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Is Petrofac Limited A Better Bet Than Tullow Oil plc?

Shares in oil and gas services provider Petrofac (LSE: PFC) have been erratic of late, and took a tumble after likely further losses in its Laggan-Tormore gas development in the Shetlands was announced this week. We’re looking at a 139p (14%) drop to 875p since the news, and that comes after a slump starting last November when problems first emerged, but after which the price had started to recover.

The shares are on a P/E of 10 based on the 22% EPS fall expected prior to the latest shock, and new forecasts will degrade that a little — and we’re not sure whether it will have any effect on the mooted 4% dividend.

Watch that debt

Tullow Oil (LSE: TLW), on the other hand, has been showing a bit of a recovery after a slide. Though the shares are down 54% over 12 months, at 401p they’re up 41% since the start of April, after March brought news of an additional $450m made available to the company under its existing credit facilities. But with Tullow having recorded a loss last year and only just expected to be back in profit in 2015, it’s on a P/E of over 40 — and the near-doubling of EPS forecast for 2016 would only drop that to 23.

Although nominally in the same business, these are two very different companies, with each offering great potential but with its own unique risks. Which is the better bet? It depends on what kind of investor you are, but if oil and gas exploration itself is what floats your boat and you can handle the risk, then I reckon Tullow should be a better bet than some of the other smaller oilies that aren’t making any money yet. Its high and rising debt level is enough to keep me well away, though, and in the medium term that needs to come down.

Forecasts slipping

Brokers have been consistently downgrading their forecasts for Tullow, and 2016’s mooted EPS figure has been pared back even further just in the past week, and what Tullow really needs is a recovery in oil prices. But the same City boys have a fairly strong Buy consensus out on Tullow, so they seem to think the company is strong enough to ride out these $60-a-barrel days.

Petrofac, on the other hand, is a quality company that’s suffering from one bad project at the moment. There’s likely to be a further £130m pre-tax loss on the Shetland project in 2015 on top of 2014’s £154m loss, but the share sell-off has surely been overdone — perhaps the punters are expecting a familiar third profit warning?

Services in demand

Debt is the thing to watch out for, and it rose significantly in 2014, but as a picks and shovels services company in an industry with a long-term future, I can only see things getting better for Petrofac from 2016 onwards — and at today’s price levels, it looks a Buy to me.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. 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.