However, there are some that do flourish, and some former small caps do now reside on the FTSE 100, the UK’s premier index.

What I look for

The biggest trap investors can fall into is thinking the best penny shares to buy are those that are the cheapest. I’ve learnt that there’s a difference between price and value.

So while I look at value, I can only ascertain this by doing a thorough review of the business and its fundamentals. Not all penny shares have lots of information readily available. So, if a stock has minimal information, that’s usually a red flag.

Next, I want to understand a firm’s financial health, as well as what it’s offering as a business. Is it future proof? Furthermore, what’s performance been like historically?

These aspects help me make a decision as to whether or not I’d even consider buying some shares.

Former penny stocks that made it big

Two notable former penny stocks that made are Ashtead and JD Sports Fashion. Both businesses started out small but have flourished. It’s fair to say they’re now established FTSE 100 incumbents. However, that doesn’t mean they don’t operate without risks or that there weren’t bumps in the road.

For example, JD Sports Fashion operates in the sportswear and leisure market. This is a market that exploded in recent years, and the firm has benefitted. Nevertheless, recent volatility has hurt consumer spending, and in turn, the company’s performance and share price.

For Ashtead, one of the largest construction rental businesses, volatility has also hurt its performance. Construction projects have been put on the back burner due to high inflation and fears of a recession.

One penny stock I don’t think will soar

I reckon it’s hard to pick which stocks will make it big, but easier to pick those that maybe won’t.

One pick I don’t think is worth considering for me is Petrofac (LSE: PFC).

Over a 12-month period, Petrofac shares have shipped 81% from 74p at this time last year, to current levels of 14p. Over a five-year period, they’re down a whopping 96% from 400p to current levels.

The oil and gas facilities provider has had to contend with falling revenues, increased borrowing, which has put strain on its balance sheet, as well as other scandals. A cocktail for disaster, if you ask me.

Earlier this year, a $1.4bn contract win relating to renewable energy work was a bit of a bolt out of the blue. However, it hasn’t done much for investor sentiment. Instead, question marks around the firm’s liquidity have continued to bog ity down. Plus, bribery scandals from previous years are dark clouds which the business can’t seem to shake off.

In the past, prominent brokers such as JP Morgan have raised concerns about Petrofac’s financial health.

Taking everything into account, I wouldn’t touch Petrofac shares with a bargepole. I’ll still keep an eye on developments, and who knows, things might turn around!

The post I’m looking for the next big thing. Are penny stocks the answer? appeared first on The Motley Fool UK.

But the list is shrinking, as ones like Michelmersh Brick Holdings have broken through either the £100m market cap limit, or a 100p share price.

In the case of Michelmersh, at 105p the shares are only just out of range now, but it’s still a candidate buy for me.

Penny stock dividend

At least Topps Tiles (LSE: TPT) is still within range with a 46p share price. But its market cap of £93m only just qualifies.

We often have to choose between a low share price that we think will rise, or a high dividend. In this case, we can hope for both.

Forecasts put the dividend yield at a whopping 7.5% this year. And though forecasts are probably at their least reliable when it comes to very-small-cap stocks, they do at least suggest dividend growth in the next few years.

A Q3 trading update showed conditions still tough, as we’d expect from the current state of the economy.

But the firm said: “Positive macroeconomic data on inflation, real wage growth, improving consumer confidence and increased activity in the housing market provides some confidence in a cyclical recovery.“

Big risk

Sometimes, a really hammered penny stocks swings into view. And it has all the hallmarks of either going bust, or making a possibly spectacular recovery. That’s the question I’m pondering over Petrofac (LSE: PFC).

Shares in the oil and gas services business were up over £15 in 2012. Today, they’re just 15p.

There was a bribery scandal a few years ago, and then Covid hammered the business.

And earlier in 2024, we saw major concerns over the firm’s liquidity, with $250m in debt set to mature in October. At the time, the threat of a significant shareholder dilution was real.

More recently, creditors have agreed to hold off for a while with Petrofac having a restructuring plan in place. And the order book looks strong, with some notable renewable energy wins.

If the board can pull it off, it might just be worth a small investment. The next few months could be crucial.

Lithium rebound?

The AIM-listed Atlantic Lithium (LSE: ALL) share price is down to just 13p per share. In early 2022, it was up over 60p.

At that time, the price of the elusive metal was soaring on the back of electric vehicle hype. But in the past couple of years, it’s slumped. Today, lithium fetches no more than it did in mid-2019.

The company itself looks to be in good financial health though. And its developments in Ghana are progressing nicely.

The future price of lithium must be the key here. And other technologies, like sodium batteries, pose a threat. There’s a lot more sodium around, and it’s far more easily accessible.

But if lithium demand stays strong and Atlantic Lithium can turn a profit in 2026 as forecasts suggest, I think it could move on out of penny stock territory.

The post Cheap penny stocks to consider buying in September appeared first on The Motley Fool UK.

When its protracted bribery case finally reached a conclusion in 2021 and the Covid pandemic receded, investors hoped Petrofac may finally begin to rebuild its reputation. Instead, inefficiencies across the company’s value chain — ranging from cost overruns to payment delays — made matters worse.

As concerns surfaced over its balance sheet this year, Petrofac’s share price briefly slumped below 9p in April. Following a delay in the publication of results and a temporary share suspension, it resumed trading at sub-15p levels in June and has largely stayed there.

That’s after its biggest business unit – engineering & construction – posted an incremental loss of about $190m for the year, and full-year losses widened to $505m from $320m in the previous year.

Things might just get better

Heading for the exit may not be a wise idea for me right now, however, because things may just get better. Petrofac’s future projects book remains strong, and it has announced an aggressive turnaround plan predicated on restructuring.

It has reached near-term agreements with selected holders of its matured debt to “not take any action” during which time it is working furiously to get its act in order. That’s where Petrofac’s project book comes into sharp focus.

It claims to have a strong order intake of $7.1bn, driving significant backlog growth to $8.1bn. Alongside new deals in traditional energy, Petrofac has also posted a series of contract wins in the renewable energy segment.

Where from here?

Having spectacularly slumped from a reliable dividend stock to a high risk/reward penny stock, the pros of holding on to (or buying more) Petrofac shares, however strong, carry baggage.

Firstly, tough negotiations with its creditors, which will likely include substituting debt for equity, may dilute Petrofac’s value further for investors in the near-term. But returns may eventually follow for those playing the long game.

Secondly, practically every service project Petrofac is embarking on will be pegged to performance-guarantee requirements from clients. That can only be a good thing, in my opinion. It’s something a company in survival mode cannot afford to ignore, but there’s no guarantee that it will.

Thirdly, having been given a lifeline by creditors, Petrofac is speeding up the sale of its “non-core” assets. While good, further clarity is needed beyond its Thai Oil clean fuels project retreat.

Fourthly, at rock-bottom prices, a suitor may yet emerge to lift Petrofac’s share price. Or maybe not: just ask Wood Group, whose well-advanced takeover talks with Sidara collapsed recently owing to “market conditions.”

Overall, things are finely poised for Petrofac. Opinion is divided among analysts based on the outcome of the four factors I flag, with caution being expressed by brokers like JPMorgan and Berenberg.

My average holding price is just below 60p. It is a level at which I have much to lose by selling Petrofac at current prices. A debt-to-equity conversion may be on the cards, carrying dilution risks for existing shareholders like me. But it’s a risk I am willing to stomach with a longer-term view.

The post Why I believe beleaguered penny stock Petrofac is worth holding on to appeared first on The Motley Fool UK.

Let’s take a closer look at what’s happened and whether the shares could climb upwards once more. If they could, buying cheap shares now could be a shrewd move.

Slumping shares

As a reminder, Petrofac is an oil and gas facilities service provider. It helps oil and gas production businesses by providing essential infrastructure needed for production.

As I write, Petrofac shares are trading for 28p. At this time last year, they were trading for 82p, which is a 65% drop over a 12-month period.

However, these past 12 months have simply been a continuation of a downward trend for a few years now. Over a five-year period, the shares are down a mammoth 95%, from 504p to current levels.

What’s happened and should I buy some shares?

A disastrous cocktail of falling revenue, increased borrowing sending debt levels higher than ever, and other scandals have contributed towards Petrofac shares falling sharply. In addition to this, macroeconomic volatility of late wouldn’t have helped either!

Declining performance is never a good sign. It can often lead firms towards looking to increase their borrowing facilities to keep the lights on and stimulate growth. Debt on a balance sheet is rarely a good sign. However, when a company is making money and growing, I’m comfortable that it may not impact share price, growth, and investor returns. Without the positive performance and growth, Petrofac shares have been struggling badly.

Moving on, back in 2021, the business was found guilty of failing to prevent some of its employees from bribing officials for contracts. The firm was fined £77m and suspended from bidding on certain contracts. Reputation and financial damage is often prolonged, and things like this can seriously hurt investor confidence.

Petrofac’s pre-close trading update for the year ended 31 December just before Christmas made for interesting reading.

Positive developments included a contract win worth $1.4bn on a long-term project that could lead to further work as well. In addition to this, the update boasts of “exceptional new order intake“. Plus, the order backlog is rising and should be around the $8bn mark by the end of the year.

Conversely, mentions of debt increasing more than expected, as well as the fact the business is set to record another loss this year, was disappointing. However, it wasn’t unexpected. It’s clear to me Petrofac is looking to strengthen its balance sheet. Plus, it’s working hard to win contracts to secure the future of the business.

What I’m doing now

I wouldn’t buy Petrofac shares today. I’m not alone, as it looks like brokers JP Morgan and Berengberg have also raised concerns around Petrofac’s financial position.

I must admit I’ll be keeping a keen eye on developments to see what happens.

Balance sheet weakness, spiraling debt levels, as well as historical scandals don’t exactly fill me with confidence. The positivity from its most recent trading statement isn’t enough to convince me that a turnaround is on the cards.

The post Is the slumping Petrofac share price an opportunity or one to avoid? appeared first on The Motley Fool UK.

So what’s going on with the UK oilfield services company? And is there an investment opportunity for me here after this massive share price fall?

Why the share price tanked

The share price fall is related to concerns over Petrofac’s financial position. Recently, a number of brokers including Berenberg and JP Morgan have flagged balance sheet concerns.

On Friday, Berenberg said that the company is in a “precarious” position due to the fact it has roughly $250m worth of debt due to mature in October 2024. It has placed Petrofac shares ‘under review’, removing their rating and price target.

“We expect the company’s trading statement on 20 December to address some of these concerns, but whether liquidity has materially improved remains highly uncertain,” wrote Berenberg’s analysts.

“In a worst-case scenario, Petrofac may be forced to renegotiate its financing agreements, potentially leaving shareholders significantly diluted,” they added.

Meanwhile, analysts at JP Morgan said the company’s balance sheet could be an obstacle for the company going forward.

Taking a closer look

Digging deeper, the balance sheet certainly looks stretched. At the end of June, the company had net debt of $584m on its books versus $349m at the end of 2022. That’s high given that a) the company’s market is just £88m and b) it generated an operating loss of $122m for the first half of the year.

The company also mentioned that during H1 it had a net working capital outflow due to delays in the settlement resolutions required to secure cash collections. These delays are concerning.

It’s worth noting that, according to Reuters, Petrofac’s combined credit score on LSEG – which measures how likely a company is to default on its debt in the next year on a scale of one (highly likely) to 100 (very unlikely) – is one.

My own data provider gives the stock an Altman Z2 score of -1.76, which indicates a ‘serious risk’ of financial distress within the next two years.

Should I buy?

Now it’s not all negative here. Back in August, Petrofac said it had seen a major increase in its order backlog. At 30 June, the group backlog was standing at $6.6bn versus $3.4bn at the end of 2022.

The group also said it was “well positioned” to continue growing its backlog and that it had a healthy pipeline scheduled for award in the next 16 months.

