Why I’d buy BP plc over Petrofac Limited

Bilaal Mohamed explains why BP plc (LON:BP) looks a much safer investment than Petrofac Limited (LON:PFC) after recent events.

| 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.

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.

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.

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.

More on Investing Articles

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

Down 70%+ since 2020, is IAG’s share price an unmissable bargain?

IAG’s share price is still down around 73% from its pre-Covid level, but with the business performing well last year,…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£17,000 of shares in the FTSE 100 dividend giant can make me £18,874 every year in passive income!

This FTSE 100 dividend superstar has an 8.8% yield with dividends projected to rise. It looks very undervalued to me…

Read more »

Investing Articles

2 top UK growth stocks I’m buying for my Stocks and Shares ISA in July

Looking for UK-listed growth firms to add to a Stocks and Shares ISA? Our writer highlights two he's planning to…

Read more »

artificial intelligence investing algorithms
Investing Articles

This overvalued growth stock makes Nvidia look cheap!

ARM Holdings is a growth stock that’s benefitted from the AI rally. Muhammad Cheema takes a look at whether this…

Read more »

Investing Articles

1 penny stock I’d buy today while it’s 63p

This penny stock's down 70% since last March, yet could be set for a big comeback as the firm rebuilds…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »