Shares in oil and gas service provider Petrofac (LSE: PFC) have risen by 20% over the last week. Although Petrofac’s share price is still down by 40% over the last year, I think this could be a turning point for the company.
The surge over the last week appears to have been triggered by the company successfully refinancing its debts. I reckon this bodes well for Petrofac’s trading outlook, but this is a stock I want to buy cheap. Is now the right time?
Good news, but…
In my experience, stock market investors can often pick up clues about the health of a business from its debt activities. I think Petrofac’s latest update is a good example of this.
The company’s lenders have supported a renewal of its revolving credit facilities (overdrafts), despite the ongoing Serious Fraud Office investigation into the firm. Although Petrofac has not been charged, one former employee has pleaded guilty to bribery offences in the UAE.
As a result, the company was banned from bidding on new projects by UAE state oil company ADNOC in March. This triggered a sharp fall in Petrofac’s share price, as ADNOC has been an important client for many years.
Despite this bad news, Petrofac’s banks have still agreed to extend its borrowing facilities. This suggests to me that they don’t see any immediate risk of the company running into financial difficulties.
However, the conditions attached to the new facilities make me think that Petrofac is still on probation.
Are the banks worried?
Petrofac’s new overdraft facilities are worth a total of $700m, compared to $1,150m previously. Management says that this is in line with the group’s reduced requirements, but I think it could also be a sign of caution on the part of lenders.
Another concern for me is that the new facilities are only valid for one year. By this time next year, the firm will need to renew them again.
Finally, Petrofac’s banks have increased its borrowing costs. The company didn’t give any detail but admitted that it faces “an increase in margin”. In other words, it will pay a higher interest rate on money it borrows.
Taken together, these three pieces of information suggest to me that Petrofac’s banks want to keep their options open in case the situation takes a turn for the worse.
Petrofac share price: my verdict
I think demand for the kind of services Petrofac offers should improve over the next year, as the oil market recovers.
However, I’m concerned about the ongoing impact of the SFO investigation. Although the company hasn’t been charged, its reputation has been damaged and its ability to compete for new work has been restricted.
In a worst-case scenario, it could still face prosecution and a hefty fine.
For these reasons, I’d only want to buy Petrofac shares if the price was really cheap. Looking at broker forecasts, the stock trades on 12 times 2020 forecast earnings. This falls to eight times forecast earnings for 2021.
I’d normally see this as an attractive valuation, but in this case I’m not sure. The dividend has been suspended since 2019 and the publication of its 2020 results have been delayed — they’re due very soon.
I intend to wait for further news before deciding. For now, I’m not buying Petrofac.