However, this backlog growth isn’t enough to get me interested in the stock.

I’m concerned about the balance sheet weakness. I’m also concerned about the level of short interest here. Currently, Petrofac is the second most shorted stock on the London Stock Exchange. This indicates that a lot of sophisticated investors expect the share price to continue falling.

Add in the fact that the company is expected to generate a large loss for 2023, and the investment case is pretty murky, to my mind.

All things considered, I think there are much better stocks to buy for my portfolio today.

The post The Petrofac share price just crashed to record lows! Should I buy? appeared first on The Motley Fool UK.

This turbulence makes me want to investigate further.

A brief history

Petrofac designs, builds, manages and maintains energy infrastructure assets. The company has embraced the move towards green energy with the development of wind turbines. However, it’s still heavily exposed to the oil and gas sector.

But the firm has a controversial past.

In October 2021 it was found guilty of failing to prevent some of its employees from offering bribes to secure contracts. It was fined £77m by the Serious Fraud Office. It was also suspended from bidding on contracts offered by Abu Dhabi National Oil Company (ADNOC), an important customer.

Petrofac is also loss-making and has seen its revenue decline over the past five years. Due to the uncertainty caused by the pandemic, the energy industry scaled back investment. This affected the business badly. It also has some legacy contracts that are unprofitable.

The business has borrowed heavily in recent times. Net debt increased from $144m at the end of 2021 to $349m, a year later.

During the same period the order book has fallen from $4bn to $3.4bn.

From an investment perspective, I’d normally run a mile from a firm like this.

Positive news

But at the end of March, the company announced that it had successfully bid on a contract with Hitachi to supply offshore (North Sea) wind assets to TenneT, the Dutch-German equivalent of National Grid.

Petrofac’s share of revenue from the deal is expected to be €6.5bn. Its shares closed 70% higher on the day the news was announced.

It has also recently extended $252m of its banking facilities to October 2024. Part of the renegotiation involved a change to the covenants which means it’s less likely to breach the terms of the new agreement.

And ADNOC is letting Petrofac bid for its contracts once more.

Conundrum

Whenever a company has been involved in a major scandal — and has paid a heavy price both from a financial and reputational perspective — I think it’s highly unlikely to be repeated. This may be a naive view but with increased scrutiny from regulators, investors and competitors it would surely be the end of Petrofac were it to repeat previous misdemeanours.

My decision on whether to invest therefore comes down to an assessment of its future financial performance, and what return I could make.

I think Petrofac has turned the corner. The directors are expecting the company to be cash neutral in 2023 with some positive potential. However, I believe it has a long way to go before it delivers the results that a listed firm should.

I could also earn a dividend from investing elsewhere. The directors of Petrofac aim to reinstate one once its performance improves. But they’re silent as to when this might happen.

Investing in Petrofac at this time would be a little too risky for me. I’m a cautious investor and will be looking elsewhere for opportunities. However, I’ll be keeping the stock on my watch list and monitoring the performance of the company with interest.

The post Down 88% in 5 years! What’s going on with the Petrofac share price? appeared first on The Motley Fool UK.

The shares had lost nearly 90% of their value in the past five years. So is this the start of a new bull run?

The firm has won some major new work, with Hitachi Energy as a partner. The pair will help grow offshore wind capacity in Dutch and German areas of the North Sea.

The deal, with power distribution operator TenneT and described as a Framework Agreement, is worth around €13bn. And Petrofac says it’s the biggest in its history.

We’ll see a series of individual contracts, with each worth over €2bn. And they’ll split the value approximately equally between the two firms.

It starts with an agreement for six projects. Five will connect up wind farms to the Dutch grid, with the sixth to the German grid.

Game changer?

On the face of it, I think this could be a game changer.

Petrofac has for years been one of the top in its sector. But that’s oil and gas services. It’s provided support engineering for drilling, pumping, and so on.

And we all know the way oil and gas looks set to go in the long term. The black stuff will be pumped and used for a while yet. But if exploration and upstream development slows, that’s not good for firms like Petrofac.

