With shares in Petrofac (LSE: PFC) trading near an eight-year low amid a deepening investigation by the Serious Fraud Office (SFO) into alleged corruption, many investors want to know whether now is the time to ‘buy the dip’ or to avoid a falling knife.
Let’s take a look at the current situation to see if Petrofac should be in your portfolio.
Petrofac’s woes are centred on revelations around that SFO investigation into suspected bribery, corruption and money laundering at the company. The probe is part of the SFO’s far-reaching inquiry into Unaoil, a Monaco-based company which Petrofac had hired for consultancy work in Kazakhstan between 2002 and 2009.
If it is found to be guilty, it could face the prospect of a major fine. Right now, there’s great disagreement on the potential size of the fine and City analysts have a wide range of estimates. At the high end of forecasts, analysts from Barclays suggested it could reach as much as $800m. On the other hand, analysts from Jefferies reckons it could be as little as $200m.
Should you buy?
The risk of such a massive fine is scary, but that’s not all that investors need to worry about. Analysts say the corruption scandal could have a serious impact on Petrofac’s ability to secure new contracts, given the reputational damage and the risk of management changes due to the investigation.
Having said that, it has so far defied earlier expectations. Just last week, it announced that it had won a new five-year contract, worth $35m, to provide specialist technical training and competency development services for the Kuwait Oil Company. This comes on top of a landmark 10-year framework agreement with Petroleum Development Oman, which was secured earlier in the month, for the provision of engineering, procurement and construction management support services for major oil and gas projects.
This demonstrates Petrofac’s strong long-standing relationships with major oil and gas producers in the Middle East, and shows the company has the means to survive the current turmoil. With this in mind, I reckon that the stock could be worth a small position as a value play.
Another underperforming stock in the energy sector which might be worth taking a look at is Africa-focused oil producer Tullow Oil (LSE: TLW).
Shares in the mid-cap producer fell as much as 5% today after the company announced that Ian Springett, its long-time finance chief, had resigned from the board owing to ill health. Les Wood, who had been interim CFO from 5 January as Mr Springett had taken an extended leave of absence, has been appointed Executive Director and CFO with effect from today.
Tullow’s share price has been stuck in a steady downtrend since it announced a $790m rights issue earlier in the year. But since then, it has successfully completed this and found some exciting exploratory discoveries in Northern Kenya. Looking ahead, analysts reckon it is set to return to its traditional strengths as a frontier explorer as it shores up its balance sheet.
With shares in Tullow trading at just 11.5 times its expected earnings in 2018, I reckon the stock represents an attractive leveraged play on the oil market.
Jack Tang 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.