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Why the Tullow Oil and Petrofac share prices look set to hammer the FTSE 100

It’s been 14 months since I last wrote about oil and gas services provider Petrofac Ltd (LSE: PFC) in June 2017. Back then, the Serious Fraud Office’s (SFO) investigation into the firm’s business practices had caused the shares to plunge and they languished around 400p or so.

Investor sentiment was set against the stock but I argued that it looked like a classic contrarian opportunity. There was strong evidence that business operations would carry on and that bankers and customers would continue to support the company whatever the outcome of the SFO investigation.

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Good progress

Fast forward to today and the share price is around 67% higher at 670p, driven by a recovering oil price and a string of positive operational announcements from the firm. The share-price movement wasn’t straight up, so you needed steady nerves, but you could say that a contrarian bet placed in June 2017 has already paid off. However, I reckon there could be more to come from Petrofac, and its low-looking valuation and high dividend yield make it an undemanding ‘hold’ from here.

Today’s interim report revealed that underlying net profit came in 20% higher than the equivalent period last year. Chief executive Ayman Asfari said in the report that the firm’s pursuit of operational excellence” led to improved margins and good progress in the half. 

Part of the plan involves divesting non-core activities, and deals of around $0.8bn were signed off in the first half, which will bolster the balance sheet. Meanwhile, the contract wins keep coming, such as today’s separate announcement of a provisional letter of award for a $600m engineering, procurement and construction contract in Algeria. Mr Asfari reckons the firm is “well positioned” for the second half of the year with good revenue visibility, a strong competitive position and healthy liquidity.”

There’s mileage in Petrofac for investors, I reckon, but another decent play in the sector could be Africa-focused oil exploration and production company Tullow Oil (LSE: TLW). You only have to look at the five-year share-price chart for Tullow to see how badly the firm’s high-debt business model fared during the crash in the oil price around 2015. Just as the oil price crashed, so did Tullow’s share price and its profits. The company made a loss during 2014, 2015 and 2016, but last year moved back into the black and earnings look set to rebuild in the coming years.

In July, chief executive Paul McDade explained in the half-year report that the firm plans to increase production from its current assets in West Africa, progress two large onshore developments in East Africa and step up its search for new oil fields in Africa and South America via “a multi-year exploration campaign which will initially focus on Namibia and Guyana.” I think there’s a lot of potential in both Tullow Oil and Petrofac right now and if the price of oil holds up we could see both stocks powering ahead to hammer the performance of the FTSE 100 index over the next few years. 

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.