The future is renewable energy, and this news shows that Petrofac can be in as much demand for new energy sources. Maybe they should change the name to Electrofac.

Petrofac lost money in the past couple of years. And the City had it down for a couple more years of losses too.

Debt

At the halfway stage last year, net debt reached $341m. That’s close to the market cap, at least before today’s change.

The firm had $511m in liquidity, so there wasn’t an immediate danger. But I don’t like to see big debt. Especially not for a loss-making company in an industry in decline.

That worry could quickly fade now.

We won’t see any immediate wiping of debt. But such a valuable contract could make it a lot easier for Petrofac to raise any new funding it might need.

And I think it should put paid to any liquidity fears, for the near future at least.

Caution

There are still risks, though. This is still only a framework around which future contracts will hang. And those contracts don’t all exist yet.

There’s still no profit yet, though forecasts will inevitably need to be changed now. And that makes it hard to put a value on the stock at the moment.

So I see a fair chance that the share price could drift back down as we wait for work to start and for cash to flow.

Still, it does look like good news for Petrofac shareholders. And I look forward to hearing what the board say with FY22 results. I expect a spring in their step.

The post The Petrofac share price just jumped 60%. Time to buy? appeared first on The Motley Fool UK.

Over that time, Petrofac shares have been as low as 92p and as high as 161p. With a loss expected this year, it’s hard to put a valuation on the stock. But I’m starting to think we could be looking at an attractive recovery candidate here.

I like business-to-business companies that provide services, materials, and infrastructure to cash-generative industries. Petrofac, providing infrastructure to the oil and gas sector, fits that bill nicely.

Renewable

It does, of course, rely heavily on the state of the oil business. And if we needed any reminder of where the energy sector is heading in the long term, we’ve just seen the conclusion of the COP26 climate conference.

But Petrofac also provides renewable energy infrastructure, and I can only see demand growing strongly there over the long term. I think a company like Petrofac, which already has extensive contracts and contacts in the energy sector, should have a significant competitive advantage.

So I see Petrofac as a good way to hopefully invest for the renewable future, while still making gains in the years in which oil and gas will still be essentials.

Profit?

The company suffered during the Covid period, as demand for its services dropped. And that had an adverse effect on the first half of the current year. Still, reporting interim results in August, chief executive Sami Iskander said: “Moving into the second half of 2022, a significant increase in bidding activity has put us firmly on the path to grow backlog over the full year“.

We’re still looking at three years of losses in a row, though. But analysts are forecasting a return to profit in 2023, putting the shares on a forward price-to-earnings (P/E) multiple of around 20. That might seem a bit high, especially during a recession. But further forecasts see it falling below seven by 2024. And analysts expect to see dividends back on the cards by 2024, with a 5% dividend yield.

Risky

Now, these are just forecasts. And forecasts are uncertain at the best of times. Heading into a recession, they’re going to be riskier. And two years ahead is too far to look, really. But the improving outlook does at least suggest to me that investor sentiment is turning positive towards Petrofac.

I see debt as another major concern. Net debt stood at $341m at the interim stage, which surely increases the risk in the current economic climate. Liquidity looked fine at the time, but I don’t think I’d buy without seeing some signs of debt coming down.

The Petrofac share price has been gaining since October, so is that likely to continue? A lot will surely depend on how the second half turns out. To get an idea of that, we’ll need to wait for December’s scheduled trading update.

The post Is the Petrofac share price set to climb? appeared first on The Motley Fool UK.

No, the sawtooth chart of the past 12 months looks like the kind of thing I could easily cut myself on. And if we look back further, the shares haven’t even started to recover from their Covid-19 pummelling.

Yikes, is this company destined to go bust in the wake of longer-term pandemic pain? No, judging by Petrofac’s first-half results, released Thursday, I don’t think so.

Pandemic

Chief executive Sami Iskander did confirm that the half was still blighted by Covid-related industry challenges. He also said: “Moving into the second half of 2022, a significant increase in bidding activity has put us firmly on the path to grow backlog over the full year“.

