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Is FTSE 250 oil stock Petrofac a long-term investment or a share to avoid?

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FTSE 250 oil stock Petrofac (LSE:PFC) is back in the headlines for less than positive reasons. The oil services company has been under investigation by the Serious Fraud Office (SFO) since May 2017. And this week the Abu Dhabi National Oil Company (ADNOC Group) suspended it from competing for new awards until further notice. That caused the Petrofac share price to plummet.

Petrofac share price volatility

The Petrofac share price has fallen 90% in the past five years. Its biggest plunge came in 2017, after the investigation kicked off. But it’s endured its fair share of volatility over the past year too. The shares are now 56% below their 52-week high. While Petrofac may have made money for a few savvy day traders, it’s been a dire investment for those with a long-term outlook.

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Petrofac’s price-to-earnings ratio is around 6, earnings per share are 15p and it cancelled its final dividend last year.

Risks to capital

Being investigated for fraud is never a good look, and this has seriously damaged the FTSE 250 company’s reputation. Former senior Petrofac executive David Lufkin pleaded guilty to 14 bribery offences, and the investigation is still ongoing. It may conclude in the next year, or the SFO could make further unpleasant discoveries.

While I imagine the company is now being run in a more transparent manner, until the investigation ends, this oil stock is a risky investment. There are plenty of safer alternatives for me to invest in.

Unfortunately, prior to the fraud investigation, Petrofac was already losing money on its engineering and construction projects because its margins were thin. For instance, in Sullom Voe, Shetland, it lost £284m on the construction of a gas plant because terrible weather and poor planning meant the project overran.

Covid-19 also threw a spanner in the works. It led to disruption across the board, problems with its supply chain, and a pause on construction activity.

Overall, Petrofac’s order book fell 31% between January and November. It managed to save around $125m in costs through the year, but its net debt has risen. This soared from $29m to $272m in just five months. It has a decent cash reserve, but if the fraud investigation results in fines, that could soon be depleted.

Speculative rewards

The company also brings in a smaller revenue stream from design, support, maintenance, and training. Unfortunately, its training centres were affected by the pandemic. Nevertheless, it has been restructuring, cutting staff, and paying down debt. Now, with the oil price looking steadier, there’s scope for the company to forge a comeback. Some good news came this week when Petrofac secured a one-year contract extension worth around $80m with a key client in Iraq. This is a facility where it’s now operated for over eight years.

While the ADNOC ban is very frustrating for the company, it will allow it to continue execution on two Engineering, Procurement, and Construction projects in the UAE that are already under construction.

So, for those bullish investors who believe Petrofac has what it takes to overcome all the adversity and ride off far into the sunset, then of course fortunes could be made. But that’s a big if. And when I’m investing on hope rather than fundamental knowledge, it amounts to nothing more than speculative gambling. I won’t be buying.

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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