Petrofac Targets Iraq Oil After Asfari Raises Value (Update2)
March 12, 2010, 12:03 PM EST(Adds closing price in fourth paragraph.)
By Brian Swint
March 12 (Bloomberg) -- Ayman Asfari, the chief executive officer whose oil and gas engineering skills guided a fourfold increase in the value of Petrofac Plc within five years, is now preparing to tap Iraq’s energy boom.
Iraq, with estimated reserves of 115 billion barrels of oil, the world’s third-largest, is set to ramp up production as companies including BP Plc, Royal Dutch Shell Plc and Exxon Mobil Corp. spend as much as $100 billion to develop fields awarded in contracts last year. A good chunk of that will go to contractors including Petrofac and larger U.S. rivals Baker Hughes Inc. and Halliburton Co.
“He’s passionate about his business model, which is about being a low-cost provider of quality engineering,” said Barclays Capital analyst Mick Pickup, who worked with Asfari on Petrofac’s initial public offering as a consultant at Lehman Brothers Holdings Inc. “Iraq is the billion dollar question. Ultimately, there will be the whole infrastructure to build there. It will be big.”
Petrofac gained 39 pence, or 3.3 percent, to close at a record 1,240 pence in London trading. The company’s market capitalization rose above 4 billion pounds ($6 billion) this week, compared with a valuation of less than 1 billion pounds when the company went public in 2005.
Asfari, a Syrian-born engineer educated at the Ivy League University of Pennsylvania, has seen the value of his 16 percent stake rise to about 650 million pounds.
‘Growth Market’
“We see Iraq as a growth market,” Asfari, 51, said in an interview from the company’s London headquarters. “This is a natural place for our expansion. We’re working in Kuwait, Saudi Arabia and Syria, and it’s very easy for us to step out across the border.”
The largest U.K. oil and gas services company reached a record in London this week after it announced the spinoff of North Sea fields it owns into a new company. The shares may outperform peers because the company has kept costs under control and is positioned to win work in Iraq, investors and analysts said.
Asfari joined Petrofac in 1991 and led the company’s expansion into the United Arab Emirates, where it has a base in Sharjah. The private equity firm 3i Group Plc invested in 2002 and the company listed in London three years later. It now has more than 11,000 employees and offices in 24 countries.
North Sea Assets
Unusually for a services company, Petrofac has invested in oil and gas projects. It announced last week it will place its U.K. production assets in EnQuest Plc, a new company founded with Sweden’s Lundin Petroleum AB.
The company’s shares have gained 19 percent this year, compared with a 0.3 percent drop in the Dow Jones Europe Oil and Gas Index.
The company’s track record includes designing gas facilities for BP and Statoil ASA in Algeria, constructing and operating offshore wells for Dubai Petroleum and setting up gas plants for Petroleum Development Oman. The Middle East experience may give it an advantage, said Gordon Happell, an analyst at Aegon Asset Management in Edinburgh.
“Petrofac is well-placed because of their geographic exposure and their differentiated customer base,” said Happell, whose company oversees 42 million pounds of investment and owns Petrofac shares. “Provided they can support medium-term growth prospects with further contract awards, the valuation remains attractive.”
Order Backlog
Petrofac reported record orders of $7.3 billion last year as its operating margin rose to 12.1 percent, up from 10.7 percent in 2008. The order backlog was $8.1 billion as of Dec. 31. That’s before any work in Iraq, where Asfari said the company is pursuing several opportunities.
“The shares look to be good value,” said Ivor Pether, who helps manage $9.7 billion of assets at Royal London Asset Management, including Petrofac shares. “But pricing pressures will increase over time because of more aggressive tendering. They’re working with quite a high operating margin, and one would expect for it to be tough to improve from here.”
Samir Brikho, chief executive of Amec Plc and one of Petrofac’s main London-based rivals, said that competition is heating up. Amec’s share price has doubled since 2008.
“Iraq’s oil sector presents a significant opportunity and we are evaluating how we can best support our existing oil and gas clients in developing the future of Iraq’s oil and gas industry,” Brikho said in an e-mailed response to questions. “Competition for market share is evident among service providers.”
Cost Squeeze
Asian companies also have a chance to do well in Iraq after China National Petroleum Corp., Petroliam Nasional Bhd. and Japan Petroleum Exploration Co. won contracts in Iraq, Royal London’s Pether said.
BP Chief Executive Officer Tony Hayward said he will push “very hard” to bring down services costs this year after trimming operating expenses by $4 billion in 2009. Shell’s Peter Voser aims to cut costs by $1 billion.
“We have to respond to the demands of our clients to remain competitive, and yes, they are squeezing costs, and we equally try to squeeze costs from our suppliers,” Asfari said. “This is a game where you have to continue to be competitive all the time.”
--Editor: Jonas Bergman, Will Kennedy.
To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.
To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net
