In other cases, however, there may still be scope for capital growth. Two examples are Petrofac (LSE: PFC) and Photo-Me (LSE: PHTM), which both seem to offer low valuations and the potential for improving financial performance over the long run.

Growth potential

Instant-service equipment company Photo-Me’s share price increased by as much as 13% on Wednesday following the release of a trading update. The company is performing in line with expectations, and has been able to make progress in turning around its poor performance in Japan. It’s restructured its Japanese subsidiary, with a management reorganisation completed, administrative functions streamlined, and low-revenue machines relocated. This is set to lead to a return to growth for the division next year.

The performance of the remainder of the business has been positive. It’s invested in upgraded technology in its photobooths, while continuing to expand its laundry business. The kiosk market has also been stable, and there seems to be expansion potential through an increasing focus on innovation.

Looking ahead, Photo-Me is forecast to post a rise in earnings of 11% next year. It trades on a price-to-earnings growth (PEG) ratio of 1.2, which suggests it may offer a wide margin of safety. Following improvements to its customer offering, its long-term future could improve and lead to a stronger business in future years.

Improving outlook

The Petrofac share price has risen by a third in the last year, with an improving outlook for the energy sector a key catalyst. The oil price has risen significantly, and this is likely to increase activity across the energy sector. With oil producers being much more profitable now that oil is at a higher price level, investment and demand for support services companies could increase. This could create more favourable operating conditions for Petrofac.

Clearly, it will take time for the company to deliver an improving financial performance. In the current year and next year, its bottom line is forecast to fall by over 20% in total. The stock market, though, seems to be pricing in the disappointing financial outlook for the business over the next couple of years. The company’s shares trade on a forward price-to-earnings (P/E) ratio of around 10, which indicates that there’s a margin of safety on offer.

Furthermore, Petrofac has a dividend yield of 4.8%, covered 2.4 times by profit. Should the resurgence of the wider energy sector continue, it wouldn’t be a major surprise for the company’s dividends to increase, which could provide a boost to its total return over the long run and increase its investment appeal.

The post Think the Petrofac and Photo-Me share prices are expensive after 10%+ gains? Read this now appeared first on The Motley Fool UK.

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• How I invested my first £1,000 in FTSE shares… and the mistakes I made
• How to invest £290 a month in UK shares for an income that aims to beat the State Pension
• Aviva’s share price has left rivals in the dust. Here’s why it’s still good value
• 2 excellent investment trusts to consider for an ISA or SIPP
• How much is needed in an ISA to target a £3,150 monthly passive income?

Peter Stephens 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.

We’re looking at a 35% climb so far in 2018, though the price chart again shows what seems to be ubiquitous behaviour for growth shares — a massive spike on good news, followed by a gradual fall as reality sets in. If you follow a general rule that says “after you see a share spike rapidly, don’t buy,” you might miss the occasional bargain, but I reckon you’d save a lot of money (and heartache) overall.

Precious stuff

Anyway, lithium is a very desirable commodity, being the stuff that in-demand batteries depend on, and Savannah has just announced a big jump in estimates for how much of it there is at its Mina do Barroso project. It’s apparently Western Europe’s largest known spodumene lithium deposit (with spodumene being lithium aluminium inosilicate).

With estimates up by 44%, the company reckons on having around 20.1 million tonnes of it at 1.04% lithium. That’s the equivalent of 209,000 tonnes of Lithium Oxide (Li₂O).

Cash?

A downside of an investment in Savannah Resources, in common with many resource exploration companies, is lack of profitability — forecasts for 2018 and 2019 suggest two more years of losses. But the firm enjoyed a successful £11.5m placing in July, which was followed by major shareholder Al Marjan Ltd shelling out £1m for some additional shares.

It’s a high-risk investment, but one that I think has a decent chance. But beware of previous false starts — the price is still below an earlier spike in 2014.

Recovery

I’ve long seen Petrofac (LSE: PFC) as a tempting recovery prospect, thinking that a sustained oil price recovery could see the firm’s fortunes turn back up. The services the company provides to the oil industry have been under severe pressure as the sector had slashed non-essential spending, with outsourcing taking a lot of that hit.

The big question for many was when things would start to turn upwards, but I’ve never been one for trying to time the market. A stable oil price, I think, was the needed trigger, and it’s starting to look like that’s what we’re getting.

From a 2018 low in early February, the Petrofac share price has gained 45%. And even after that, the shares are trading on a lowly P/E multiple of less than nine based on current forecasts. On top of that, dividends for this year and next are expected to yield around 5%, even after the payout was cut by almost half in 2017.

Organic growth

First-half results in August showed the firm pursuing “organic growth as the market recovers.” That was on the same day we heard of a new $600m contract in Algeria, taking new orders for the year to August up to $3.3bn.

Petrofac still has the weight of an SFO investigation bearing on its shoulders, but I really see the pessimism as being already factored-in to the share price. It’s probably being held back by small EPS falls forecast for this year and next too, but that’s after a very big earnings recovery.

Petrofac looks like a solid recovery buy to me right now, and it might get some of my next pension investment cash.

The post Could this high-flying growth stock smash the Petrofac share price in 2018? appeared first on The Motley Fool UK.

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• How I invested my first £1,000 in FTSE shares… and the mistakes I made
• How to invest £290 a month in UK shares for an income that aims to beat the State Pension
• Aviva’s share price has left rivals in the dust. Here’s why it’s still good value
• 2 excellent investment trusts to consider for an ISA or SIPP
• How much is needed in an ISA to target a £3,150 monthly passive income?

Alan Oscroft 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.

One company, though, which has struggled in recent years versus the FTSE 100 is Petrofac (LSE: PFC). The support services company’s shares have increased in value recently, but still lag the wider index in the last five years. Here’s why that could be about to change.

Low valuation

While Petrofac has recorded a rise in its share price in recent months, it is still down by over 50% in the last five years. Some of this disappointing performance is down to difficulties in the energy sector during that time, while the SFO investigation has also caused investor sentiment to remain downbeat. However, the company has enjoyed improved performance regarding contract wins, and this could help to stabilise its bottom line over the long run.

Still, the company continues to face a disappointing near-term outlook. In the current year its bottom line is expected to fall by 18%, followed by a further decline of 6% next year. However, investors seem to have factored-in its uncertain outlook, with its shares trading on a forward price-to-earnings (P/E) ratio of around 10 at the present time. As such, and while it has endured a difficult period, the risk/reward ratio for the stock could be appealing from a long-term investment perspective. This could help it to beat the FTSE 100 in the coming years.

Margin of safety

Also offering a wide margin of safety in the resources industry is Kenmare Resources (LSE: KMR). The producer of titanium minerals and zircon released positive half-year results for the six months to 30 June on Monday.

They showed that the company was able to ship 589,200 tonnes of finished products during the period. This was up 10% on the figure from the same period of last year. This helped to push revenue higher by 37% to $140.1m, with higher prices also acting as a catalyst. EBITDA (earnings before interest, tax, depreciation and amortisation) increased by 59% to $47.5m, with net debt falling to $9.3m from $34.1m at the end of 2017.

Looking ahead, Kenmare is forecast to post a rise in earnings of 26% in the next financial year. Despite its positive recent performance and its upbeat growth outlook, it has a price-to-earnings growth (PEG) ratio of just 0.2, which suggests that it could offer a wide margin of safety. Certainly, its share price may be volatile. But with a low valuation and what seems to be a sound strategy, its long-term share price growth potential seems to be high. As such, now could be a good time to buy it.

The post Here’s why the Petrofac share price could be set to storm back against the FTSE 100 appeared first on The Motley Fool UK.

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• How I invested my first £1,000 in FTSE shares… and the mistakes I made
• How to invest £290 a month in UK shares for an income that aims to beat the State Pension
• Aviva’s share price has left rivals in the dust. Here’s why it’s still good value
• 2 excellent investment trusts to consider for an ISA or SIPP
• How much is needed in an ISA to target a £3,150 monthly passive income?

Peter Stephens 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.

My thinking was that the eventual recovery from this setback would coincide with a wider recovery in the oil market. Company profits and market sentiment would gradually improve together, leading to a re-rating of the share price.

