Petrofac Limited Falls As It Downgrades 2015 Guidance… Are BP plc And Royal Dutch Shell Plc Next?

A lower oil price hits forecasts for Petrofac Limited (LON: PFC). Are BP plc (LON: BP) and Royal Dutch Shell Plc (LON: RDSB) about to follow suit?

| 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.

After a handful of years of relative stability, 2014 has seen the price of oil fall by around a quarter. Indeed, as a result of stalling demand and increased supply, the oil price has tumbled throughout the course of the year. Perhaps more importantly, though, the oil price is showing little sign of reversing its recent trend in the near future, as Saudi Arabia maintains current supply levels so as to keep hold of its dominant market share.

The knock-on effect of a lower oil price is weaker results for oil producers and oil services companies. With oil services company Petrofac (LSE: PFC) today downgrading its outlook for 2014 and 2015, could oil producers such as Shell (LSE: RDSB) and BP (LSE: BP) be next?

Downbeat Expectations

In today’s release, Petrofac states that, while its expectations for 2014 are still within its previous guidance range (albeit at the lower end), it anticipates that results for 2015 will miss its previous targets. The key reasons for this are a lower oil price environment, an expected final commercial settlement in respect of the Laggan-Tormore project in Shetland resulting in no profit or loss being recognised in 2015 on the project, as well as changes in the company’s view of costs and the timing of first oil in respect of the Greater Stella Area project in the North Sea.

As a result, net profit for 2015 is expected to be around $500 million, which is a quarter lower than previous guidance. As such, shares in Petrofac have fallen by 23% on the day and are now down 25% during the course of 2014.

Looking Ahead

Of course, only part of the profit warning from Petrofac is due to a lower oil price, with the delivery of projects missing forecasts being the other major reason. As such, shares in the company have perhaps been hit harder than if the profit warning was due solely to external factors, as investors seem to be of the view that poor project delivery could signal additional challenges in future for the business. Therefore, sentiment in Petrofac could remain weak in the short run, as investors wait for proof that the company’s project delivery is back on-track.

Read Across For BP And Shell

Clearly, a lower oil price is bad news for oil producers such as BP and Shell. However, today’s update from Petrofac does not provide particular insight for either company, since the majority of Petrofac’s challenges are internal, rather than external, and a lower oil price is already arguably being factored in to medium term forecasts for the two oil producers.

Therefore, shares in BP and Shell are currently trading in-line with the market thus far today. And, with both stocks offering yields of 5.4% (BP) and 4.9% (Shell) and trading on price to earnings (P/E) ratios of just 10.4 and 10.6 respectively, they still seem to offer excellent income and value potential even if the oil price stays relatively low over the medium term. More importantly, though, their share prices offer a margin of safety so that, even if downgrades to profit guidance are forthcoming, they may not be hit as hard as you may expect.

As for Petrofac, investors will need to see evidence of improved project delivery before sentiment picks up. With shares in the company trading on a P/E ratio of around 9, however, they could still prove to be a strong long-term buy.

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.

Peter Stephens owns shares of BP, Petrofac, and Royal Dutch Shell. The Motley Fool UK owns shares of Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

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

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »