Is Petrofac Limited’s Upbeat Trading Statement A False Dawn?

Petrofac Limited (LON: PFC) has issued an upbeat trading update but can the company be trusted?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of oil services company Petrofac (LSE: PFC) have jumped by nearly 10% in early trading today after the company issued what seems to be an upbeat trading update. 

The company said this morning that the end of costly problems at its flagship gas project in the North Sea was in sight. However, the company is still booking an additional £30m on its North Sea Laggan-Tormore project, which is owned by French oil major Total

So far, losses stemming from the Laggan-Tormore project have hit $425m and severely damaged Petrofac’s reputation. The market seems to be relieved that an end to Petrofac’s troubles is in sight or is it?

Blame game

Petrofac’s management has blamed harsh operating conditions and strike threats by workers for the delays at Laggan-Tormore. But workers have laid the blame squarely with Petrofac’s management.

And it seems as if Petrofac’s management should shoulder the responsibility. The Laggan-Tormore project has been an enormous red herring for the company.

Initial cost estimates grossly underestimated the vast numbers of skilled workers needed to construct such a large complex, high level of specification gas plant in such testing weather conditions.  

Petrofac only hired 850 workers for the Laggan-Tormore project but since, this number has more than doubled to 2,000. The company has been forced to hire barges, hotels, and cruise ships to accommodate additional workers. 

Losses stemming from the Laggan-Tormore project have hit Petrofac’s shares hard over the past 12 months. Even after this morning’s gains, the company’s shares have fallen 23% year to date — excluding dividends.

At one point earlier this year, Petrofac’s shares had slumped by 50% over a 12-month period. 

Poor performance

Unfortunately, it’s not just the Laggan-Tormore project that has held Petrofac back.

The company has been struggling with its Integrated Energy Services division, which produces oil and gas, for some time.

The IES division was part of Petrofac’s plan to diversify. Putting capital into the oil & gas projects Petrofac was working on provided the potential for bigger gains, and higher risks.

However, the IES division has turned out to be nothing but a thorn in Petrofac’s side. Along with the Laggan-Tormore troubles, the group has also booked losses on its Greater Stella Area oil project in the North Sea. 

According to plan

Nevertheless, while IES struggles, the rest of Petrofac’s business appears to be performing according to plan. 

The group has booked $4.7bn worth of new business so far this year. And at the end of May, Petrofac’s order backlog stood at a record $20.5bn.

What’s more, Petrofac is now in the process of winding down its IES division. The company is focused on generating value from the existing IES project portfolio and reducing the capital intensity of this business. This should help minimize the number of mistakes in the future. 

Trust issues

Troubles at Petrofac’s IES division have torn the company’s reputation with shareholders to shreds over the past 12 months.

During the 12 months to April this year, Petrofac issued no fewer than three profit warnings. Management’s primary task will now be to prove that the company can be trusted once again and meet analysts’ forecasts. 

At present Petrofac is trading at a forward P/E of 15.2 and supports a trailing dividend yield of 4.4%. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »