$225m contract shows why Lamprell plc could be a top energy buy

Roland Head looks at today’s news from Lamprell plc (LON:LAM) and explains why strong fundamentals suggest a strong outlook.

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Shares of oil rig builder Lamprell (LSE: LAM) rose by 6% this morning, after the group announced a $225m contract win in the offshore wind sector. Lamprell has lost 21% of its value over the last year, but the firm’s share price has risen steadily since its interim results were published in September.

In this article, I’ll explain why I’m holding onto my shares in Lamprell. I’ll also look at a potential income buy elsewhere in the oil and gas services sector.

Time for a turnaround?

Rig builder Lamprell has historically focused on the oil and gas market. The group’s yards in Dubai are currently busy completing orders for jackup rigs. These were placed before the oil market crashed.

The only problem is that customers haven’t placed very many orders over the last couple of years. This has left Lamprell in a position where cash flow from completed orders is strong, but future earnings visibility is very poor.

To give you a taste of how serious this situation could be, consensus forecasts currently show Lamprell’s revenue falling from $871m in 2015, to just $416m in 2017. However, I suspect 2017 forecasts will be upgraded after today’s news.

Lamprell has won a $225m contract with ScottishPower, to build the foundations for 60 offshore wind turbines. These will be installed as part of the East Anglia One Offshore Wind Farm project. This new contract is scheduled to start in March 2017, with completion expected by October 2018.

The firm’s interim results, covering the period to 30 June, showed that Lamprell had net cash of $151m and net current assets of 92p per share. The share price today is just 84p. This suggests to me that the market is placing a low value on Lamprell’s future business. I think this is too pessimistic, and I continue to hold.

This 6.6% yield looks tasty

Shares in oil and gas services group Petrofac (LSE: PFC) hit a high of 952p in October, but have since fallen by 15% to 790p. This decline has left the shares trading at the same level as at the start of the year.

One possible reason for this slide is the oil and gas companies that employ Petrofac will be more careful with their money than they were when oil traded at more than $100. This could mean that Petrofac struggles to return to historic levels of profitability.

In turn, this could slow the firm’s progress with debt reduction, and restrict dividend growth.

However, I believe that market conditions have improved considerably since the start of the year. I suspect that Petrofac will be able to maintain its dividend, and gradually reduce debt levels.

Consensus forecasts put Petrofac on a P/E of 10.7 for 2016. Earnings are expected to rise by 27% in 2017, implying a forecast P/E of just 8.4 for next year.

Meanwhile, the stock’s forecast dividend payout of $0.65 per share implies a yield of 6.5% at the current share price. This payout should be covered 1.44 times by earnings this year.

On balance, I think Petrofac is reasonably priced, and could be worth a closer look.

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.

Roland Head owns shares of Lamprell. 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.

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