How’s it going so far?

Progress so far has been good. When I last wrote about it at the start of March, the firm’s shares were changing hands for about 430p. They’ve risen by about 30% since then, as the price of crude oil has surged towards $80.

The company has also announced more than $1.1bn of new contracts in India and the Middle East over the last two months, suggesting that its sales pipeline may be improving.

We’re not out of the woods yet

Some challenges remain. We don’t yet know the outcome of the SFO investigation. There’s a risk that the company could face a substantial fine if found guilty.

A second problem is that profits are expected to fall again in 2019. The legendary growth investor Jim Slater always recommended not buying a turnaround stock until forecasts showed a return to profits growth.

Good value

Petrofac’s growth credentials may still be uncertain. But for value investors, I think the firm has a lot to offer. Free cash flow totalled about £215m last year, giving the stock an attractive free cash flow yield of 10% and supporting the dividend.

Profit margins also seem to have stabilised. Last year saw an underlying operating margin of 8%. Forecasts for 2018 suggest to me that a similar result is likely this year.

My target share price of 800p would put the stock on a P/E of about 12.6, based on 2018 forecast earnings. That’s probably a bit punchy at the moment, but it should be achievable once the business returns to growth.

Today, the shares trade on a forecast P/E of 9.5 with a prospective yield of 4.8%. I believe they offer good value at this level.

Another special situation?

Indian mining group Vedanta Resources (LSE: VED) has provided a rich stream of dividends for investors brave enough to take the plunge.

I say brave because this group carries certain extra risks when compared to the other big FTSE mining plays. Its Indian copper business has run into problems recently. And unlike most rivals, it hasn’t yet taken advantage of the mining recovery to reduce debt levels.

Vedanta ended last year with net debt of $9.6bn, up from $8.5bn one year earlier. This borrowing equates to 2.3 times earnings before interest, tax, depreciation and amortisation (EBITDA) and to a whopping 6.4 times last year’s after-tax profit of $1.5bn.

Both of these figures are too high, in my view. But in this case I might make an exception.

Two hidden advantages

There are two reasons for this. The first is that Vedanta’s assets are highly cash generative. The group generated free cash flow of about $560m last year, covering its $164m dividend payment more than three times over.

The second reason relates to the group’s ownership. Chairman Anil Agarwal controls Vedanta through a 67% stake that’s held by his investment vehicle, Volcan Investments. Only 25% of the group’s shares are traded publicly.

This carries risks for minority shareholders, as Volcan can effectively control the group’s future. But Mr Agarwal has kept Vedanta listed on the London market for 15 years. I think it’s unlikely that he’ll turn rogue now. And if the commodity market remains stable, I think he should be able to refinance and repay the group’s borrowings without much difficulty.

In my view, Vedanta stock is priced cheaply enough to reflect the risks I’ve discussed. The shares trade on a forecast P/E of 7.9 for 2018/19, falling to a P/E of just 4.9 for 2019/20. The forward yield of 7% should be covered by earnings and free cash flow. For bold investors, I believe this could be a profitable buy.

The post Will the Petrofac share price reach 800p in 2018? appeared first on The Motley Fool UK.

More reading

• How I invested my first £1,000 in FTSE shares… and the mistakes I made
• How to invest £290 a month in UK shares for an income that aims to beat the State Pension
• Aviva’s share price has left rivals in the dust. Here’s why it’s still good value
• 2 excellent investment trusts to consider for an ISA or SIPP
• How much is needed in an ISA to target a £3,150 monthly passive income?

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.

Yet while this business model is sound, the Serious Fraud Office (SFO) corruption investigation currently under way, combined with persistently low oil prices, are reason enough for me to avoid buying shares of the firm today, despite what is looking like a very attractive valuation.

The problems with the SFO investigation are twofold. First off, there is the very real possibility of a large regulatory fine. Some analysts are mulling over the possibility of fines reaching as high as $800m. A fine of this size, or even a considerably smaller one, could be disastrous for income investors because this is nearly four times last year’s total dividend payouts of $224m. Furthermore, although net debt at year-end was $617m, or just 0.8 times EBITDA, a fine this large would not be good for the balance sheet.

