Petrofac's ex-sales chief pleads guilty to bribery charges

Shares in Petrofac tumbled on Thursday after the oil services group's former global sales chief pleaded guilty to eleven counts of bribery as part of an ongoing Serious Fraud Office probe into the company.

David Lufkin entered the pleas at Westminster Magistrates’ Court on Wednesday, the SFO said on Thursday, adding that its investigation into Petrofac’s use of agents in multiple jurisdictions, including Iraq and Saudi Arabia, is ongoing.

The SFO, which has been investigating the company since at least May 2017 over suspicions of bribery, corruption and money laundering, said the charges related to the making of corrupt offers to influence the award of contracts to Petrofac worth in excess of $3.5bn dollars in Saudi Arabia and $730m in Iraq.

A number of Petrofac individuals and entities are alleged to have acted together with the Lufkin, Petrofac confirmed in a later statement, though it noted that no charges have yet been brought against any subsidiary or current employees and that no current Petrofac board member is alleged to have been involved.

In Thursday's statement, chairman René Médori said: "The SFO has chosen to bring charges against a former employee of a subsidiary company. It has deliberately not chosen to charge any group company or any other officer or employee. In the absence of any charge or credible evidence, Petrofac intends as a matter of policy to stand by its employees."

However, in 2017, the SFO said its investigation was centred on activities in Kazakhstan pre-2010, but this week's charges suggest the probe has widened and affects contracts awarded as recently as 2015.

SAUDI AND IRAQI EPC CONTRACT BRIBES

The offences for which Lufkin pleaded guilty, the SFO said, included payments of roughly $21.4m ultimately made by Petrofac to its agent in respect of engineering, procurement and construction (EPC) contracts for Jazan Refinery and Terminal Project awarded in December 2012 and worth $1.7bn to the company; payments of about $19.5m ultimately made by Petrofac to its agent in respect of the EPC contract for a sulphur recovery plant as part of the Fadhili Gas Plant Project awarded in November 2015 and worth approximately $1.56bn.

In Iraq, payments of roughly $2.2m were said to have been ultimately made by Petrofac to two agents in respect of a $329.7m EPC contract on the Badra oilfield in Iraq awarded to Petrofac in February 2012 and another $4m ultimately made by Petrofac to an agent in respect of an O&M contract on the Fao Terminal project in Iraq, which, together with yearly extensions awarded in 2013, 2014 and 2015, was worth approximately $400m to Petrofac.

"Corrupt offers of payments were also made to an agent to influence the award of contract variations to the Badra Phase One EPC contract, and for the extension of the Badra Operations and Maintenance contract," the SFO said, though Petrofac was unsuccessful in obtaining these contracts and no payments were made to the agent.

"Corrupt offers of payments were also made to its agent for the award of other contracts at the time. Petrofac was unsuccessful in obtaining these contracts and no payments were made to its agent," the SFO said.

Lufkin is due to be sentenced at a later date.

A year and a half ago, with both chief executive Ayman Asfari and chief operating officer Marwan Chedid questioned and released as part of the probe, the FTSE 250 group set up a compliance and ethics committee to monitor internal policies relating to issues such as corruption and risk.

Last February, Petrofac confirmed that the SFO had been continuing to question its chairman, executive directors, non-executive directors and employees over its the investigation.

The FTSE 250 group has been trading strongly over the past year, winning $3.8bn of new orders in engineering & construction and with a backlog of work of $10.2bn as of 30 November.

Petrofac shares were down 22% to 436.8p by 1015 GMT on Thursday.

Morgan Stanley noted that Petrofac's shares have underperformed relative to the sector 35% since the initial May 2017 SFO announcement, representing $1.3bn of "lost market value", with a 60% underperformance since March 2016 when allegations first appeared in the Huffington Post, equating to $2,586bn of lost value.

"We continue to believe this will ultimately prove a more than sufficient discount to reflect the outcome of the SFO situation," analysts said, noting the largest SFO fine was for Rolls Royce in $497m in 2017, 3% of market cap at the time, which represented 258m for repaying profits on deals covered and £239m penalty.

Analysts at HSBC put forward three possible scenarios, including one where Petrofac is cleared with no charges, with a resulting estimated fair value for the shares of 830p.

A second scenario sees the case settled via DPA, with a $400m fine after discounts and $20m costs, while a third envisions a total case impact of around $1bn including fine and "franchise impact", resulting in an estimated fair value of the shares of 640p.