Should I Buy Petrofac Limited?

I’m window shopping for shares again, and there are plenty of goodies for sale. Should I pop Petrofac (LSE: PCF) into my trolley?

That Petrol Emotion

Boy, was I tempted to buy shares in oil services company Petrofac last time I looked at it, almost one year ago. Its share price had fallen a hefty 20% in three months, despite a 17% rise in profits, and 17% hike in the dividend. Oil stocks were struggling generally at the time, with Brent crude falling below $100 a barrel on weakness in China and Europe, and overheated talk about of the US shale revolution. Political turbulence in the Middle East and Africa, where Petrofac does much of its business, only made things worse.

But I didn’t part with my money, suspecting there was further volatility to come, and I’m glad I wavered. Petrofac is down 12% over 12 months, underperforming the FTSE 100, which rose 2%. In November, its shares were hammered by a profit warning, after chief executive Ayman Asfari warned of slowing income and suggested this could hit its 2015 earnings target of more than £539 million.

oil rigTroubled Waters

Now that was the time to buy Petrofac, the stock has since rebounded 20% in three months. It still trades at a tempting 11.8 times earnings, however, which makes it cheaper than two other FTSE 100 companies that trade in the oil equipment, services and distribution sector, Amec (12.2x) and John Wood Group (16x). Should I buy it today?

Its recent full-year figures explain its sluggish performance. Net profits rose to 3% to £650 million, while earnings per share also grew 3%, to 189 cents. But earnings growth was only “modest”, overshadowing a good group operational performance. Asfari reckons Petrofac has kicked off its 2014 in an “encouraging position”, with a record $15 billion order backlog, up 27% on last year. It already secured $3 billion of new awards this year, giving visible earnings going forward. But profit growth will be modest again this year, before strengthening in 2015.

Over A Barrel

This might be a good time to invest in oil services, with Opec just upgrading its forecast for world oil demand, predicting consumption will rise by 1.14 million barrels per day (bpd) in 2014, 50,000 more than previously estimated. The world requires 91.1 million bpd of oil this year. 

Against that, we have to measure the fact that Petrofac’s one mighty double-digit EPS growth has been steadily falling over the past six or seven years, and is forecast to rise just 5% this year, although that should rebound to 18% in 2015. Petrofac also faces tough competition from Chinese rivals. 

Buy now, and this share could start to gush next year. Just like last time, I’m tempted to buy, but not quite tempted enough.

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Harvey doesn't own any company mentioned in this article. The Motley Fool owns shares in Petrofac.