So while the company could survive a large fine with more debt and suspended dividend payouts, its share price would likely head further south. And the larger worry with the SFO investigation is that founder and CEO Ayman Asfari may be embroiled in it. We’ve already seen the longstanding COO suspended by Petrofac and removed by the board, showing that they are taking seriously the possibility of C-suite heads rolling as a result of the inquiry.

Losing Asfari or other long-serving management team members would be a significant hit to the investment thesis of Petrofac, especially since management’s ties to Middle Eastern oil companies have long been a key reason to invest in the firm. This isn’t to say the share price won’t rebound nicely, but with a serious cloud such as this hanging over the company, I wouldn’t countenance purchasing shares.

Safe and stable? 

Another problem for Petrofac, and an even bigger one for Royal Dutch Shell (LSE: RDSB) is, of course, the fact that oil prices continue to hover under $50/bbl, despite attempts by oil majors and OPEC alike to engineer a price rise through supply cuts.

The good news is that through slashing operating costs and taking an axe to exploratory capex, Shell has been able to largely balance the books. In Q1 the company recorded $3.8bn in constant cost of supplies earnings as the average price per barrel of oil rose by nearly $4 quarter-on-quarter and capex was cut from $6.9bn to $4.7bn.

Earnings of this level should mean the company’s dividend is safe for the time being as they covered the $2.7bn in cash and $1.2bn in scrip paid out during the quarter. But I remain leery of buying the company’s shares at this point. There is little sign of oil prices recovering due to either substantial supply cuts or a rapid increase in global demand for petroleum products, not to mention the poor long-term outlook for fossil fuel demand.

This leaves Shell a very nice income stock, but one that is trading at a pricey 15.7 times forward earnings and is still highly indebted with gearing at 27.2%. I reckon there are much better income stocks out there for long-term investors.

The post Why I’d dump both Petrofac Limited and Royal Dutch Shell plc appeared first on The Motley Fool UK.

More reading

• How I invested my first £1,000 in FTSE shares… and the mistakes I made
• How to invest £290 a month in UK shares for an income that aims to beat the State Pension
• Aviva’s share price has left rivals in the dust. Here’s why it’s still good value
• 2 excellent investment trusts to consider for an ISA or SIPP
• How much is needed in an ISA to target a £3,150 monthly passive income?

Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of Petrofac. The Motley Fool UK has recommended Royal Dutch Shell B. 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.

At today’s 400p or so the shares remain more than 50% lower than they were in mid-May, just before news of the SFO’s investigation broke.

Operational business carries on

However, I reckon the firm looks like a decent candidate for a contrarian investment right now. Fear and negative sentiment surround the company and the share sell-off has been spectacular and fast, driving the valuation to a low level that looks attractive. Meanwhile, Petrofac’s operational business carries on.

On 30 May we learnt that Petrofac and its lenders have agreed to extend $1bn of the firm’s $1.2bn revolving credit facility for another year from 2 June 2020, which suggests that the bankers aren’t too worried.

Then on 8 June the company announced the securing of a long-term framework agreement with Petroleum Development Oman for the provision of engineering, procurement and construction management support services for major oil and gas projects. And on 13 June Petrofac revealed it has agreed a five-year relationship with Kuwait Oil Company for the provision of specialist technical training and competency development services.

It seems that both lenders and customers expect Petrofac to trade beyond the outcome of the SFO’s investigation and remain happy to continue business with the firm for years to come.

Sentiment pummels the valuation

Meanwhile, the depressed level of the share price throws up a forward price-to-earnings rating just below six and the forward dividend yield runs at almost 11, which at first glance seems to build in a lot of fat to insulate investors from any penalties enforced after the SFO’s investigation.

Yet it’s worrying, isn’t it? On 12 May, the SFO said it is investigating the activities of Petrofac, its subsidiaries, and the firm’s officers, employees and agents relating to an ongoing investigation into the activities of a company that Petrofac dealt with called Unaoil.  Petrofac is putting a lot of time and resources into dealing with the SFO, so there will be costs, but we don’t know whether wrongdoing will be uncovered.

