More than a quarter of a billion pounds was wiped off the market value of Petrofac on Monday after it admitted that losses had spiralled on a major gas plant contract.
The company is entering the final stages of construction of the Laggan-Tormore plant which it is building on Shetland on behalf of Total.
In its final results for the year to December 31 published in February, Petrofac advised of a circa £150 million loss on the project.
The company also specifically stated that it did not expect any further losses to accrue through to contract completion in the autumn of this year.
However, that pledge proved to be untrue yesterday as Petrofac confirmed it now expected to recognise a further £130m pre-tax loss on the Laggan-Tormore contract.
The admission was met by shock in the markets and shares in the company plummeted by more than 13%, the equivalent of more than £267m, in morning trading yesterday
Petrofac yesterday blamed adverse weather conditions and industrial action during March for unexpected delays to the project but said activity had now ramped up at the site.
However, the firm said it had since become apparent that “significantly more man-hours” than anticipated would be required to bring the project to conclusion.
It said “low manpower productivity levels”, the failure of a sub-contractor to deliver their element of the project satisfactorily and a greater level of rectification and reinstatement works than expected had all conspired to drive up its costs.
As a result of the issues raised, Petrofac yesterday said it had now completed a full reassessment of the schedule and cost-to-complete estimate for the project.
It said it still expected handover of Laggan-Tormore in the third quarter of the year but costs were now £130m higher than previous estimates.
Group chief executive Ayman Asfari said the firm was “deeply disappointed” at the position in which it found itself.
“Laggan-Tormore is different from the rest of our EPC project portfolio, where we typically utilise sub-contractors to deliver construction services.
“We had to take on this level of direct construction responsibility when some of our sub-contractors failed to deliver in line with their agreed scopes.
“Our lack of experience of operating a direct construction model in a wholly new geography for our Onshore Engineering and Construction business, particularly in a location where labour costs are much higher and productivity much lower than we are used to, has cost us dearly.
“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 moving forward.
“ For now, my senior management team and I are focused on delivering the project in line with the revised schedule agreed with our client.
“As such, we have refreshed the site leadership team and further strengthened it with key members of our Sharjah-based OEC team and have changed a number of elements of our working practices to drive the project through to completion.
“Putting the challenges we are facing on this project to one side, the rest of our portfolio continues to perform in line with expectations.”
Shares in Petrofac, a leading service provider to the oil and gas industry with more than 20,000 staff globally, closed the day at 912.50, down 10.01%.