What’s Behind Petrofac Limited’s Recent Slump?

Petrofac Limited (LON:PFC) is falling this week, here’s why.

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Petrofac‘s (LSE: PFC) shares have slumped around 6% this week, making the company one of the FTSE 100‘s worst performers. However, Petrofac has not released any news during the past week and there appears, at first glance, to be no reason for this decline.

Nevertheless, it seems as if the market is turning its back on the company due to events unfolding within Iraq.

Middle East troublesoil

While the world has been concentrating on Eastern Europe and Israel over the past week or so, the gains made by Sunni Islamist group Isis across Iraq have gone relatively unnoticed.

Unfortunately, these gains have begun to threaten Petrofac’s operations within Iraq. The oilfield services provider’s main operations within the country are located at Iraq’s super-giant Rumaila oil field and the Majoon oil filed, owned by Royal Dutch Shell. These operations are located South of Baghdad, but Isis is closing in fast.

If violence within Iraq does impact Petrofac’s operations, the company could be forced to issue yet another profit warning. This would be the third profit warning in 12 months. 

Management reassurance

Nevertheless, despite these concerns, Petrofac’s management has sought to deal with investor concerns by stating that the group’s operations in Iraq, represent less than 5% of expected revenues for 2014.

In an update issued during June, management sought to reassure investors with the following statement:

“…While we continue to monitor events [within Iraq] closely, there has been no significant impact on our current operations to date…”

What’s more, within the same release, management revealed that the group’s order backlog stood at a record level of $20.1bn as of May this year. Up from the backlog of $15bn reported at the end of 2013.

Since the release of this statement, the company has been awarded a $700m contract within Kuwait.

Lowly valuation

For bargain hunters, Petrofac looks to be an attractive opportunity. Indeed, after recent declines the company is trading at an astonishingly low valuation.

Petrofac is currently trading at a forward P/E of 10.3, lower than almost every other company in the FTSE 100. The company is trading at a forward P/E of 11.3.

What’s more, the company’s return on capital (equity plus total debt) was 18% during 2013, three times the average of its main competitors. So, in some ways, Petrofac should be trading at a premium to its peers.

Additionally, Petrofac’s shares support an attractive dividend yield of 3.4%, around the same as the average FTSE 100 yield. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns shares of Petrofac. The Motley Fool owns shares of Petrofac.

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