If the SFO does uncover evidence of bribery and fraud, individual directors and employees could face conviction and financial penalties could be directed at both them and the company. But Petrofac Ltd is a legal entity in its own right and will likely continue trading even if new directors come on board to run the business. Just like the firm’s bankers and customers appear to believe, I don’t think this investigation will result in the demise of Petrofac.

Reputational damage looks limited

I’d argue that any Illegal activities are historical, so reputational damage is unlikely to affect the firm’s forward trading, especially if any guilty individuals are removed from the payroll.

That’s why I reckon Petrofac looks like a classic contrarian opportunity where we can bet against the prevailing fear and sentiment surrounding the stock in the hope and belief that a valuation re-rating could drive investor returns from here as the imbroglio recedes.

The post Why Petrofac Limited looks like a classic contrarian opportunity appeared first on The Motley Fool UK.

More reading

• How I invested my first £1,000 in FTSE shares… and the mistakes I made
• How to invest £290 a month in UK shares for an income that aims to beat the State Pension
• Aviva’s share price has left rivals in the dust. Here’s why it’s still good value
• 2 excellent investment trusts to consider for an ISA or SIPP
• How much is needed in an ISA to target a £3,150 monthly passive income?

Kevin Godbold owns shares in Petrofac Limited. The Motley Fool UK owns shares of Petrofac. 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.

But what a difference a few months can make, as we’ve since seen a 60% crash to 375p. It’s entirely due to the fearsome news that the firm had suspended its chief operating officer in response to a deepening investigation by the Serious Fraud Office into alleged corruption.

It was all triggered by probing into the activities of Monaco-based oil firm Unaoil, amid suspected offences of bribery, corruption and money laundering. But does it all mean the end for Petrofac? I say no.

While we have no idea what the SFO will find, including any possible financial penalties Petrofac might face, a common response by the markets to bad news like this is one of overreaction — with shares oversold and a buying opportunity emerging. 

Too cheap now?

Petrofac is one I’ve liked for some time — being a picks and shovels service firm, it’s nowhere near as critically dependent on the oil price as many explorers and producers. And business is continuing as usual, with the company having just picked up a 10-year contract with Petroleum Development Oman for engineering and construction services.

The share price crunch has dropped Petrofac’s forward P/E to only a little over four, with the dividend yield in turn boosted to more than 13%. Of course, that will all be adjusted when we know more of the investigation, and I certainly wouldn’t rely on the dividend now.

But we’d have to see an enormous hit to the company’s finances for today’s valuation to not look cheap.

No profit here

In my other corner today is North Sea explorer and producer Hurricane Energy (LSE: HUR), which is in a very different, but still uncertain, position. 

Hurricane might well have made the biggest North Sea discovery so far this century, but it’s a long journey from first finding the stuff to getting it profitably to market. And in this case, there’s no profit on the short-term horizon yet, with first oil not expected before 2019, and the firm still in a serious cash-burn phase.

At least Hurricane isn’t saddled with the huge debts that are pressing on some of its sector competitors — in fact, it was sat on £82.2m in cash at the end of 2016 (up from £9.9m a year previously, thanks to £126.2m in funding during the year).

Where’s the real money?

But those sums seem puny compared to the estimated $467m cost of the company’s “six-year early production system” plan, so where will that amount of cash come from? Hurricane says it “may include a combination of equity, debt and/or a farm-out“, and that brings me to my main concern.

It’s “anticipated to occur in mid-2017“, and with low (and falling) oil prices, we’re surely not looking at the best conditions for securing funding on the most preferable terms.

How much more cash is really going to be needed before we see profits, and what degree of dilution will existing shareholders face until then? Those are the big questions and risks. But where there’s risk there’s serious potential.

A younger me would probably have jumped at both, and though I’ll keep away for now, I certainly can see the temptations.

The post Why Petrofac Limited could be a better buy than Hurricane Energy plc now appeared first on The Motley Fool UK.

More reading

• How I invested my first £1,000 in FTSE shares… and the mistakes I made
• How to invest £290 a month in UK shares for an income that aims to beat the State Pension
• Aviva’s share price has left rivals in the dust. Here’s why it’s still good value
• 2 excellent investment trusts to consider for an ISA or SIPP
• How much is needed in an ISA to target a £3,150 monthly passive income?

