Why Petrofac Limited could be too cheap to ignore

Is Friday’s fall a buying opportunity for Petrofac Limited (LON:PFC) investors?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of oil services group Petrofac (LSE: PFC) fell by 15% to 700p on Friday, after the firm said that it was under investigation by the Serious Fraud Office (SFO).

The SFO investigation is believed to relate to Petrofac’s past dealings with a company called Unaoil. Monaco-based Unaoil has been the subject of allegations that it used bribery to secure contracts for western companies, including Petrofac.

Prior to Friday’s sell-off, I had been eyeing Petrofac as a potential oil recovery buy. The group’s shares were trading on about 9.3 times forecast earnings, with a prospective yield of 6.3%.

The question I need to answer now is whether the risks and potential costs of the SFO investigation should rule out Petrofac as a possible buy.

What do we know?

Petrofac has previously said that it used Unaoil for “local consultancy services primarily in Kazakhstan between 2002 and 2009”. Back in August 2016, it said that it had hired lawyers and forensic accountants to conduct an independent investigation into the Unaoil allegations.

According to Petrofac, this investigation “did not find evidence confirming the payment of bribes”. The company said that it had passed its findings to the SFO.

Friday’s sell-off may have been influenced by events at Rolls-Royce, which recently agreed a £671m settlement with the SFO relating to bribery and corruption allegations.

A fine on this scale could be painful for Petrofac. But Rolls-Royce shares have continued to recover strongly and the payment schedule seems unlikely to impact the firm’s underlying recovery.

I’m tempted to suggest that Petrofac will be able to ride out this storm, whatever the eventual outcome of the investigation. The group’s profits are expected to recover this year and net debt has halved since 2015.

Petrofac currently trades on a P/E of just 7.9, with a covered dividend yield of 7.2%. Although this stock isn’t without risk, I think the shares could be a profitable buy at current levels.

A real oil bargain?

Premier Oil (LSE: PMO) were up 4% on Monday morning, after the firm said oil and gas production had risen by 44% to 82,600 barrels of oil equivalent per day (boepd) during the four months to 30 April.

Although full-year production guidance has been left unchanged at 75,000 boepd, Premier’s costs have also been lower than expected. The company said operating costs for the year to date were $13.70/boe, 11% below budget.

A P/E of 2

In today’s update, Premier Oil said that its refinancing plan is now underway. The group’s net debt remains unchanged from December at $2.8bn and management expects a “more significant debt reduction in 2018”.

As things stand, Premier’s market value is just £301m. But the group’s enterprise value (market value plus net debt) is £2.4bn. If debt falls to plan, then the value of the group’s shares should rise to reflect this.

The risk, of course, is that oil prices will remain stagnant and Premier’s net debt will take longer than expected to reduce. The group’s stock currently trades on a 2018 forecast P/E of two, suggesting the market still sees a lot of risk here.

I share this view. I think investors considering Premier as a turnaround buy need to be able accept a high degree of risk and potential losses.

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.

Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »