Why I’ve Bought Petrofac Limited

Petrofac Limited (LON:PFC) — the growth play that turned into a contrarian play.

| 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.

Petrofac (LSE: PFC) is not normally what you would consider a contrarian/value play. The oil services company has grown from being a minnow to a giant of the resources industry.

Petrofac’s rapid expansion over the past decade has been accompanied by a share price that has rocketed outwards. This company has been the classic growth share, which has been a multi-bagger for those investors lucky enough to have bought in at the early stages of its rise.

Yet, round about 2011, the share price seemed to hit a plateau, peaking at about 1,600p. Yet the company has been maintaining its growth rate.

An ambitious but achievable goal

In 2010, Petrofac chief executive Ayman Asfari said the company should double its profits in five short years. Considering this is a maturing company that has already grown substantially, this is an ambitious target.

But the company is on track to achieve this goal, with a good progression in profits over recent years: 2010 — £433m, 2011 — £540m, 2012 — £632m. A further increase in net profit is forecast in 2013.

Yet value investors will take note that the share price has not kept pace with this progression. This is probably because the market is sceptical that Petrofac can maintain its growth rate. I suspect the company’s growth rate is slowing, but only gradually.

A temporary setback

The company’s share price has taken a knock recently because growth was slowed due to a delay to the Salah gas project in Algeria. Because of this, the share price has tumbled from 1,650p to 1,250p.

But I think this is only a temporary setback, and once growth resumes the share price will rebound. At the current price of 1,294p, Petrofac is on a forward P/E ratio of just 10. For a growing company, this is an absolute bargain.

I think the future prospects for this company are bright: the oil price remains high and the demand for oil is strong. Much of today’s oil is produced by national oil companies rather than the BPs and Shells of this world, and these companies often seek out the expertise of oil services companies such as Petrofac. As the world’s oil becomes harder to find and extract, the expertise of oil services is at more of a premium.

Just how much further could Petrofac grow? Well, the daddy of oil services companies is Schlumberger, which has a market capitalisation of $110bn — some 16 times the size of Petrofac. So there is plenty of scope for further growth.

Foolish final thought

There are a large number and range of oil and gas shares in the UK stock market. The range of stocks in this sector can at times seem bewildering.

Would you like to invest in oil and gas shares, but are not sure how? Small company oil and gas shares in particular, although risky, can produce portfolio-busting returns. Would you like to learn more? Just read our free report “How To Unearth Great Oil And Gas Shares”.

> Prabhat owns shares in Petrofac, BP and Shell. The Motley Fool has recommended shares in Petrofac.

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.

More on Investing Articles

Investing Articles

Down 23%! Should I buy more CrowdStrike shares for my Stocks and Shares ISA?

Sometimes bad news can be good news for long-term investors. But is that the case for CrowdStrike in relation to…

Read more »

Investing Articles

2 UK shares near 52-week lows I’m considering snapping up

These UK shares are loitering near, or at, 52-week lows. Are these prime opportunities for our writer to boost her…

Read more »

Investing Articles

Unilever: a passive income stock with potential for decades of dividend growth

Stephen Wright thinks Unilever can keep reducing its share count for years to come. And this should help make it…

Read more »

Middle-aged black male working at home desk
Investing Articles

Worried about retirement? I’d buy high-yield dividend shares to build wealth

The number of pensioners enduring poverty in the UK looks set to rise. Investing in dividend shares could help Britons…

Read more »

Investing For Beginners

2 boring but beautiful FTSE 100 stocks to add to my ISA

Jon Smith runs over a couple of FTSE 100 stocks that he really likes the look of, even though they…

Read more »

Investing Articles

Here’s how I could supercharge my wealth by snapping up the best dividend stocks!

This Fool explains how dividend stocks play a crucial part of her aspirations to build wealth, and details one pick…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Revenue up 10% and accelerated growth potential for this overlooked FTSE 250 company

Today's first-quarter update from this good-value FTSE 250 company keeps me keen on the stock as recovery and growth continues.

Read more »

Investing Articles

Here’s why I’m so bullish about the BT share price now

The BT share price shot up after FY results, and a couple of months on it's still up there. Might…

Read more »