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of Petrofac. 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.

Hefty contract wins like this strike me as a sign that the industry is moving on after crunching its gears with the collapse of the price of oil and other resources over the last few years. Maybe now is a good time to buy, or hold onto, stocks such as Petrofac. 

A strong presence in Oman

Petrofac signed the deal with a subsidiary of Oman Oil Facilities Development Company LLC (OOFDC), and the work involves the engineering, procurement and construction (EPC) of OOFDC’s Salalah LPG extraction project in the southern part of Oman.  

Under the contract, Petrofac will construct the liquefied petroleum gas (LPG) unit and associated facilities, including tie-ins to existing pipeline infrastructure, together with LPG storage and jetty facilities at the Port of Salalah. 

Petrofac’s group chief operating officer, Marwan Cheidd, says the contract is the firm’s 11th in the Sultanate and reinforces Petrofac’s commitment to Oman. The company has been doing business there since 1988.

In 2015, Petrofac’s revenue came in around $6,844m, so this one deal won’t transform the company. However, I find it encouraging that deals like this are flowing in the industry and for Petrofac. 

Return of the oil bull?

The oil price touched lows below $30 at the beginning of 2016 and today’s $56 or so indicates a decent recovery. I’m tempted to believe that the early 2016 low might act as a floor for the price of oil. Indeed, many observers and commentators are predicting a return of the oil bull market from here, pointing to an agreement between Russia and the OPEC oil supplying nations led by Saudi Arabia to reduce the global supply of oil in an effort to boost the price. 

Such efforts combine with a positive outlook for economic activity in 2017 to make me optimistic about the price of oil and Petrofac’s potential as an investment. However, I keep my own analysis of Petrofac’s attraction as a stock as simple as possible and find well-known outperforming fund manager Neil Woodford’s approach useful. He reckons his total return expectation for a stock equals its dividend yield plus the anticipated rate of dividend growth. On that score, Petrofac is appealing right now.

Cyclical value

At today’s share price of 925p, Petrofac’s dividend yield runs at 5.6% and City analysts following the firm expect the payout to increase around 4.3% in 2017. Forward earnings look set to cover the dividend around 1.8 times. To me, Petrofac looks attractive, so I plan to continue holding and will view any increased earnings due to further oil price recovery as a bonus.

Although recent oil price lows could form a bottom on the chart there’s no doubt that Petrofac operates in a cyclical industry. To me, that means the firm deserves its low forward price-to-earnings rating that runs around 9.5 for 2017. So I’m not expecting a valuation uprating, just steady operational progress as exemplified in today’s contract win announcement.

The post Should you buy, sell or hold Petrofac Limited after today’s announcement? appeared first on The Motley Fool UK.

More reading

• How I invested my first £1,000 in FTSE shares… and the mistakes I made
• How to invest £290 a month in UK shares for an income that aims to beat the State Pension
• Aviva’s share price has left rivals in the dust. Here’s why it’s still good value
• 2 excellent investment trusts to consider for an ISA or SIPP
• How much is needed in an ISA to target a £3,150 monthly passive income?

Kevin Godbold owns shares in Petrofac Limited. The Motley Fool UK owns shares of and has recommended Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

I think there’s a good chance that both companies will benefit from higher energy prices in 2017. Petrofac’s customers may start to commission more new projects, while higher petrol and diesel costs should help to push travellers back onto buses and trains.

However, both companies have issued trading statements today that suggest challenges remain. Go-Ahead’s rail profits are likely to fall below expectations this year, due to the impact of strike action on Southern Rail. Meanwhile Petrofac’s backlog of orders has fallen markedly since the end of June.

Am I still right to view both stocks as a buy for the year ahead?

The bad news is in the price

Go-Ahead said this morning that passenger revenues on the Govia Thameslink franchise (which includes Southern Rail) are expected to fall by 4% during the current half year. The group’s other rail franchises are performing well, with revenues up by between 2.5% and 5.5%.

The more profitable bus operations are in much better health. Revenue has risen slightly during the first half, and profits are expected to be in line with expectations.

