The Motley Fool

Why did the Petrofac share price crash this week?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Businessman looking at a red arrow crashing through the floor
Image source: Getty Images.

The share price of Petrofac (LSE:PFC) continued to collapse this week, falling a further 27%. The stock has been on a downward trajectory since 2017, falling from £9.17, to £1.95 in 2020, and finally £0.96 today. Overall, that’s nearly a 90% loss over four years.

Yet ignoring the pandemic’s impact, the business appears to have done relatively well throughout that period. Petrofac became profitable, total debt dropped by 40%, and its liquidity grew stronger. So why is the Petrofac share price falling? And is this a buying opportunity for my portfolio? Let’s take a look.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

What’s going on with the Petrofac share price?

Petrofac is an international services company for the energy sector. It designs, builds, manages, and maintains infrastructure on behalf of its clients, providing far more flexibility for leading energy companies like BP.

The Petrofac share price began falling in 2013 due to rising debt and weakening revenue concerns. However, the real problems began in April 2017. The serious Fraud Office (SFO) announced an investigation into the firm, which led to the immediate suspension of Marwan Chedid – the chief operating officer at the time.

Since then, things only appear to have got worse. In 2019, David Lufkin, the former head of sales, pleaded guilty to 11 counts of bribery. He was found guilty of another three counts in January this year, which ultimately led to the stock sell-off on Monday this week.

Why? Because beyond the reputational damage, this latest conviction led the Abu Dhabi National Oil Company (ADNOC) to suspend Petrofac from competing for any new contracts indefinitely. In other words, Petrofac just lost access to one of its key growth markets.

The Petrofac share price collapses after briberyt charges are made

Is there a chance of recovery?

This is undoubtedly terrible news that will significantly impact the future of Petrofac and its share price. At least that’s what I think.

But it may not be a complete catastrophe. Due to the nature and complexity of Petrofac’s services, it has created some substantial switching costs for its clients. And so I don’t believe its existing projects will be significantly affected by this latest development in the scandal. Even ADNOC has agreed to allow Petrofac to continue its projects already under way before the recent suspension.

Also, as I mentioned before, the financials of the business have seen some improvement. Even with all the disruptions from Covid-19, Petrofac still managed to reduce its total debt by $200m thanks to its substantial cash reserves.

The bottom line

The investigation into Petrofac is still ongoing and may uncover more criminal activity in the future. However, these investigations typically last four years, indicating it may soon be over. At which point, the company will have to begin the long journey of repairing its reputation.

If successful, the Petrofac share price may recover to its pre-scandal levels over the long term, and thus potentially become a classic turnaround story. But for now, it serves as a good case study of how much damage can be inflicted when a business breaches regulations. It’s a risk all investors should consider, I feel.

Personally, I’m waiting to see how much impact the ADNOC contract suspension has on the business throughout 2021. So for now, I won’t be adding the stock to my portfolio.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Zaven Boyrazian does not own shares in 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.