Do Premier Oil Plc And Petrofac Limited Hold 100% Upside?

Why Petrofac Limited (LON: PFC) and Premier Oil Plc (LON: PMO) could see their share prices doubling.

| 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.

The rout in the oil & gas sector rightly has value investors salivating at the prospect of unearthing shares with significant upside at bargain prices. Petrofac (LSE: PFC) and Premier Oil (LSE: PMO) are both trading at less than nine times forecast earnings, suggesting that both could be in for gains of 100% or more when crude prices rebound.

Keep on pumping

Oil & gas services provider Petrofac has the benefit of consistent revenues whatever the price of oil, as long as producers continue pumping. And Petrofac’s main customers are Middle Eastern national oil companies that don’t appear ready to give up market share, no matter how long crude prices remain low. In fact, its order backlog grew 14% year-on-year to record levels as customers raced to keep ageing wells pumping. This goes some way to explaining why analysts are forecasting a staggering 174% increase in earnings per share for 2016. Total’s North Sea Laggan-Tormore project finally coming on-line will also be a major weight off the shoulders of executives as their move to branch out into offshore projects resulted in a $400m loss. Management appears to have learned from this mistake and its focus is now onshore projects, where margins are higher and the company has the most experience.

Petrofac’s balance sheet is in an enviable position, with cash reserves of $800m and a very manageable $1bn of net debt. Dividend payments are currently yielding 5.2% and are well covered at two times earnings, suggesting they’ll be safely maintained, if not increased, over the medium term. With shares trading at a mere 7.8 times forecast earnings and a healthy dividend, I believe Petrofac is a significant bargain. Furthermore, unlike the rest of the oil & gas industry, the company has strong growth prospects, whether or not crude prices rebound quickly. At current prices, I believe Petrofac has the potential to double for investors over the medium term.

Coping with low prices

Premier Oil saw shares jump 97% last Monday after resuming trading following the reverse takeover of E.ON’s North Sea assets. Although the shares have now given up half of that increase, this remains an astute purchase and provides significant upside potential for long-term shareholders. This deal adds 15k barrels per day of production and will immediately improve cash flow. Management has reacted well to low crude prices by bringing operation costs per barrel down to roughly $16 and cutting 2016 capex spending by 32% year-on-year. While net debt remains a worrying $2.4bn, only $670m is due before 2019. With cash and credit lines of $1.2bn available, the company is well-positioned to ride out several years of low crude prices.

Once crude prices rebound, and they inevitably will, Premier is in a very good spot. Management has sold off higher-cost assets and bought up better ones at bargain prices, increasing total production by nearly 20% this year. Shares are currently trading at a very cheap nine times forecast earnings. While share prices may remain flat until oil rebounds, I believe Premier is well-positioned to increase significantly in value once crude prices trend upwards.

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.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended 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

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

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 »