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OPINION

Existential? Then exit

Existential? Then exit
June 1, 2017
Existential? Then exit

In mid May, Petrofac's shares got a drubbing when the company acknowledged that the UK's fraud buster, the Serious Fraud Office (SFO), had hauled it into an investigation into corruption at a Monaco-based company, Unaoil. At the time, Petrofac said little - that its chief executive and chief operating officer had been questioned under caution by the SFO; although it did venture to suggest that "the company is co-operating with the authorities". Well, not quite, is the SFO's response. Or, at least, Petrofac now says "the SFO has informed Petrofac that it does not consider the company to have 'co-operated' with it as that term is used in relevant SFO and sentencing guidelines".

That's a coded way of saying Petrofac may face a tougher rap should the SFO bring a successful prosecution. It could reduce Petrofac's scope to make a US-style 'plea bargain', where a company makes reparation for its criminal actions without facing the collateral damage of a conviction.

Simultaneously, Petrofac has suspended its chief operating officer, Marwan Chedid, who has quit the main board. In footballing terms, this can be seen as "taking one for the team". Far better that Mr Chedid pick up a second yellow card than the other arrested employee, chief executive - and founder of Petrofac - Ayman Asfari. Meanwhile, Mr Asfari has been distanced from the SFO's probe by grouping the company's non-executive directors - plus the finance director - into a special committee that will deal with the SFO. The committee will be helped by an expert - presumably a lawyer - who has yet to be hired.

Inevitably, however, focus will shine on the non-executives. Will they be up to the task of asking tough questions and - possibly - making tougher decisions? At the risk of sounding insular, it seems fair to say it would look better if there was a single Brit among the six; after all, Petrofac is immersed in a British legal procedure. Perhaps, for the purposes of the exercise, a French man, René Médori, could count as an honorary Brit. He has spent most of the past 17 years as the finance director of FTSE 100 companies, including the past 12 as finance director of mining house Anglo American (AAL). He retired from that post in April so he may even have some spare time. The remaining collection of a Netherlander, a Dane, a German, a Swiss and an American look as uninspiring as most collections of non-executive directors when viewed through the prism of a company's annual report - capable people when operating in their comfort zone, no doubt. But, then, aren't we all?

The stock market's response suggests that Petrofac faces an existential moment. The share price, which had been dropping since March, slumped another 36 per cent following last week's unnerving update. At its current 408p, it is 57 per cent below its 2017 high.

Who can blame the market? Without Mr Asfari - now a plausible proposition - would there still be a company? But even with him, it's fair to ask, is there a profitable company? The nature of all companies - even those such as Petrofac whose cash flows are lumpy - is that, if they always bring in just enough cash they can survive almost indefinitely without ever being truly profitable. Perhaps Petrofac is one such, sustained for years by periodic payments on underpriced - and ultimately unprofitable - contracts. The difference now is the added fear that some of those contracts were corruptly obtained.

The best I can say is that skimming Petrofac's accounts for the past four years provides some reassurance. There are no clear signs that Petrofac flatters its profits by loading costs on to the current assets part of its balance sheet. At least, in the four years 2013 to 2016 the group has generated almost $2bn (£1.56bn) of operating profit, yet only $311m of that was produced by changes in working capital.

Nor should we forget that an investigation by the SFO hardly equates to a prosecution - it's not as though it has a brilliant track record. Who can forget the pig's ear it made of investigating the Anglo-Iranian entrepreneurs, the Tchenguiz brothers, in 2011; a case so incompetently pursued it ended up costing the taxpayer over £28m in damages and legal bills.

The SFO's director, David Green, says the SFO has changed much since then. Maybe. But I prefer to watch from the sidelines than have capital tied up in this rollercoaster ride. True, I could have made that decision two weeks ago and my willingness to hang on - to ignore the possibility that bad news is so often quickly followed by something worse - has cost the Bearbull income fund a further 1.5 per cent of its assets. Sure, Petrofac's shares could still bounce. But, basically, this is enough - I have better things to do and I'll remind myself of the words of the great Wall Street speculator, Jesse Livermore: "A loss never bothers me after I take it. I forget it overnight."