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Is the Petrofac share price a bargain or should I buy GKP for 2019?

Oil investors have seen some tough losses since October when the price of crude oil fell sharply. Brent Crude is now hovering around $60, down by about 30% from highs of more than $85 three months ago.

For investors with a medium-term view, I don’t see any reason to be alarmed. Recent updates from oil firms suggest to me that market conditions are continuing to improve, albeit slowly.

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I’m backing this stock

Companies which provide engineering services to oil and gas companies can be a useful indicator of market conditions. I believe that after several years of heavy cutbacks, big oil producers will soon have no choice but to increase spending if they want to avoid production declines. Recent news seems to support this view.

On 12 December, energy services firm Wood Group reported “positive trading momentum” and “revenue growth of over 10%” for 2018.

Last week, FTSE 250 rival Petrofac (LSE: PFC) reported $5bn of new orders in 2018, and said its backlog of work was unchanged from one year ago, at $10.2bn.

Petrofac’s management expects the firm’s 2018 results to be in line with market forecasts. They say that the firm’s shift back to its roots as a provider of engineering and operating services is continuing to go to plan. I expect this to drive profit margins higher over the next few years.

The boss has been buying

One risk for Petrofac shareholders is that a Serious Fraud Office investigation into the firm which began in 2017 is still ongoing. A big fine is still possible, but as a shareholder, I believe this risk is already factored into the share price.

Ayman Asfari, the firm’s founder and chief executive, seems to agree. Back in March, Mr Asfari spent £10m on Petrofac shares, taking his total holding in the firm to 18.8% (worth about £296m).

Mr Asfari paid 494p per share in March. As I write, the share price is 452p. This values the firm at just six times forecast earnings for 2018, with a forecast dividend yield of 6.5%.

In my view this is too cheap. I rate the shares as a buy, and may soon add more to my own holding.

A speculative buy?

Back in October 2017, I rated Kurdistan oil producer Gulf Keystone Petroleum (LSE: GKP) as a speculative buy at 95p. Today, the shares are trading 80% higher at around 170p.

I remain bullish about this business. Figures for the current year show that Gulf Keystone generated a record pre-tax profit of $26.7m during the first six months of 2018. Low cash operating costs of just $3 per barrel mean that the firm can produce oil profitably at almost any oil price.

Regular oil payments mean that these profits are matched by good cash generation.  By early September, Gulf Keystone had built a cash balance of $240m. This should be enough to fund next year’s planned upgrade to the Shaikan field, which will see production rise from 30,000 barrels of oil per day (bopd) to 55,000 bopd.

This business carries some political risk, as the Shaikan field is located in the Kurdistan region of Iraq. Despite this, I think the shares look good value at the moment. Based on broker forecasts, the shares currently trade at less than five times 2019 forecast earnings. Gulf Keystone remains a speculative buy, in my opinion.

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Roland Head owns shares of Petrofac. 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.