He added that “the outlook for the industry is robust and the work we have done over the past 18 months means that Petrofac enters this important period in a strong competitive position“.

The half was clearly tough. Total business revenue fell 23% compared to the first half of 2021. And the company reported a net loss of $14m (including one-off items).

Against that, Petrofac recorded an 18-month pipeline of $57bn, with a backlog of $3.7bn. So the firm’s future business stream looks healthy enough. And the longer-term nature of its order outlook suggests the company has better visibility than some.

Debt

The debt situation doesn’t look great, with net debt increasing to $341m. That’s what a free cash outflow of $193m can do for a company’s balance sheet. Hopefully that will start to improve. But Petrofac did say it only expects free cash flow in the second half to be broadly neutral.

It looks like the company should be safe from needing to find more cash, though. It reported liquidity of $511m at 30 June, and told us it remains within its banking covenants. The board expects year-end net debt broadly in line with the 30 June figure.

The absence of an interim dividend probably won’t surprise shareholders. But the company intends to reinstate a dividend policy “in due course, once the group’s performance has improved“.

So, a mixed bag. And it leaves me torn.

Two minds

Part of me wants to keep well away from companies that built up big debts during the pandemic. My thinking is that those are the ones most likely to suffer when the next crisis comes along, whatever it is. And the best way to invest defensively, surely, is to do it before we know what we’re defending against.

But I also think I see a company that’s come through a very tough time and is now showing early signs of a likely strong recovery.

With the current uncertainty, I think the share price could easily continue its up-and-down pattern. But I’m going to watch Petrofac’s second half very closely.

The post What’s happening to the Petrofac (PFC) share price? appeared first on The Motley Fool UK.

Oil and gas infrastructure

As a quick reminder, Petrofac provides oil and gas infrastructure services throughout the world. These services include construction, maintenance, and support services to energy and oil businesses.

So what’s happening with Petrofac shares currently? Well, as I write, they’re trading for 116p. At this time last year, the stock was trading for 100p, which is a 16% return over a 12-month period.

To buy or not to buy

So what are the pros and cons of me buying Petrofac shares?

FOR: Petrofac has a vast profile and presence. It is truly a globally diversified business and has contracts throughout the world. This is important as it can leverage this to boost performance and returns. It recently secured a lucrative contract worth over $1.65bn with the Abu Dhabi National Oil Company. Furthermore, it managed to secure over $2bn worth of orders in 2021 overall, which was a significant increase compared to the previous year. It has continued this momentum in 2022, with a few noteworthy contract wins, including a $100m deal with Cairn Energy.

AGAINST: Petrofac was involved in a fraud and bribery scandal a couple of years ago. These types of scandals affect investor sentiment badly. In the end, the business was fined £77m and a senior employee pleaded guilty to bribery charges. Sometimes, these types of issues have a negative effect on investor sentiment and can also affect future business negatively too.

FOR: I learned that Petrofac has decided to join the renewable energy market. It recently signed a memorandum of understanding with Ocean Seawind Technology for a contract maintaining wind turbines in the Mediterranean Sea. It recently announced its “new energy team”, created to focus on the renewable energy sector. With this development, the ability to explore cleaner energy solutions could provide Petrofac with exciting new opportunities that could boost performance and returns longer term.

AGAINST: I understand that the oil and energy market is volatile. As economic headwinds continue throughout developed countries, demand could be affected. In turn, demand for Petrofac’s services could also be affected. I will keep a close eye on developments here.

A UK share I would buy

I would be willing to open a small position in Petrofac shares. The essential nature of the business, and the fact that oil and energy is pretty much a global staple, help me make my decision.

Furthermore, Petrofac shares look decent value for money to me on a price-to-earnings ratio of just 10 at current levels. Oil and energy can be a volatile yet lucrative market, so I will keep a close eye on developments, especially with continuing macroeconomic headwinds to take into account. This is why I would only buy a small number of shares to start with.

The post UK shares: should I buy this oil and gas infrastructure stock? appeared first on The Motley Fool UK.