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Back Petrofac recovery play

With a disastrous project out of the way, and shorters starting to retreat, now is the time to get back into this lowly-rated, high-yielding oil services firm.
Back Petrofac recovery play

Oilfield services companies have been battered by clients' sharp cuts to drilling, developmental and maintenance capital expenditure in response to lower oil and gas prices. With its shares 43 per cent down since May 2014, Petrofac (PFC) is one such victim of the carnage in the sector and in part has been an architect of its own downfall. But following last month's half-year results, we think the FTSE 250 constituent could be moving into recovery mode. The company is heavily exposed to the Middle East, a highly resilient and low-cost source of global production where the pipeline for contract work is reportedly alive and well. And now, having completely rid itself of a disastrous North Sea project, Petrofac is well placed to benefit from its own cost-cutting measures. If everything goes to plan, there should be substantial scope for the shares to re-rate.

IC TIP: Buy at 835p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points
  • Discount to historical average and peers
  • Excellent yield
  • Exposure to active Middle East clients
  • Loss-making project finished
Bear points
  • Debt levels
  • Challenging market
  • Past mistakes

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.

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