Why I’ve Bought Petrofac Limited

Petrofac (LSE: PFC) is not normally what you would consider a contrarian/value play. The oil services company has grown from being a minnow to a giant of the resources industry.

Petrofac’s rapid expansion over the past decade has been accompanied by a share price that has rocketed outwards. This company has been the classic growth share, which has been a multi-bagger for those investors lucky enough to have bought in at the early stages of its rise.

Yet, round about 2011, the share price seemed to hit a plateau, peaking at about 1,600p. Yet the company has been maintaining its growth rate.

An ambitious but achievable goal

In 2010, Petrofac chief executive Ayman Asfari said the company should double its profits in five short years. Considering this is a maturing company that has already grown substantially, this is an ambitious target.

But the company is on track to achieve this goal, with a good progression in profits over recent years: 2010 — £433m, 2011 — £540m, 2012 — £632m. A further increase in net profit is forecast in 2013.

Yet value investors will take note that the share price has not kept pace with this progression. This is probably because the market is sceptical that Petrofac can maintain its growth rate. I suspect the company’s growth rate is slowing, but only gradually.

A temporary setback

The company’s share price has taken a knock recently because growth was slowed due to a delay to the Salah gas project in Algeria. Because of this, the share price has tumbled from 1,650p to 1,250p.

But I think this is only a temporary setback, and once growth resumes the share price will rebound. At the current price of 1,294p, Petrofac is on a forward P/E ratio of just 10. For a growing company, this is an absolute bargain.

I think the future prospects for this company are bright: the oil price remains high and the demand for oil is strong. Much of today’s oil is produced by national oil companies rather than the BPs and Shells of this world, and these companies often seek out the expertise of oil services companies such as Petrofac. As the world’s oil becomes harder to find and extract, the expertise of oil services is at more of a premium.

Just how much further could Petrofac grow? Well, the daddy of oil services companies is Schlumberger, which has a market capitalisation of $110bn — some 16 times the size of Petrofac. So there is plenty of scope for further growth.

Foolish final thought

There are a large number and range of oil and gas shares in the UK stock market. The range of stocks in this sector can at times seem bewildering.

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> Prabhat owns shares in Petrofac, BP and Shell. The Motley Fool has recommended shares in Petrofac.