Would An Oil Price Bounce Revive Petrofac Limited & Weir Group PLC?

Petrofac Limited (LON: PFC) and Weir Group PLC (LON: WEIR) have had markedly different fortunes over the past year, and Harvey Jones would only invest in one of them right now.

| 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.

Oil services company Petrofac (LSE: PFC) has had a surprisingly positive year, given the oil sector slump and the fact that it ended 2014 by posting two profit warnings. Investors entered 2015 fretting over scrapped projects, work backlogs and rising debts and they would have been even more worried if they knew what the year had in store for the oil industry.

That Petrofac emotion

Yet Petrofac’s share price is actually up 7.5% over 12 months, while so many oil stocks are down 40% or 50%. This is even more surprising when you consider its Shetland shenanigans, where it incurred losses totalling nearly $263m on the Laggan-Tormore gas plant site, due to high labour costs, industrial action and harsh North Sea weather. The delayed project is now reaching completion.

Happily, Petrofac’s main focus is on warmer climes in the Middle East and Africa, where demand for its services has been rising as Opec producers ramp up production to maintain market share. Its group backlog stood at $21.6bn on 30 November, up from $18.9bn at the start of the year, giving it a secure flow of forward revenues. Its success in winning new contracts and extending existing projects is particularly impressive given the oil investment slowdown.

Petrofac also boasts a robust pipeline of bidding opportunities and with net debt broadly flat at around $1bn, there are few worries on this score. What it really needs, naturally, is a spike in the oil price. When sentiment briefly rose last week, it leapt more than 7% in a day as investors reckoned it would be ripe to benefit from any recovery. With forecast earnings per share (EPS) growth of 174% this year, Petrofac could be a relatively safe way to play the fightback, especially at its current valuation of just 6.3 times earnings. Its 6.1% yield also tempts.

Weary group

Weir Group (LSE: WEIR) has had a far tougher time, its share price down 50% in 12 months. The Glasgow-based engineer has been hit hard by the slowdown in shale. US drillers have been resilient but are showing increasing signs of strain as their pricing hedges run out. Weir grew strongly on driller demand for its pumps and crushers and has now been sunk by the slowdown as miners cut investments, buy fewer consumables and mothball higher-cost mines.

When oil trading was at $50 last November Weir was predicting further declines in upstream oil and gas activity, so you can imagine the damage $30 oil is inflicting. Its aftermarket has also been hit. Management has been slashing jobs and costs to cope while continuing to invest in products and technology, as it still believes in the long-term potential of its markets and business model. Shale activity could quickly revive if oil hits $50, but confidence has been hit hard.

Weir now trades at a temptingly low six times earnings. But be warned, revenues and profits are both forecast to decline slightly this year, while EPS may rise just 1%. Some may consider this a recovery play but Weir has a long and bumpy road ahead of it.

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.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. The Motley Fool UK has recommended Weir. 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

Here’s how I’d aim for a ton of passive income from £20k in an ISA

To get the best passive income from an ISA, I think we need to balance risk with the potential rewards.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

2 FTSE 100 stocks I’d buy as the blue-chip index hits record highs

This Fool takes a look at a pair of quality FTSE 100 stocks that appear well-positioned for future gains, despite…

Read more »

Satellite on planet background
Small-Cap Shares

Here’s why AIM stock Filtronic is up 44% today

The share price of AIM stock Filtronic has surged on the back of some big news in relation to its…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

At a record high, there can still be bargain FTSE 100 shares to buy!

The FTSE 100 closed at a new all-time high this week. Our writer explains why there might still be bargain…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

After profits plunge 28%, should investors consider buying Lloyds shares?

Lloyds has seen its shares wobble following the release of its latest results. But is this a chance for investors…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

Something’s changed in a good way for Reckitt in Q1, and the share price may be about to take off

With the Reckitt share price near 4,475p, is this a no-brainer stock? This long-time Fool takes a closer look at…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This new boost in assets might just get the abrdn share price moving again

The abrdn share price has lost half its value in the past five years. But with investor confidence returning, are…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

As revenues rise 8%, is the Croda International share price set to bounce back?

The latest update from Croda International indicates that sales are starting to recover from the end of 2023, so is…

Read more »