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Why Petrofac Limited could be a better buy than Hurricane Energy plc now

As recently as March I reckoned Petrofac (LSE: PFC) was a “top yielder I’d buy and hold for the next 10 years“. The share price was standing at 916p.

But what a difference a few months can make, as we’ve since seen a 60% crash to 375p. It’s entirely due to the fearsome news that the firm had suspended its chief operating officer in response to a deepening investigation by the Serious Fraud Office into alleged corruption.

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It was all triggered by probing into the activities of Monaco-based oil firm Unaoil, amid suspected offences of bribery, corruption and money laundering. But does it all mean the end for Petrofac? I say no.

While we have no idea what the SFO will find, including any possible financial penalties Petrofac might face, a common response by the markets to bad news like this is one of overreaction — with shares oversold and a buying opportunity emerging. 

Too cheap now?

Petrofac is one I’ve liked for some time — being a picks and shovels service firm, it’s nowhere near as critically dependent on the oil price as many explorers and producers. And business is continuing as usual, with the company having just picked up a 10-year contract with Petroleum Development Oman for engineering and construction services.

The share price crunch has dropped Petrofac’s forward P/E to only a little over four, with the dividend yield in turn boosted to more than 13%. Of course, that will all be adjusted when we know more of the investigation, and I certainly wouldn’t rely on the dividend now.

But we’d have to see an enormous hit to the company’s finances for today’s valuation to not look cheap.

No profit here

In my other corner today is North Sea explorer and producer Hurricane Energy (LSE: HUR), which is in a very different, but still uncertain, position. 

Hurricane might well have made the biggest North Sea discovery so far this century, but it’s a long journey from first finding the stuff to getting it profitably to market. And in this case, there’s no profit on the short-term horizon yet, with first oil not expected before 2019, and the firm still in a serious cash-burn phase.

At least Hurricane isn’t saddled with the huge debts that are pressing on some of its sector competitors — in fact, it was sat on £82.2m in cash at the end of 2016 (up from £9.9m a year previously, thanks to £126.2m in funding during the year).

Where’s the real money?

But those sums seem puny compared to the estimated $467m cost of the company’s “six-year early production system” plan, so where will that amount of cash come from? Hurricane says it “may include a combination of equity, debt and/or a farm-out“, and that brings me to my main concern.

It’s “anticipated to occur in mid-2017“, and with low (and falling) oil prices, we’re surely not looking at the best conditions for securing funding on the most preferable terms.

How much more cash is really going to be needed before we see profits, and what degree of dilution will existing shareholders face until then? Those are the big questions and risks. But where there’s risk there’s serious potential.

A younger me would probably have jumped at both, and though I’ll keep away for now, I certainly can see the temptations.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of 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.

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