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Why I am avoiding this oilfield service major despite its dividend

If there is one-thing investors don’t like, it’s uncertainty. A known problem or cost is often easier to forgive than an ‘unknown-unknown’. To some extent this is the problem oilfield service provider Petrofac (LSE: PFC) has at the moment.

Since 2017, the company has been under investigation by the Serious Fraud Office (SFO) over bribery allegations regarding some of its Middle East contracts, and though only one conviction has been secured, worryingly, this investigation is still ongoing.

How much will it cost?

A big question then, is exactly how much will these investigations and any subsequent fines actually cost and what will be their longer-term impact on the firm and its share price? You may call me sceptical, but in my experience it is not necessarily these types of allegations in themselves, that concern investors the most, but rather the monetary costs associated with them. This is the problem Petrofac faces — with the SFO still investigating the company, the true and final costs are simply not known.

Combined with any public relations fallout that will weigh on the share price as investors avoid putting their money in, are these costs likely to be insurmountable? I think probably not.

I agree with the view of my fellow Fool Roland Head that the company will in all likelihood be able to weather this storm and cover potential fines without too much of an issue.

But the reason why I’m not yet ready to put my money into Petrofac is that even with those significant current pressures, its shares may not yet fully reflect the costs to come.

Both in terms of cash available and, perhaps more importantly, investor sentiment, any further allegations, fines or convictions are going to hit the stock again. The company has said that a number of people and now-ex employees are under investigation, and if the SFO decides to fine the firm itself, things will be even worse for its shares.

Public relations

As mentioned, there is also another potential ‘cost’ the company could suffer, and that comes about through the impact bad PR has on its potential clients and partners.

Allegations like these mean many companies thinking of dealing with the firm are likely to want to play it safe and wait to see how things will end up. This is already seeming to hit Petrofac’s bottom line with the company earlier this year, failing to win contracts in Iraq and Saudi Arabia where these allegations are focused.

All that said, I still feel that Petrofac can overcome its issues eventually. I think there is some upside potential for investors and with the current price being soft and the dividend yield being a high 7%, the share is worth keeping an eye on. But I am not ready to buy just yet. As I said earlier, as cheap as the shares may currently be, my overriding concern is that they may still have further to fall.

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Karl has no positions 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.