Does New Contract Make Petrofac Limited A Buy To Beat Cheap Oil?

It’s not just the oil producers and explorers who suffer when the price of the black stuff plummets. No, with oil below $50 a barrel many are cutting back their exploration and development plans, and that means less work for support companies like Petrofac (LSE: PFC).

But news today of a $4bn contract in Kuwait gave Petrofac’s shares a lift of more than 5% to 660p, before they dropped back a little to 654p as I write. The price is still down 50% over the past 12 months, but it has now recovered 10% from its recent 52-week low of 594p, and any upward movement will be welcomed.

Heavy oil project

Petrofac leads a consortium that will take on $4bn of work relating to the Kuwait Oil Company‘s Lower Fars heavy oil development programme in the north of the country, with the work involving both brownfield and greenfield developments and the construction of a 160 km pipeline. When finished, the project is expected to produce 60,000 barrels of oil per day.

The new contact is Petrofac’s eleventh in Kuwait, and with the Middle East being a lot less worried about cheap oil than many other production regions, how does it make the company look as an investment?

Strong orders

Petrofac is expected to deliver a 16% fall in earnings per share (EPS) for 2014 followed by a further 10% fall in 2015, and the firm’s most recent update supports that.

In November Petrofac told us it should deliver net profit “towards the lower end” of its earlier $580m–$600m guidance, with 2015 net profit predicted at around $500m. At the time, the company was sitting on a record order backlog of approximately $21bn. Net debt of around $1.1bn at the end of September doesn’t look like anything to worry about.

All of this puts Petrofac shares on an attractive-looking valuation right now, I reckon. Even with EPS set to fall, the current consensus gives us a P/E valuation of under 6 for the year just ended, rising only as far as 6.6 for 2015 — before the oil price crash, Petrofac shares were trading close to the FTSE 100 average of around 14.

Big dividends

There are great-looking dividends too, with yields of 6.6% on the cards for 2014 and 2015, and they should be very well covered at 2.6 times and 2.4 times respectively.

And if that’s how good Petrofac is looking during the hard times, it’s looking even better to me as a long-term investment.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Petrofac. The Motley Fool UK owns shares of Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.