Further cost overruns hit Petrofac shares

Oil services group Petrofac has blamed continued poor weather and strained industrial relations as it booked a further $195m of losses for work at a flagship North Sea gas development.

The writedown adds to $230m of losses already taken by Petrofac on the Laggan-Tormore gas plant project on Shetland in the year to December.

Shares in Petrofac, the second largest London-listed oil services company by market value, fell by 12 per cent to 896p on Monday, valuing its equity at £3.1bn.

Total of France, which hired Petrofac to build the Laggan-Tormore development, has said the planned exploitation of fields west of Shetland "represent the future of the UK oil and gas industry".

However, Petrofac's latest profit warning is the latest recognition of execution risks involved in the £3.5bn development, which has been blighted by harsh operating conditions and regular strike threats by workers.

Although the first production was originally planned for last year, project completion is now not expected until the third quarter of this year. Last month Total signalled to potential buyers it planned to auction off a stake of up to 20 per cent in Laggan-Tormore.

On Monday Petrofac conceded that a final ramp up of the final construction and commissioning phases of the onshore gas plant had been delayed by a further month because of "adverse weather conditions during March on Shetland and industrial action".

The company added: "It has become apparent that we will need to expend significantly more man-hours to complete the project than anticipated as a result of low manpower productivity levels as the project nears completion."

The cost overruns come amid a wave of votes by trade unions threatening industrial action against a range of North Sea operators as the companies attempt to cut contractor rates and staff salaries in response to the recent collapse in price of crude.

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"We have already affirmed that we will no longer take construction risk on large lump-sum projects within the UK to avoid a similar experience to Laggan-Tormore," he said, conceding a decision to take in a project "in a location where labour costs were higher and productivity lower than Petrofac was used to [had] . . . cost us dearly".

Analysts at Berenberg said on Monday that they believed that there remained further risk to Petrofac's group earnings. "We think that there is a high risk of further losses on this project over the next three months," they said. "Petrofac is managing the labour force by itself and its relationship with the unions appears very strained."

Analysts at Investec predicted that the latest loss of $190m, announced on a fixed-price contract originally worth about $800m, would result in a 38p dent to its share price.

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