uncompleted portion of lump-sum engineering, procurement and construction contracts and variation orders plus, with regard to engineering, operations, maintenance and Integrated Energy Services contracts, the estimated revenue attributable to the lesser of the remaining term of the contract and five years. Backlog will not be booked on Integrated Energy Services contracts where the Group has entitlement to reserves. The Group uses this key performance indicator as a measure of the visibility of future revenue. Backlog is not an audited measure.”
In summary, PFC defines backlog as being comprised of uncompleted portions of contracts “signed to date.” Retail companies would refer to this as their “order book,” i.e., orders booked, but not yet delivered. Pharmaceutical companies would call it their “pipeline,” or the estimate value of products in development. Both terms are similar in meaning to PFC’s backlog terminology. They all refer to reasonably secure estimates of future income within a relatively well defined period of time. (The pipeline is a less secure estimate as it is based on successful development of a product not yet available.)
In other words, Petrofac knows almost to a certainty that the backlog will turn into revenue and, based on the contracts, when, precisely, that revenue is expected to be posted, barring any unforeseen circumstances beyond their control.
Speaking of unforeseen circumstances, Petrofac supplies goods and services to major oil companies that operate in countries like Nigeria, Iraq, the UAE, Cameroon, Malaysia, and many others where political and economical stability may shaky at times.
In fact, reports broke only a few hours ago that Iraqi President Jala Talabani has suffered a stroke and is in hospital. Although some early reports claimed that he had died, it is now believed that he is in critical condition whilst doctors work to stabilize him. Speculation about the potential demise of the 79-year-old president can be sufficient to cause concern for businesses operating in Iraq, when, in reality, the president’s condition is probably more stable than his country’s.
Petrofac is a member of the FTSE 100 and has a market cap of £5,724 million. The company’s services cover the entire life-cycle of oil, gas and energy assets from initial design and construction right through to decommissioning. If it’s projection for a 15% increase in net profits is correct – at December 18th it should be – the groups net profit will have increased by a factor of 3 over the last five years from $258 million USD to $782 million.
