Oil Industry to Face More Cost Pressure, Petrofac CEO Says

Oil and gas producers will have to keep a lid on investment to appease shareholders, creating a challenge for services companies such as Petrofac Ltd., Chief Executive Officer Ayman Asfari said.

“Our industry is facing a huge amount of cost pressure,” Asfari said in an interview in Davos, Switzerland today. “More is being spent to produce less. Our clients are seeing the rate of return on capital dropping and they’re being challenged by investors who want them to be more disciplined.”

Petrofac, the U.K.’s largest oil services company, dropped 25 percent last year, the biggest decline since 2008, even as the benchmark FTSE 100 rose 14 percent. Project delays hurt Petrofac’s earnings, and it has said profit growth will probably be “flat to modest” this year.

Petrofac fell as much as 1.9 percent and traded down 0.4 percent at 1,237 pence as of 9:24 a.m. in London.

“It was a tough year for us,” Asfari said. “The situation will hopefully change.”

Petrofac may be able to benefit from producers’ desire to control costs by assuming more responsibility for delivering oil and gas output at projects it works on, Asfari said.

Royal Dutch Shell Plc, Europe’s biggest oil company, this month issued its first profit warning in a decade, saying earnings were about half of what analysts were expecting in the fourth quarter. Shell’s costs are rising as oil prices hold steady, eating into profits, and the company is also struggling to raise output.

Emerging Economies

“Everybody now is talking about a mid-term oil price that’s flat” as shale oil production in the U.S. rises, Asfari said. “Against all that, oil and gas demand will continue to rise, driven by emerging economies.”

Petrofac is seeking to reach $862 million in post-tax income by 2015, more than doubling 2010 recurring profit. While project delays in Abu Dhabi and Malaysia have slowed earnings growth, the company can still meet its goal in two years, it said Nov. 18. Still, that may require a profit jump of about 30 percent from 2014 to 2015, according to Chief Financial Officer Tim Weller.

Before it's here, it's on the Bloomberg Terminal.