The Motley Fool

Bargain or bust: will the Petrofac share price bounce back?

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.

Stack of British pound coins falling on list of share prices
Image source: Getty Images

The Petrofac (LSE: PFC) share price has fallen by more than 30% over the last year. Shares in the energy services provider are now worth 90% less than they were 10 years ago.

Petrofac’s problems are well known — the company has been under investigation by the UK’s Serious Fraud Office since 2017 and is struggling to rebuild its order book. However, Petrofac has new management and the SFO investigation must end at some point. I’ve been looking at the shares as a potential special situation buy.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

A tough time for Petrofac

I’ll start with a word of warning. I see this as quite a high-risk situation. In my view, Petrofac’s share price could still have further to fall.

Once concern is that Petrofac’s revenue has fallen by nearly 50% since 2016. Although some of the company’s rivals have also seen their revenues fall over this period, Petrofac faces additional difficulties due to the SFO investigation.

This criminal probe has damaged the company’s reputation and appears to be limiting its ability to win new work. In March, Petrofac was barred from bidding on new contracts for UAE state oil company ADNOC — one of its oldest clients.

Petrofac also missed out on contract wins in Saudi Arabia and Iraq in 2019. I think this was probably linked to the SFO investigation too.

If Petrofac is eventually charged by the SFO, the company could end up facing a significant fine.

Right now, there’s no way to know what the final damage might be. In my view, that’s the main risk facing shareholders.

High risk, high reward?

Markets hate uncertainty. I think this is one reason for Petrofac’s weak share price performance. I think we could see a strong recovery if the SFO investigation concludes without the company being charged.

The business is now being run by a new chief executive, Sami Iskander, who has a history of senior roles with major western oil and gas companies. He’s committed to maintaining high standards of ethics and compliance, while extending the firm’s operations into the fast-growing renewable energy sector.

If Iskander’s strategy is successful, I think Petrofac’s performance could improve rapidly over the next two or three years. In my view, this is a classic high-risk, high-reward situation.

Petrofac share price: what I’d do

Broker forecasts suggest Petrofac will return to profit this year and deliver steady growth in 2022 and 2023. The latest consensus forecasts show earnings of 15.1 cents per share for 2021, doubling to 30 cents per share by 2023.

If the company can deliver on these forecasts, then I think there’s a good chance Petrofac’s share price could double over the next few years. But at this stage, I think there’s still a high degree of uncertainty about this.

Petrofac shares look reasonably priced to me, on around 13 times 2021 forecast earnings. But I’m not sure this provides me with enough margin of safety if things go wrong.

Petrofac’s rival Wood Group is priced on a similar valuation without the risk of the SFO investigation. I don’t like betting on uncertain situations when I buy stocks, so for me, Wood Group might be a better buy today than Petrofac.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Roland Head 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.