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Now is not the time to buy falling knife Petrofac Limited

Shares in troubled oil service company Petrofac (LSE: PFC) are crumbling this morning after the company announced that it had suspended its chief operating officer in response to the investigation by the Serious Fraud Office.

According to the company’s press release on the topic, COO Marwan Chedid has been suspended until further notice. He has also resigned from Petrofac’s board.

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Something amiss?

Mr Chedid’s suspension and resignation signals that management knows the company has acted in ways it shouldn’t have done, which explains why investors are rushing to dump their holdings in business this morning. The SFO has also accused the company of failing to co-operate properly with its investigation.

As part of the SFO investigation, Chedid, and Petrofac’s chief executive officer Ayman Asfari had been arrested under caution and later released without charge. Asfari will continue in his position at the firm “and will have no role or responsibilities for engaging with or liaising with agents and consultants” with regards to the probe.

Damage control

It’s clear that the remainder of Petrofac’s management is now in damage control mode. The company is planning to establish a committee on its board to deal with the SFO, and the overall response to the agency will be handled by a “senior external specialist.”

Still, despite these actions, it’s difficult to tell what the COO suspension and SFO investigation means for investors because the whole process is still in its early stages. That being said, after today’s revelation it is clear that the SFO may have substantial evidence to back up its claims against the company, so investors should prepare for the worst.

Bribing the world

The SFO investigation concerns Petrofac’s dealings with Unaoil. Labelled “the company that bribed the world” the Monaco-based oil firm is claimed to have bribed governments in oil-rich countries across the globe to help win contracts for customers such as Petrofac.

Petrofac isn’t the only company to have used Unaoil services. Rolls-Royce, Halliburton, and Wood Group have all dealt with it as well.

It may take many years for the results of any investigation to be published, the task made all the more difficult considering the size of the alleged corruption at Unaoil. This is likely to mean a cloud of uncertainty will hang over Petrofac for some time and while there has been no significant impact to the company’s underlying business as of yet, management turmoil combined with a blighted reputation will almost certainly have an impact on operations in the near future.

The bottom line

So overall, while the shares currently look cheap it may be best to avoid the company. Shares in the firm are trading at a forward earnings multiple of only 4.9 but considering we do not, as of yet, really know how severe the corruption scandal is and the size of any penalties that will be levied on business, it’s not possible to tell if this multiple reflects all of the bad news. With this being the case, the best course of action may be just to stay away from Petrofac until the dust has settled.

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Rupert Hargreaves owns shares of Rolls-Royce. The Motley Fool UK owns shares of and has recommended Petrofac. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.