Would An Oil Price Bounce Revive Petrofac Limited & Weir Group PLC?

Oil services company Petrofac (LSE: PFC) has had a surprisingly positive year, given the oil sector slump and the fact that it ended 2014 by posting two profit warnings. Investors entered 2015 fretting over scrapped projects, work backlogs and rising debts and they would have been even more worried if they knew what the year had in store for the oil industry.

That Petrofac emotion

Yet Petrofac’s share price is actually up 7.5% over 12 months, while so many oil stocks are down 40% or 50%. This is even more surprising when you consider its Shetland shenanigans, where it incurred losses totalling nearly $263m on the Laggan-Tormore gas plant site, due to high labour costs, industrial action and harsh North Sea weather. The delayed project is now reaching completion.

Happily, Petrofac’s main focus is on warmer climes in the Middle East and Africa, where demand for its services has been rising as Opec producers ramp up production to maintain market share. Its group backlog stood at $21.6bn on 30 November, up from $18.9bn at the start of the year, giving it a secure flow of forward revenues. Its success in winning new contracts and extending existing projects is particularly impressive given the oil investment slowdown.

Petrofac also boasts a robust pipeline of bidding opportunities and with net debt broadly flat at around $1bn, there are few worries on this score. What it really needs, naturally, is a spike in the oil price. When sentiment briefly rose last week, it leapt more than 7% in a day as investors reckoned it would be ripe to benefit from any recovery. With forecast earnings per share (EPS) growth of 174% this year, Petrofac could be a relatively safe way to play the fightback, especially at its current valuation of just 6.3 times earnings. Its 6.1% yield also tempts.

Weary group

Weir Group (LSE: WEIR) has had a far tougher time, its share price down 50% in 12 months. The Glasgow-based engineer has been hit hard by the slowdown in shale. US drillers have been resilient but are showing increasing signs of strain as their pricing hedges run out. Weir grew strongly on driller demand for its pumps and crushers and has now been sunk by the slowdown as miners cut investments, buy fewer consumables and mothball higher-cost mines.

When oil trading was at $50 last November Weir was predicting further declines in upstream oil and gas activity, so you can imagine the damage $30 oil is inflicting. Its aftermarket has also been hit. Management has been slashing jobs and costs to cope while continuing to invest in products and technology, as it still believes in the long-term potential of its markets and business model. Shale activity could quickly revive if oil hits $50, but confidence has been hit hard.

Weir now trades at a temptingly low six times earnings. But be warned, revenues and profits are both forecast to decline slightly this year, while EPS may rise just 1%. Some may consider this a recovery play but Weir has a long and bumpy road ahead of it.

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