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Why I’d buy BP plc over Petrofac Limited

Image: BP. Fair use.

The month of May was certainly not a good one for oil services firm Petrofac (LSE: PFC) or its shareholders. Nor was it a good one for its management team, with both its CEO and COO being arrested by the Serious Fraud Office (SFO) in connection with an investigation involving bribery, corruption and money-laundering. So what on earth is going on, and what does it mean for investors?

Criminal investigation

On 12 May the FTSE 250-listed firm announced that the SFO had launched a criminal investigation into the company and its subsidiaries, in connection with Unaoil, a Monaco-based consultancy that worked with Petrofac, primarily in Kazakhstan between 2002 and 2009.

It was also revealed that Marwan Chedid, the firm’s COO, and CEO Ayman Asfari had both been questioned under caution by the SFO. Investors were not impressed, and the share price collapsed 14% to 700p on the day of the announcement.

It gets worse

The share price continued to drift lower until 25 May, when the market was greeted with the news that Chedid had been suspended until further notice, and had subsequently resigned from the board. Meanwhile, Asfari would continue with his duties, but would not be involved in any matters connected to the ongoing investigation, leaving the company without its COO and its CEO not exactly in a happy position.

Again, the market reacted badly to the news, resulting in a share price collapse that meant the shares were now trading at eight-year lows. At under 400p, Petrofac’s shares were now worth less than half what they were prior to the announcement of the SFO investigation in the middle of last month – a level not seen since 2009. So is this a buying opportunity for contrarians?

Perhaps. But I believe an investigation of this nature could drag on for some time, and the resulting uncertainty may put off many larger investors. I think taking a contrarian approach at this early stage would be nothing more than taking a gamble on the outcome. I would ignore the artificially-inflated 13% yield as future dividends could be in jeopardy if the bribery and corruption allegations result in legal claims against the company.

A safer alternative

For those looking a for a little less excitement, and lot more certainty from within the oil sector, I believe oil super-major BP (LSE: BP) could be just the ticket. Last month’s first quarter results revealed an impressive performance from the FTSE 100 oil and gas producer, as profits for the period surged to $1.45bn, compared with a loss of $583m for the same period in 2016.

Underlying replacement cost profit came in at $1.51bn, a massive improvement from the $532m it reported for the first quarter of last year. The all-important dividend was held at 10¢ per share, with the full-year payout expected to remain at 40¢.

For me, BP remains one of the FTSE 100’s top income buys, with a 6.4% yield on a par with its great rival Royal Dutch Shell, and easily beating all other oil and gas producers on London’s Main Market.

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK owns shares of Petrofac. The Motley Fool UK has recommended BP and Royal Dutch Shell B. 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.