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Why has the Petrofac share price jumped 50% in two days?

Silhouette of an oil rig
Image source: Getty Images.

Petrofac (LSE: PFC) shareholders have suffered while the company has been under investigation by the Serious Fraud Office (SFO). But in early morning trading Monday, the Petrofac share price jumped 20%. On top of an even bigger jump Friday, Petrofac shares have soared by 50% in less than two market days.

It’s all about an agreement to bring the investigation to a close. On Friday, Petrofac announced that it had reached a plea agreement with the SFO.

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The statement said that the company has “indicated guilty pleas to seven counts of failing to prevent former Petrofac group employees from offering or making payments to agents in relation to projects awarded between 2012 and 2015 in Iraq, Kingdom of Saudi Arabia and the UAE, contrary to Section 7 of the UK Bribery Act 2010.”

A sentencing hearing, originally scheduled for 27 September, should now take place on 1 October.

Sentencing worries

The potential penalty will weigh on the Petrofac share price in the meantime. In Friday’s announcement, Chairman René Medori said: “We have fundamentally overhauled our compliance regime, as well as the people, and the culture that supports it. Our comprehensive programme of corporate renewal has been acknowledged by the SFO.”

At the same time, chief executive Sami Iskander spoke of the firm’s new management team, and the company’s rebuilding progress. All of the employees involved in the SFO’s charges have long since left the company.

So, as Petrofac is moving away from these troubling events, should I consider buying? That’s down to two key things, the nature of the company and the Petrofac share price valuation.

Nature of the business

Petrofac provides oilfield services. And that’s the kind of business that can succeed whoever makes the big oil strikes and pumps the black stuff. I’ve always liked that kind of company, as they’re not at the sharp end of the competition. It’s like the old suppliers of picks and shovels during the gold rush. They made their money no matter who struck the motherload

Petrofac, and others in the same business, still face oil price risks. When prices fall, explorers and producers cut back their workload. And they’ll rein in spending on third-party services. So while I think Petrofac is safer than an oil explorer, I still rate it a risky investment.

Petrofac share price valuation

In 2020, a year hit by the Covid-19 pandemic and by an oil price crunch, Petrofac performed poorly. The year saw a big crunch in earnings, to almost nothing. And even that was after a couple of years of declines in earnings per share. I don’t think last year, then, is a useful one for valuation comparisons.

But how would Petrofac look should it make it back to 2019 figures? Even on that year’s relatively modest earnings, today’s Petrofac share price would give us a price-to-earnings multiple of only about three. And even adjusting for Petrofac’s year-end net debt of $116m wouldn’t move it very much.

So, I see a company in a business I like, on an attractive stock valuation. But there’s a lot of risk, oh yes. I’ll keep watching, especially the court sentencing thing. If that doesn’t go too badly, I might put Petrofac on my list.

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Alan Oscroft 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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