Back Petrofac recovery play

Underpinning this is an important sign of operational strength. At the end of 2015, successful bidding had grown the order backlog to a record $20.7bn (£16bn) without compromising its profit margins. And although this pipeline declined 16 per cent in the six months to June, that was only after a record first half in which turnover surged 22 per cent to $3.89bn. True, the heightened workload - especially in the key engineering and construction division - led to a cash-sapping increase in work in progress during the period of $602m, but this should reverse in time. What's more, Petrofac still has excellent revenue visibility beyond 2017 thanks to a series of high-value lump-sum projects.

Unfortunately, aggressive expansion into projects outside the Middle East when the oil price was high have come back to haunt the group, but we think the worst of the pain has now been taken. Several projects incurred post-tax write-offs this year, including a $26m reduction in fees for the cessation of a service contract with Malaysia's Petronas and a $67m impairment to the carrying value of an investment in Seven Energy of Nigeria.

But the real disaster of recent years centres on work undertaken by Petrofac on Total's (Fr: FP) Laggan-Tormore gas development, the largest UK construction project since the London Olympics. A combination of poor weather, industrial action and failings by some sub-contractors have knocked more than $711m off Petrofac's earnings since 2014. Mercifully, the company finally drew a line under the debacle in May. Recent comments from chief executive Ayman Asfari suggest Total recognises the pain the contract has caused the oil services group, and has given reassurances that Laggan-Tormore will not count against Petrofac in upcoming bids.

For the time being, it is the Gulf rather than Paris which is the more likely source of commissions. Analysts at Wood Mackenzie have found the Middle East has seen the lowest cuts to capital expenditure of any oil-producing region during the downturn. Despite growing strains on fiscal budgets, the prerogative of countries such as Saudi Arabia and Kuwait to maintain market share means national oil companies have been loath to reduce spending. As a result, Petrofac is actively bidding on a number of projects in this key region for its business.

So, with Laggan Tormore out of the way, margins should slowly revive. Brokers JPMorgan expects net profit before exceptional items to more than double next year to $383m, and increase again to $448m in 2018, which in turn could steer the company to a net cash position by December that year. That would be a particularly welcome result for Mr Asfari, who together with his family holds just under a fifth of the company's shares. This brighter outlook has also caused a drop in the number of short positions in the company since February, when more than 10 per cent of the stock was out on loan.