The fact that Go-Ahead is losing money as a result of the Southern Rail strike action isn’t likely to surprise anyone. The group’s shares haven’t fallen after today’s news, and have actually gained 6% over the last month.

I think this is an appropriate reaction. Go-Ahead’s balance sheet is in good shape and the group generates a lot of cash. Last year’s dividend was comfortably covered by free cash flow, for example.

The current strike disruption won’t last forever. In the meantime, the company is bidding for a number of new bus and rail operations overseas. Go-Ahead currently trades on a forecast P/E of about 11, with a prospective yield of 4.8%. In my view this remains an attractive entry point for patient investors.

A worrying shortfall?

I have to admit that I was expecting better news from Petrofac this morning. Although full-year net profit is expected to be in line with expectations, at $410m, the group’s other figures were more mixed.

Order backlog fell from $17.4bn to $14.5bn between 30 June and 30 November. At the end of last year, the order book was worth $20.7bn, so it’s now fallen by 30% in eleven months. That’s quite a big decline.

However, there are signs of progress. New order intake was $1.4bn during the second half of the year, up by 40% from $1bn during the first half.

It’s also worth remembering that the oil market is only just starting to recover. If recent oil price gains hold firm over the next few months, I’d expect the outlook for Petrofac to improve steadily next year.

At the time of writing, Petrofac shares are down by 5%, at about 865p. This puts the stock on a forecast P/E of about 11.6, with a potential dividend yield of 6.0%. I believe this represents good value.

The post Rising oil prices could make Petrofac Limited and Go-Ahead Group plc buys for 2017 appeared first on The Motley Fool UK.

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Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Falcon soars

On 27 January, in the middle of the oil stock rout, I said that Falcon Oil And Gas (LSE: FOG) looked tempting for those who are bullish on the oil price recovery, concluding that: “There’s a strong bull case to be made, but only for speculative investors.” I hope you speculated. At the time, it traded at 5.5p. Today you pay 8.5p, a rise of 55%.

I admired Falcon for its high-quality assets, fully-funded Australian drilling programme, and debt-free balance sheet, which also boasted $9.8m in cash. Rather than drilling through its cash pile, like many other explorers, Falcon has been adding to it and it totalled $12.7m at year-end. Costs are under control, helped by a successful campaign of slashing administrative expenses, which fell 38% last year from $4m dollars to $2.5m. All this and $50 oil too! If you believe oil is due another leg up, Falcon could be a safer way to play it.

Petro flops

Oil services specialist Petrofac (LSE: PFC) is a rare damp squib in a sector that has been on fire lately, so what went wrong? Scandals never help, and Petrofac has been embroiled in a global bribery scandal, following claims a former executive paid $2m to clinch a major oil deal in Kuwait. It was also hit by results in March showing a sharp drop in annual profits due to delays and cost overruns at its Laggan-Tormore plant.

Last year, it booked a huge $430m charge on the project and last month announced a further charge of £70m, but at least this is a final settlement and should draw a line under the saga (at a total cost of $800m). With a strong order book, valuation of around nine times earnings and yield of 5.74%, Petrofac looks poised to start playing catch-up.

Here Weir goes

Glasgow-based pump maker Weir Group (LSE: WEIR) hit a low 807p in January, but today trades at 1,185p, a rise of 47% for those who bought at the very bottom. This offers much-needed relief as the company had been through a torrid time due to falling demand from US shale clients, which also knocked its supposedly resilient after-sales market. US rig count is now down from a peak of more 2,000 to around 300, so the future still looks challenging.

Everybody is waiting to see what will happen to shale if the oil price climbs higher. Will flexible drillers swing back into action? If so, Weir could fly even higher. HSBC recently upgraded the stock to buy saying it’s particularly sensitive to the oil price, and will do particularly well if the oil price continues to climb. Trading at 13.7 times earnings Weir is no longer that cheap, but the yield compensates at 4.97%.

The post $50 oil drives Falcon Oil & Gas Limited, Petrofac Limited and Weir Group plc in different directions appeared first on The Motley Fool UK.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. The Motley Fool UK has recommended Weir. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.