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This is why the Petrofac share price has slumped 10% today!

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It’s been a forgettable end to 2020 for the Petrofac (LSE: PFC) share price. The engineering giant’s stock was already steadily losing value during the course of December. A near-10% fall in Monday trading now takes its shares to their cheapest for six weeks.

Petrofac — which designs, makes, manages and services infrastructure for the oil and gas industry — hasn’t dropped on the back of any company-specific or industry-wide developments in start-of-week trade.

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It has, however, fallen due to a meaty drop in crude oil prices. The West Texas Intermediate (WTI) price has just shuttled to within a whisker of the $50 mark. This is down more than two bucks from Friday’s levels. And the benchmark is now at its lowest since 11 December.

Oil pipes in an oil field

Oil drop hits Petrofac’s share price

Oil’s drop reflects severe risk aversion on Monday. Investors are fretting over spiking Covid-19 cases, caused in part by the spread of a new aggressive variant of the virus. New travel bans on those coming from the UK have also spooked market makers over oil demand, which has been weak for much of the year anyway.

It’s possible that crude prices could remain volatile for the rest of 2020 and as we enter 2021 too. Analyst John Hardy of Saxo Bank commented: “These developments [are] another sign that the market may have to go through a prolonged period before the vaccine rollout eventually supports a recovery in fuel demand and the price of oil.”

Orders sink

It’s not just today’s slump in crude prices which has made Petrofac the biggest faller on the FTSE 250 today though. Investor appetite was already on the back foot following a shocking trading update last week. Today’s fall in WTI prices has only worsened weak investor enthusiasm for the UK share.

Back then, Petrofac announced weak oil prices and Covid-19 uncertainty had caused “a wide-ranging delay in the award of new projects across the industry as well as in a more challenging commercial backdrop.” Its order book has fallen to $5.1bn, versus $7.4bn at the turn of the year. And revenues of $4bn are expected this year, down from $5.5bn in 2019.

What the brokers say

Analyst Nicholas Hyett of Hargreaves Lansdown, for one, isn’t a fan of this UK share today. He comments that “we struggle to be enthusiastic” about the engineer.

Planned cost savings might be making the business more efficient, but even the most efficient business can’t make money without any projects to work on,” Hyett said. “Ultimately it’s order growth that will drive any recovery and while the group’s keen to point to offshore wind projects as a potential source of contracts, we think oil & gas projects are key in the short term,” he added.

Hargreaves Lansdown also said the outlook there “isn’t terribly promising.”

Petrofac’s share price looks mighty cheap on paper following recent weakness. At 138p, the business trades on a forward price-to-earnings (P/E) ratio of 8 times. But this is a reflection of its worrying risk profile from 2021 onwards. I don’t care if it’s cheap. I won’t be touching this share with a bargepole.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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.

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