Energy industry services company Petrofac announced on Friday that it has reached an in-principle agreement with key stakeholders to undergo a financial restructure aimed at improving its financial stability and supporting future growth.

The in-principle agreement has garnered support from an ad-hoc group of senior secured noteholders, who represent about 47 percent of the outstanding notes, as well as from key clients whose contracts comprise a majority of Petrofac’s Engineering & Construction (E&C) backlog, the UK-listed company said in a press statement.

Under the proposed financial restructure, Petrofac will receive long-term funding underwritten by the ad-hoc group, as well as additional equity financing from both new and existing investors, which is expected to address operational liquidity needs.

According to the statement, a significant portion of Petrofac's existing debt will be converted into equity through a Court-approved restructuring process -  the extent of the dilution remains under negotiation.

The non-binding deal’s success, however, hinges on resolving certain historical liabilities and securing agreements from other creditors, the statement underlined.

Talks are also progressing with banks, and two major shareholders who own 34 per cent of the company on the proposed restructure.

Additionally, the company has negotiated alternative arrangements with key clients to meet performance security requirements, enabling it to release a substantial portion of retentions and safeguard key contracts within its E&C backlog.

For a contract awarded in 2023, Petrofac has managed to lower its performance guarantee obligations to approximately $100 million. This will be secured through either a new performance bank guarantee or alternative arrangements.

In 2023, the E&C business had its strongest year for new awards in five years, with backlog more than tripling to $6.1 billion, up from $1.6 billion in 2022. New contracts secured in 2023, which included ADNOC carbon capture, utilisation and storage (CCUS) contract, accounted for 90 percent of this backlog (or $5.5 billion).

The statement noted that the improvement in liquidity will enhance the Group's ability to execute its current order book and pave the way for a gradual increase in access to guarantees for new EPC contracts on standard commercial terms.

Previously, in April 2024, the ad-hoc group made a non-binding offer that included up to $200 million in new funds, $100 million in credit support for performance guarantees, and the conversion of a substantial portion of the Group's debt into equity. This offer was contingent on the Group securing specific performance guarantees, which would in turn release over $200 million in collateral and retentions, while unlocking progress payments on backlog contracts.

The statement said the Group continues to carefully manage its financial and payment obligations and to rely on forbearance granted by creditors.

On Monday, Petrofac had confirmed that it extended its existing forbearance agreement in respect of the non-payment of the interest coupon on its $600 million senior secured notes from 20 September to 18 October 2024, allowing additional time for the Group’s financial restructuring to be progressed.

A lock-up agreement with finalised terms is expected in the coming weeks, with the Court process expected to take around two months following that, according to the statement. Interim financial results for the six-month period ending 30 June 2024 are scheduled for release on Monday, 30 September 2024.

René Médori, Chairman of Petrofac, acknowledged the significance of reaching this stage, stating, “While we have not yet crossed the finish line, this is a critical step toward securing a deal that will substantially strengthen Petrofac's balance sheet and improve its liquidity.” He expressed gratitude to shareholders, clients, and creditors for their continued support through this challenging period.

Tareq Kawash, Petrofac’s Group Chief Executive, highlighted the progress made in securing new contracts, particularly within Asset Solutions, which has secured over $1 billion in new work in 2024. Kawash emphasised that Petrofac's ongoing efforts to resolve legacy contracts and historical working capital issues are vital to ensuring a more positive future for the Group.

Asset Solutions achieved a strong order intake of $1.6 billion in 2023, closing the year with a backlog of $2 billion as of 31 December 2023 (up from $1.8 billion in 2022), according to Petrofac's May 2024 statement. Notably, none of the backlog contracts have pending performance guarantee requirements.

(Editing by Anoop Menon) (anoop.menon@lseg.com)

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